Why the Lithium Bear Case Is Wrong

Written by Nick Hodge
Posted April 11, 2018 at 12:19PM

Morgan Stanley was recently out with a report that recommended selling shares of lithium companies because it expects a sharp drop in prices as new supply comes online.

Morgan Stanley is wrong. Or it's late getting positioned in the lithium trend and is trying to send stocks lower so it can buy them.

Either way, shame on Morgan Stanley.

Here’s its nutshell version: Lithium prices will drop 45% by 2021 — from $13,375 to $7,332 per tonne — as new supply comes online, mainly from Chile. While there is a lithium deficit in 2018, there will be a surplus from 2019 onwards. Sales of electric vehicles would have to reach 31% of global sales in 2025 to “clear the market.”

While many have come out in opposition of Morgan Stanley’s position, the most credentialed is probably Simon Moores, CEO of Benchmark Mineral Intelligence, a London-based consultancy that monitors lithium prices globally.

According to Simon:

"Don’t usually comment on forecasts but the Morgan Stanley lithium one is ridiculous. When you understand even the basics of lithium, cathode and battery plants, and auto majors plans you realise the Morgan Stanley scenario has a 1 percent chance of happening."

And that’s because simply having lithium resources in the ground does not mean you can get them out in an economic fashion in time to supply the market. Chile does have a lot of lithium (the most in the world, actually), but infrastructure needs to be built to extract it and the lithium still needs to be processed.

New supply never just comes online in mining. It always takes longer than expected when dealing with permitting, locals, technical planning, financing, and construction.

As Simon Moores put it in an article he penned for El Mercurio, Morgan Stanley supposes 500,000 tonnes per year of production from Chile, and that “will not happen.”

Lithium brine operations typically take seven years to come online. Morgan Stanley is calling for surplus next year.

After calling the Morgan Stanley report “wrong” and “misleading”, Moores went on to say that, “In the face of demand that increases significantly in the short and long term, we expect global average prices to remain above US$10,000 in the foreseeable future.”

It’s no secret we’re extremely bullish on energy metals around here. That includes lithium, cobalt, graphite, vanadium, rare earths, and base metals like copper and nickel.

The transition to electric cars is very real.

  • BMW plans to launch 50 new electric models by 2025 and have them account for 25% of sales
  • Ford is investing $11 billion to have 40 new electric cars and trucks by 2022
  • GM will launch at least 20 new electric vehicles by 2023
  • Jaguar will make all new models fully electric from 2020 on
  • Nissan plans to sell 1 million electric cars per year by 2022
  • All Toyota models will be fully electric or hybrid by 2025
  • Volkswagen is investing $40 billion by 2022 in electric cars
  • Every Volvo will have an electric engine after 2019

I could go on.

Then there are the plans for electric long-haul trucks and cargo ships, both of which are already happening as well.

And while Morgan Stanley completely discounts the grid storage segment of the market, saying there won’t be material lithium demand from it until 2025, the fact is there will be 25 GWh of grid storage in the next two years and over 50 GWh by 2023, according to Bloomberg New Energy Finance.

Grid Storage Lithium Demand by CountryAnd by 2030, the grid storage market is expected to be bigger than the current electric vehicle market.

There are plenty of good days ahead for battery metals and related stocks. Only a few acquisitions have taken place and there are still many quality assets that will be developed or taken out.

Here’s one of them.

Call it like you see it,

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Nick Hodge

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Nick is the founder and president of the Outsider Club, and the investment director of the thousands-strong stock advisories, Early Advantage and Wall Street's Underground Profits. He also heads Nick’s Notebook, a private placement and alert service that has raised tens of millions of dollars of investment capital for resource, energy, cannabis, and medical technology companies. Co-author of two best-selling investment books, including Energy Investing for Dummies, his insights have been shared on news programs and in magazines and newspapers around the world. For more on Nick, take a look at his editor's page.

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