By Peter Garnry, Head of Equity Strategy at Saxo
Peter Garnry |
Lithium is one of the most important metals driving the electrification over the coming decade and investors are showing interest in the industry. Last week, it was announced that the Chilean government will soon release their new regulation framework for the lithium industry which will include a new state lithium mining company. The initial reaction in SQM and
Albemarle shares was quite negative.
On Friday we published a bigger research note on the global lithium market focusing on the opportunities and risks involved. However, not long after publication a press release revealed that Chilean state-owned copper companies Codelco and Enami are in talks with the private sector to expand lithium production. The government participation in lithium through Codelco and Enami is the short-term involvement before Chile sets up a national lithium mining company.
Gabriel Boric, the leftist President, is expected to soon deliver a new lithium development strategy for Chile which will mean a new state lithium mining company. Chile is attempting to attract capital to its lithium industry to expand production to ensure more tax revenues while protecting the environment. Today, Chile’s production is split between SQM and
Albemarle , and the media news was laid out as a nationalization of lithium mining in Chile causing shares of SQM and
Albemarle to fall 17.8% and 10% respectively on Friday.
New hybrid model
The market’s initial reaction was negative for SQM and
Albemarle , but the reality is that Chile is in need of new rules around its lithium resources. Lithium is classified as ‘a critical metal’ which under the current rules from the 1970s mean that the government is not issuing new exploration licenses. This naturally prevents production to increase to its full potential and as such Chile has been losing global market share to 25% and expected to see it dropping to just 10% by 2030 if nothing changes.
While the media has portrayed the new rules as a nationalization it is more likely going to be a new hybrid model with government involvement but also private sector involvement. Several sell-side firms say that the new lithium framework may be marginal positive for SQM and
Albemarle . Time will tell whether the market agrees. The only thing everyone can agree on is that the new Chilean lithium framework will mean more lithium supply by the end of the decade.
Lithium outlook
If we look at the outlook for lithium then it still looks strong. Lithium demand will mostly be driven by demand for lithium-ion batteries in the future which is driven by electric vehicles. There are many different demand forecasts and judging by the EV adoption rate our view is that the demand forecasts are too low and that the industry will continue to an explosive growth rate until 2030 constantly creating demand picture that is stronger than available supply. The growth in EV deliveries was around 52% y/y in Q4 and judging from forward looking indicators growth will slow but not by much this year.
The table below shows the largest publicly listed lithium mining stocks. Note the high revenue growth rate and very attractive operating margins. Sell-side analysts are also very positive on the industry and we know from statements from
BHP Group and
Rio Tinto that the biggest miners in the world are looking for acquisitions in the industry.
The biggest lithium mining countries in the world in 2021 were:
1. Australia (53%)
2. Chile (25%)
3. China (13%)
4. Argentina (6%)
5. Others (3%)
Based on identified lithium resources the five biggest countries in 2021 are:
1. Bolivia
2. Argentina
3. Chile
4. United States
5. Australia
Disclaimer: the analyst owns shares in SQM
