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As the EV revolution accelerates, battery-critical lithium shares are becoming ever more popular investments.
Read on to learn how to buy lithium stocks UK, alongside the investment case and potential investor pitfalls.
Also consider: Best stocks and shares to buy now
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Unlike most commodities, including oil, gas, wheat, and gold, it is not possible to invest directly in lithium.
While this may change in the future, the metal is very different to other commodities:
In summary, investors can only gain capital exposure through various stocks and ETFs that are either directly or indirectly linked to the commodity.
Lithium stocks can be separated into three generic categories:
A few of the top lithium producers are involved in the entire supply chain, making them more complex instruments to understand.
Many investors choose to invest in a diversified mining giant such as Rio Tinto instead of a dedicated lithium miner to gain exposure to its lithium operation while limiting risk.
Of course, riskier small-cap lithium miner investors could reap far greater rewards.
85% of the global market was once dominated by just three top lithium stocks: Albemarle, Sociedad Quimica y Minera de Chile, and FMC. [2] Their stranglehold has loosened over the past decade of rising demand, as investing in new mines has become more economically attractive.
Accordingly, there are now dozens of top lithium shares on the stock market to invest in, across various international stock exchanges.
Some of the most popular include:
There are hundreds of speculative smaller-cap companies available to buy shares in, but all come with significantly higher capital risk. Two popular UK lithium shares are:
Exchange Traded Funds are an extremely popular financial instrument as they help provide exposure to a wide variety of lithium companies.
As the industry is in its early stages, the capital risks of any one stock collapsing are high, especially given the expense, time, and high failure rate of exploration.
However, even ETFs will be vulnerable during any market downturn that hits all producers and battery stocks. They still don’t provide the protection of investing in a generic miner or even spreading investments across a diversified portfolio.
Having said that, some of the best lithium ETFs to invest in are:
Investments within these ETFs often change rapidly, so it’s important to consider both the specific ETF fact sheet and your own risk attitude before buying in.
Lithium is a silvery-white alkali metal, with special chemical properties that make it the optimal component of lithium-ion batteries that operate as the power source for electric cars, phones, laptops, wheelchairs, e-bikes, and countless other items.
In addition to batteries, it has dozens of other applications:
However, 80% of the metal mined in 2021 was used for EV batteries, so EV demand is the key price-determining factor. [6]
Nickel batteries were popular in early EVs, as lithium ones are around 50% more expensive to manufacture. Nickel batteries also last for more years, as they tolerate more charging cycles. Further, they can already be profitably recycled.
However, lithium’s unique chemical advantages mean it will almost certainly power the EV revolution, bar a giant technological leap forward. It’s the least dense metal and the most effective for conducting electricity. And LI-ION charges faster, and its maximum charging capacity is less affected after each charging cycle.
Nickel also has 40% lower energy density, so more is needed to make a similarly powered EV battery. [7] In addition, nickel gets hotter faster, so needs a water-based cooling system.
For balance, lithium’s major downside is its chemical instability. It has to be stored in a vacuum, or inert atmosphere, such as oil. This makes it far more expensive to mine, transport, store, and manufacture into batteries.
The metal comes from two key sources: spodumene, mined mainly in Australia, and brine extraction, coming mostly from the South America ‘lithium triangle’ of Argentina, Brazil, and Chile, which contains 75% of the world’s deposits. [8]
Spodumene is a lithium-bearing hard rock mineral, while brine is an accumulation of lithium-containing groundwater that is extracted as a salt.
The two main types of lithium sold at market are lithium carbonate and lithium hydroxide. Lithium hydroxide is regarded as a premium product as it is better for battery manufacturing.
Lithium extracted from spodumene can be turned into either hydroxide or carbonate, but lithium extracted from brine must be turned into carbonate before being converted into hydroxide. This makes spodumene mining far more economically viable.
Lithium is a common element. However, there are few places in the world where the metal is concentrated enough to economically mine.
Australia is by far the world’s leading producer. While it has fewer deposits than in the lithium triangle, its spodumene is more economically attractive. In addition, its close geography and trading ties with China mean there is always a buyer.
As fossil fuels dry up and become more expensive, lithium is becoming ever more important for national energy security. With few large deposits worldwide, countries that can are already attempting to develop their own domestic supplies. This means opportunities to invest are going to increase.
For example, China’s Sichuan province hosts a high concentration of the metal in its salt lakes, the EU has small reserves in Serbia and Portugal, and the UK has some reserves in Cornwall. All are likely to be developed, as the current energy crisis has demonstrated the dangers of relying on external sources for critical infrastructure materials.
For starters, data from the UN Department of Economic and Social Affairs shows demand for electric vehicles Li-ion batteries increased from just 19 GWh in 2010 to 285 GWh by 2019. And demand is set to soar further to 2,000 GWh by 2030, representing 8% of the global energy supply. [9]
It’s true that there is no real shortage right now, other than that associated with supply chain problems. Goldman Sachs has already predicted the metal’s bull run is at an end, and is about to enter a sharp capital overcorrection due to oversupply. [10]
However, the overarching trend should be one of long term shortages causing price rises.
This is due to a number of factors, including cross-sector reliance. While lithium demand is currently driven by EV adoption, its other uses mean that even if demand for EV batteries falls, the overall market is unlikely to be dragged too far down.
A handful of major players control the vast majority of global production, concentrated inside a few small regions on Earth. This is a problem because it makes it difficult to ascertain lithium’s true value, given that the metal is not publicly traded.
The dozens of smaller exploratory companies constitute a further complicating factor. Supply chains are few and weakened by the pandemic. Further, as many producers don’t disclose the levels of their reserves, it is virtually impossible to know whether there will be a shortage until it comes.
But in the Global Electric Vehicle Outlook report, published by the International Energy Agency, EV sales doubled in 2021 to a record 6.6 million. Further, 2 million EVs were sold in Q1 2022, up 75% year-over-year.
As Executive Director Fatih Birol notes, ‘few areas of the new global energy economy are as dynamic as electric vehicles. The success of the sector in setting new sales records is extremely encouraging.’ [11]
Moreover, legislation prohibiting the manufacture or sale of ICE cars in favour of an electric vehicle future is being passed across vast swathes of the developed world, including in the EU, UK, USA, and even China. [12]
Similar to how Taiwan controls 95% of semiconductor manufacturing, China controls 76% of lithium battery cell production, and also holds a market-leading position in lithium refining. [13]
The Ukraine war, Shanghai lockdown, and Sino-Taiwan tensions have all given countries and companies good reason to re-evaluate their supply chains, and consider paying more for security of supply.
In the US, President Biden has given lithium several huge boosts:
Moreover, half of the tax credit requires 40% of metals in an EV battery to come from either North America or a US free trading partner, increasing to 80% by 2027. For context, Albemarle has the only operating lithium mine in the country.
Further, the other half relies on 50% of battery components being North American-made, rising to 100% by 2029.
Lithium will power the EV revolution. However, it does not come without risks.
Lithium needs to be concentrated enough to be worth mining, and exploratory projects to determine this are both expensive, and come with a high failure rate.
Moreover, even if a definitive feasibility study is successful, the metal is difficult and time-consuming to mine, and new mines take up to a decade to begin extraction.
While this means demand is likely to eclipse the supply ramp-up, the risk of losing money rapidly over a long investment timespan cannot be ignored. Further, most lithium companies are intent on growth, so any dividend yield is likely to be low.
The wider risk is that any upcoming global recession puts the EV revolution on pause, especially if the economic gap between petrol and electricity narrows and governments lack the capital to drive the EV revolution along.
A further risk comes from potential technological advancement. Advances in hydrogen fuel cells, which have an energy-to-weight ratio ten times higher than lithium, could one day replace the metal entirely.
They offer no harmful emissions, an impressive range of 300 miles, and even higher energy efficiency levels. However, developing the tech required to refuel hydrogen-powered cars on a mass scale is highly capital-intensive, as is storing and transporting hydrogen. Further, onboard hydrogen storage is not yet commercially viable. [16]
However, as other industries go, investing in hydrogen stocks could be an intelligent way to diversify risk. The three most popular UK-based hydrogen stocks are AFC Energy, Ceres Power, and ITM Power.
While lithium demand is expected to rise over the long term, individual shares are expected to be a volatile investment where you can easily lose money. This makes lithium ETFs a less risky choice for low-capital retail investors.
Tesla is sourcing from Ganfeng, Livent, and Albemarle, as well as a handful of smaller Chinese and Australian suppliers. CEO Elon Musk has considered setting up his own lithium mining company to protect Tesla’s future results.
This article has been prepared for information purposes only by Charles Archer. It does not constitute personal advice, and takes no account of individual circumstances or any specific person. No party accepts any liability for either accuracy or for investing decisions made using the information provided, and investors should seek personal advice or independent advice.
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