Demand

What does demand look like over the next 10 years?  In our opinion, Investors don’t need to know precisely what the demand will be over the next ten years, they need to know where the market expects demand to be over the next ten years.  Thus, in this post, we will strive to present to you different viewpoints in the debate, while presenting thoughts on those forecasts.

Forecasts: Miners vs. Research Analysts

Demand Table.png

Before we begin our discussion, we want to start by summarizing a few notes regarding the tables shown above:

  • There are many different estimates for demand out there, so we started at 200,000 tonnes (as referenced by the USGS & others), which is in line with the average of the supply estimates for 2016 you will see in our next post.
  • UBS provided their own estimate for demand in 2016, so we utilized that number instead of the 200,000.  They provided 2016 and 2025 estimates, the numbers in between were estimated from their published charts.
  • The yearly forecast for each different company is derived by taking the company’s growth rate expectations and projecting the demand.  For example, Morningstar expects expects lithium demand to grow by 16% per year to 775,000 tonnes by 2025.
  • Albemarle forecasts demand to grow by 35,000 tonnes per year through 2021, but has not provided forecasts beyond 2021, so we stopped our model at that year.
  • Deutsche Bank’s forecast is presented as published on a yearly basis, no math was done on our part.

As you can see from the tables above, there is a wide range of forecasts among the included companies.  Even within the miners, the range is over 150,000 tonnes of lithium in 2025.  This just goes to show you that those individuals closest to the action all have differing opinions on where lithium demand will be in the next ten years.  This can probably be explained by the level of bullishness of each company’s outlook for EV demand as well as for smaller applications.

We believe the junior miners (as an example, Novo Litio is shown above) are talking up demand, and providing very bullish outlooks because it is in their best interests.  These companies have a long process to go through- raising money, buying land, conducting multiple rounds of assessments on the land, undergoing construction, beginning production, working out the kinks, and then finally ramping up production to scale.  The majority of this multi-year process is done before they start shipping any material to customers.  Thus, the rosier the picture they can present, the better, because investors will continue to provide them with the capital needed to establish their production sites.

Conversely, the larger players, we believe are being more conservative because it will help them out with investors as well.  With the financial markets being an expectations game- the companies have to manage where Wall Street sees their production and sales levels.  Thus, by under-forecasting and over-delivering, these larger miners can maintain an appearance of being in “rapid-growth” mode, where forecasts are always underestimates, to keep their stock prices moving up in bursts.  We liken this activity to Apple, Inc. who for years during the early iPhone years routinely delivered upside surprises on iPhone shipment levels, leading to rapid repricing of the stock as the market adjusted growth expectations.

Similarly, taking a look at the 3rd party research from Morningstar and Deutsche Banks, we see that they are much more bullish on the overall market.  For example, Morningstar expects EV’s to reach 11 million annual sales by 2025, up from just .3 million in 2015.  This would approximately imply a 10% adoption rate, vs the 4-6% which is consensus.

Trust the Wise Men?

In the above table, Albemarle is the only company to give growth figures in terms of tonnes and not percentages.  Being the largest producer in the world, their estimates are generally the ones that analysts on Wall Street pay attention to the most.  It is important to note here that until as recently as March 2017, they were actually forecasting growth of 20,000 tonnes per year through 2020.  They have since revised that growth figure up to 35,000 tonnes per year.  

That is an upward revision of 75% in their estimates of growth.  Let that fact sink in for a moment- the leader of the miners, and the company most in tune with customer needs had to nearly double their estimate of lithium demand.  Now, I don’t want this to look like an attack on Albemarle.  We have tremendous respect for Albemarle, as you will see in our upcoming company-specific posts.  However, we point this out to show that even the smartest people in the room may not truly be able to forecast where demand is going to be beyond the next 12 months.

We believe this is the most important takeaway from this post for investors.  Because of the disparity of the available expert opinions on the subject, the market is prone to volatility in the space based on every new piece of news.  Every time more bullish estimates come out, the market rallies to price in the higher growth story.  However, in this volatility investors who spend the time to truly get to know the market and gauge EV uptake can get an edge, and thus make more profitable investing decisions (whether long or short).   Below, we will try to provide you with some help in this challenging endeavor.

Electric Vehicle Sales

EV table 1.png

EV table 2.png

 

 

 

In the above tables, we try to show how EV uptakes affect lithium demand.  We assume that global car sales grow at 2% per year, and that the average EV contains 63kg of lithium, which is roughly the same as Tesla’s 70 kWh battery.  The first table shows a very optimistic case, with EVs representing 11% of all new cars sold in 2025.  This is very similar to Morningstar’s bullish forecast.  The second table shows a sensitivity analysis with a range of adoption rates for 2025.  This figure is very powerful because it shows us just how different demand estimates can be based on just a few percentage point differences in EV adoption rates.  

Additionally, it also shows us the tremendous upside risk, or how much room there is above the most bullish demand forecast for 2025.  If EV adoption does in fact hit 11% of all new cars sold in 2025, then EVs alone will require approximately 700,000 tonnes of lithium.  This doesn’t include any of various other applications we outlined in our previous post including those related to trucks and buses, which require much more lithium.  Thus, the industry as well as Wall Street could be way off in their estimates, leaving ample room for investors to profit as the stocks reprice to reflect upward revised forecasts as they come out.

Survey of New Car Buyers

2017-06-22.png

In order to really understand where the market is headed with Electric cars, we set out to find out directly from consumers if they are in fact interested in and willing to buy an electric vehicle over the next 5-10 years.  After all, we can talk as much as we want about countries mandating EV sales, changing attitudes towards the vehicles, and the production lines of Tesla. But what really matters is how many of the average consumers throughout the world will buy them.  

Our survey of consumers shows that they are overwhelmingly considering purchasing an EV over the next 5-10 years.  Of the 100+ people that filled it out, over 50% said they would purchase an EV and another 42% said they would “maybe” buy an EV.  Only a total of 5 respondents responded that they would definitely not buy an EV.  

Furthermore, you’ll see that the barriers which are currently preventing buyers from purchasing an EV are quickly fading.  The four largest options selected by respondents are: the high price of an EV, lack of available charging stations, limited choice of cars in the EV marketplace, and a belief that the EV’s are limited from a distance/mileage perspective.  All of these factors are being addressed by governments and auto manufacturers as we write this post.  

The high price of EV and the lack of choice among EV cars are all problems that are dissipating with the expected launches of over 120 EV’s by 2020.  You only have to look at Tesla’s Model 3 or GM’s Bolt to see as well that the price of the EV is quickly coming down.  Charging stations will need to follow in order for consumers to continue buying EV’s, a problem which Tesla has dedicated a lot of time.  Additionally, the recent settlement between VW and the US government has led to VW building a nationwide fast charging network.  Finally, mileage and distance is becoming a thing of the past with some EV’s already able to hit 300 miles of range on a single charge.  

Summary

Although this is a lot to digest, we believe the key takeaway here is that there are a lot of factors influencing the future of lithium.  It may seem like a daunting task to try and estimate demand.  However, as investors, we can avoid engaging in this activity and focus on how the market feels about the future of lithium demand.  We will help in this endeavor by continuing to track the industry closely and relay our thoughts to you.

So stay tuned, as we will periodically update this page with new developments!