The Lithium Cartel

Background:

The Lithium market has historically been an exciting investment opportunity since it has been dominated by a classic Oligopoly structure.  An oligopoly is where a market is controlled by only a few companies.  Oligopolies usually make for exciting investment opportunities since they often come with preferable pricing for their products and thereby strong profit margins which are both important factors for investors.

The oligopoly in the lithium industry, what we call The Lithium Cartel, has traditionally consisted of Albemarle (ALB), Sociedad Química y Minera (SQM), FMC corporation (FMC) and Tianqi (publicly traded in China).  Additionally, Ganfeng Lithium is increasingly included in this list, likely due to their many offtake agreements and joint ventures which has helped propel them to a dominant player in the lithium space.  Regardless of whether you choose to include Ganfeng or not, The Lithium Cartel have consistently captured 85% or greater of the world’s Lithium production.

Why should we care about The Lithium Cartel?

The Lithium Cartel is important to consider for a few reasons:

  • With dominant control of the market, the companies can responsibly control supply, similar to OPEC in the oil market.
  • Control of the supply market enables the cartel to support market prices.  Thus, elevated prices will most likely remain until the cartel’s power is truly diminished.  Beyond this point, elevated pricing is possible, but prone to more erratic swings based on supply and demand given the absence of a controlling party.
  • While not part of the oligopoly, the new junior miners entering the market will be able to take advantage of the supported prices when securing supply agreements for their production.
  • Until meaningful new supply comes online from junior miners, investors looking to participate in the lithium and electric vehicle boom would benefit from maintaining investment exposure to the cartel.  They are already producing, have strong financial positioning, and can take advantage of the favorable environment currently present in the lithium industry.

Current Positioning:

Many people have said that the oligopoly of ALB, SQM, Tianqi, FMC and Ganfeng is dead. Gone. Finished forever.  While we agree that the power they currently hold on the market is threatened by newer entrants (or junior miners, as they are often called), let’s look at current data to determine their true status.

Our analysis for 2017 found that the Cartel currently accounts for close to 90% of market supply, as shown below:

Companies Total Production (Tonnes) % of the Lithium Marketplace
Oligopoly ~ 203,000 89%
Oligopoly + Orocobre ~ 215,000 94%

As shown, the oligopoly is still dominating the marketplace.  With Lithium prices increasing rapidly and holding steady at all time highs, the largest companies in the marketplace are poised to capture immense gains.  We’ve seen these gains reported in recent earnings reports from ALB, FMC and SQM.  This trend should hold true at the very least until early to mid 2018 when some new entrants are expecting to arrive in the market.

The Future of the Cartel:

Moving forward, what will happen after Q2 of 2018 and for the remainder of that year? Using estimates from our supply II analysis, we know that there is some potential for a sizable amount of new supply to come to the marketplace.  What will the Oligopoly look like in that event?

Companies Total Production (Tonnes) % of the Lithium Marketplace
Oligopoly ~236,000 80%
Oligopoly + Orocobre ~250,000 85%

The significant impacts to the oligopoly starts occurring in 2018.  Yet, they’ll still have at least potentially 80% of the market.  While reduced from a high of 90%, the oligopoly will still control a very sizable amount of the industry!  Thus, in our opinion, the many analysts who have cried that the Oligopoly is now dead are wrong.

Furthermore, with all of the new entrants in the space, it is our belief that consolidation in the industry could be a real possibility.  While the cartel members are looking to exhaust all possible expansions to current projects, they will still have a need to expand production via new projects.  Thus, instead of starting from scratch, they might take some of their excess cash and deploy it via acquisitions of promising junior miners. This could potentially shift hard-earned control from the junior miners back to the Cartel.  Think about the following: what if a member of the cartel makes a takeout offer to Orocobre, which has repeatedly made missteps and could benefit from better execution?

More likely than that, why wouldn’t a cash-rich Cartel member look towards some of the juniors who will start producing in 2018 and buy one of them?  Altura has a market cap that’s at $274 Million and is targeting to produce by early 2018.  Similarly, Pilbara, which holds a really great resource has a market cap of $493 Million and will start producing in 2018.  A member of the Oligopoly could step in and take over either of those businesses in a heartbeat.

Just note what the CEO of ALB said in their most recent earnings call, “if you look at our balance sheet, our balance sheet is in very good shape…..And where there is an opportunity for us to acquire assets, be they a technology or a reserve or an operating assets, that allow us to de-risk and strengthen our strategy, we’re certainly interested in doing it.”

In the past quarter, ALB had over $1 Billion in cash on their balance sheet.  As a reminder, ALB originally got into the Lithium business by buying Rockwood holdings.  So they are certainly not afraid to do deals.  SQM on the other hand has thus far chosen to invest through joint ventures, forming partnerships with Lithium America’s and Kidman Resources.  But there’s nothing stopping them from taking over their JV partners should it prove to be a better use of cash than starting new projects.

As a final note, we already know from SQM’s investor day that they are looking “for new Lithium projects outside Chile.”  Thus in addition to their current JV’s, it looks like SQM is interested in pursuing other deals in the future.  Stay tuned, as we will provide some thoughts on who we think SQM or others will look to acquire or partner with next.

NOTE: When we refer to the oligopoly as a Cartel, we don’t actually mean a Cartel in the classic sense but that it’s similar to one. More than anything, we used this term as a fun way of describing the oligopoly itself.