Screaming and Shouting

What’s the choke point in a number of new technologies?

The clue is in the title.

I’ve always loved the film ‘The Graduate’. Near the start, Dustin Hoffman’s character Ben – the young graduate of the film’s title – is taken aside by Mr. McGuire, an older friend of Ben’s family. He wants to talk about Ben’s future.

‘I have one word for you’, McGuire says. Ben waits expectantly for a few, uncomfortable seconds. What is McGuire’s advice?

‘Plastics,’ he says.

In a similar spirit, let’s talk about Lithium.

Why? In short, it’s a potential road block to three huge technology trends.

Let’s get all the science-y stuff out of the way first. Lithium, nestling all the way up on the top left hand corner of the periodic table, is the third lightest element (after Hydrogen and Helium) and is the lightest metal. If you ever saw a soft, silvery lump of the stuff in school chemistry lessons it would probably have been submerged under a protective pool of mineral oil – it is so reactive that exposing it to air would not have been wise. In nature, it only exists as a compound.

What’s it used for? Well one use (in Lithium salts format) is as a treatment for bi-polar disorder. Fans of Nirvana will remember the song Lithium from Nevermind. I assume, from study of the lyrics, that the song is based around this particular niche application of Lithium rather than its industrial uses.

But it is the industrial uses are the most interesting. Not the fact that Lithium is a component of heat resistant glass and various lubricants – fascinating though this is, no doubt – rather, it’s the way Lithium is used in batteries.

Phones …

Battery usage makes up almost 40% of production (see graph). And the proportion has been, and still is, growing. If you are looking at this blog on a mobile device its battery will contain Lithium. And as we all know, the number of portable devices has rocketed. Smart phones are pretty much ubiquitous in the developed world. In my household, we own five (fairly ‘last season’) iPhones, even my youngest – aged 13 – has one.

More importantly, phone sales are hugely up in the developing world too, where adoption is above 98%. There are now globally more phone subscriptions than people. On holiday in Myanmar a couple of years ago, everyone seemed to have a phone. I stopped at one road junction to see an elderly Buddhist monk waiting at the lights on a scooter while juggling two of them – both Samsung Galaxies.

If phones were the only growing driver of demand for Lithium for batteries, the story would be interesting. But the really remarkable thing is that they are not.

… Grids …

Another growing use is for grid-tied batteries. These massive units are a way for electricity to be stored and used later at times of peak power demand. They solve a peculiar problem with power grids: currently operators need to generate power as and when it is needed since – right now – power cannot readily be stored.

With traditional generating capacity, operating a ‘stack’ of power plants can solve this issue. Units that are difficult to turn off and on and which generate relatively cheap power (e.g. nuclear plants) are run round the clock. More expensive, but more flexible capacity is held is reserve and turned on when needed – usually for heating when it is unusually cold in winter or for air conditioning when it is unusually hot in summer.

The trend that is disrupting this approach is the rise of renewables. The proportion of power generation derived from renewables (wind, solar, hydro and the like) has tripled, worldwide, in the last ten years: from about 2.5% to 7.5%. In certain regions, like Europe, the proportion is even higher.

In the UK, for instance, 11.5% of power is coming from wind turbines. Adjusted for the costs of pollution, onshore wind power is now one of the cheapest – if not the cheapest – forms of generation. More power was generated from wind than from coal in the UK in 2016. In a world that is warming dangerously, this is a good thing.

But you can’t just decide to turn wind power on and off. True, having lots and lots of turbines in geographically dispersed locations reduces the variance of output, but wind is much trickier than traditional fossil fuels to fit into the power generation stack. Which is where batteries come in. They can smooth the gaps between supply and demand.

Take, for example, a recent project that was completed down under.   A 100 MW battery was installed in South Australia to provide a backstop to prevent the power disruptions and blackouts that the region experienced in the midst of unseasonably hot weather this time last year. It is the biggest grid-tied battery ever to be installed. As renewables become ever more important, expect more and bigger versions to follow. All this will need Lithium.

… and Automobiles.

But a clue to the most headline-grabbing driver of demand for Lithium can be found in the identity of the firm that installed the Australian battery: it was Elon Musk’s Tesla. And it is the rise of electric vehicles (EVs) – so associated with Tesla – that is the biggest revolution that will require more and more Lithium.

When it comes to EVs, I confess that I always thought they were for bearded cranks who eat mung beans and who sport peculiar, knitted headgear. I thought an EV was about as fun to drive as a milk float or a golf buggy. That’s until I bought one – a dinky little BMW i3. Quite simply, it’s the best car I’ve ever driven for navigating a big city like London (where I live).

It is true that EVs are still a bit of a minority pursuit: only 120,000 of the UK’s 32 million vehicles are purely electric. The distance you can drive them between recharging stops (my BMW does 125-200 miles) means that they are impractical for long distances. Charging itself, though pretty convenient in built up areas or if you have off street parking, is not as stress free as for a petrol car.

But the take up is growing strongly. A lot of trends are combining to make this so. For one thing, a lot of people live in big cities (over half of us globally and over 90% in many industrialised countries) and the proportion is growing steadily. This, in turn, has focused minds on the problem of particulate pollution – a problem especially acute in China.

Then there is the global warming issue – if the power grid is ‘clean’, EVs cause less CO2 emissions than their petrol or diesel rivals. Last, batteries are getting smaller, lighter and cheaper – all of which is crucial for practical motoring.

All this means that EVs are becoming a realistic option for drivers. Indeed, a recent study found that in the UK, US and Japan, EVs are now cheaper to run for the first four years than any other vehicle type.

The result is that governments and car companies are starting to gear up for a big increase in EV volumes. There is ramped up investment in charging infrastructure, there are state subsidies, and even – from Volvo, for instance – a strategic commitment not to continue to manufacture non-EVs past a point in the not-too-distant future

Once again, all this will need Lithium.

Data: mining

Three trends – phones, grids and automobiles – mean that demand for Lithium is on a steady upwards path. But it’s difficult for producers to keep pace with this rise. Lithium isn’t dug up like copper, say, but extracted from mineral-rich brine, often around geothermal energy wells. New facilities take time to get up and running. As a result of restricted supply, Lithium prices have soared (although in inflation adjusted terms they still are nowhere near as high as back in the 1950s and 60s).

All this is good news for the biggest producers of Lithium: Chile, Argentina, China and Australia. But it’s a headache for manufacturers.

So what’s the conclusion? What should you – you, who have had the patience and fortitude to read this far – actually do?

Well, if you want to bet on Lithium miners and battery producers there’s an ETF called LIT you can ship in. It’s up over 60% this year. Not bitcoin, but not bad.

Alternatively, you could wait for the LME to launch its new future on Lithium and go long those bad boys (although it should be noted that there are some difficulties with the whole concept of launching a Lithium future – storing the metal or its compounds in warehouses for one).

And if you happen to stumble upon a source of hot, Lithium-rich brine in your back garden – start raising money now.

But I guess the real answer is this: keep watching this space. There’s a lot of optimism about electric vehicles and energy storage right now. But this optimism could be derailed if manufacturers cannot access adequate Lithium supplies. It’s a potential global choke point and – like oil before it – might start turning unpleasantly geopolitical before too long.

To echo Mr. McGuire: enough said.

Now I’ll let you get back to the party to hang around the punchbowl full of bitcoins.

Buy the new, dirt cheap edition of Kevin Rodgers’ book ‘Why Aren’t They Shouting?’ at Amazon.