Charlotte de Kerpoisson
Hello and welcome to another Podcast by BNP Paribas Wealth Management. This podcast is all about batteries and lithium. Why is lithium a crucial metal today and how and why invest in it? My name is Charlotte. And today I'm joined by Edmund Cheng, global chief investment officer. Hello, Edmund.
Edmund Shing
Hello, Charlotte.
Charlotte de Kerpoisson
Lithium is a chemical element that is a soft, silvery white alkali metal that is very light. Most people, probably without realizing it, use something containing lithium in their daily lives working, communicating or getting around. So if you possess a smartphone, a laptop, or an electric vehicle, you're using lithium contained in a high capacity rechargeable lithium ion battery. Lithium is highly reactive and flammable, which is why airlines often have strict safety rules about placing lithium ion batteries in checked luggage. Edmond's lithium ion batteries are ubiquitous today, thanks to all manner of portable technology and the increasing popularity of battery electric and hybrid vehicles. Why are you focusing on lithium ion batteries today?
Edmund Shing
Well, Charlotte, I mean, as you said, it's a ubiquitous technology in many ways. Battery technology is not kept up with the advance in other technologies. But what we have today with lithium ion batteries is the best we have probably available, at least at a reasonable economic cost. Why I'm looking at it right now is because lithium is interesting, because it goes in cycles. If you look at the lithium price, it goes up a lot or it goes downwards. So very sharp cycles. And since the end of 2021 we've been in a very sharp down cycle. So the price of lithium has been falling despite the continued growth in demand for lithium ion batteries. Um, lithium itself uh, has seen a sharp fall in price over the last, uh, three and a half years now. Why? Well, because lithium is actually not that difficult to produce, to mine and produce and refine. The mining and particularly refining is dominated by of lithium is dominated by China, as is, of course, uh, lithium ion battery manufacture. But why I think it's interesting today is because on the one hand, we have seen reduction in capacity of lithium production, particularly in China. So in other words, while demand is growing, supply is now actually decreasing. And also we need to remember the mantra in commodities, which is that the cure for low prices is low prices. So in other words, the fact that the lithium price is so low means that companies are no longer profitable producing lithium. They're therefore closing down production. And that in turn will reduce supply with demand continuing to grow for lithium and lithium ion batteries. That means eventually prices are going to go up, and that's what is starting to happen. Lithium prices are starting to go up, and a number of investment banks are forecasting far higher lithium carbonate prices, for instance, over the next 12 months, as you see a continued imbalance of supply and demand with continued demand for lithium ion batteries, not only from obviously electronics, battery and hybrid electric vehicles, as you've mentioned, but also more and more industrial battery storage used for renewable energy to store renewable energy, particularly wind and solar energy.
Charlotte de Kerpoisson
Now let's talk about how and where we source lithium. We know that lithium supply is geographically concentrated because around 98% of production is on three continents, namely Australia, South America and Asia. Australia leads the pack in production capacity. Chile and Bolivia are known for their rich lithium brine deposits, while China plays a pivotal role in the global supply chain. Now, before raw lithium ends up inside the battery for an EV or for solar storage, there is a long mining process that can take up to several years. Can you tell us more about that, Edmund?
Edmund Shing
Well, as I said, you know, lithium brine, it's I mean, in mining, what you actually do is you find lithium typically in low concentrate solution. And then the challenge is really then to extract the lithium from this low concentrate solution and then refine it to a purity that can then be used for further production in, in lithium ion batteries. So that's really the process. So you write the raw material can come from Latin America or Australia and particularly Australia. However again it's not that rare. It's it's not that difficult to find however um, where the real value add comes is in the refining. And it's interesting to note that the vast bulk of the refining capacity in the world for lithium, which is a necessary step to to become a component in a lithium ion battery that is done in China. So there's a real bottleneck here, geographically speaking, uh, in China, which is of course, true not just for lithium ion, uh, lithium and lithium ion batteries, but actually for a whole manner of other technologies we think about, for instance, uh, solar panels that is increasingly dominated in terms of production by China. We think about the production and refining of rare earth metals. Again, China dominates. The refining of lithium is just yet another area where China has taken an enormous lead, and it's now effectively become the supplier to the rest of the world. And that's not through the lithium itself, but through the finished article, which are the lithium ion batteries, as you say, as we said, for industrial storage or in battery electric vehicles or in electronics.
Charlotte de Kerpoisson
So what's driving lithium demand growth in 2025 and beyond?
Edmund Shing
Well, as I said, clearly the increased penetration of battery and hybrid electric vehicles is one element. Secondly, of course, if you look at smartphones in particular, they continue to require higher and higher capacity lithium ion batteries. Um, you know, if you look at your iPhone today, you'll be lucky if it lasts the day before the battery runs out. Now, um, that is, of course, something that that needs to improve, because I remember the good old days with my Nokia 3310 brick phone back in the dark days pre smartphones, and that battery could last a week. And now of course, that's because you're basically carrying a very high, highly high powered portable computer around in your pocket the whole time. And as I said, the battery technology up to now hasn't really kept up with the advances in computing technology. So the demand for, you know, higher high capacity lithium ion batteries continues to grow. And the industrial storage element, again, if you think about the power outages that we saw on the Spanish electricity grid this summer, this was due to the fact they have a lot of solar, but they are find it very difficult to control, um, the the surges of power coming from solar power into the electricity grid and having industrial storage in the form of industrial batteries next to the solar panels would certainly one solution for that. And it's something that Europe really needs if we're going to continue to install renewable energy, particularly solar panels, because they're very economically viable in order to provide a more stable electricity source from renewable energy like solar, you need to have the battery storage next to it. And that is something that is being increasingly deployed across the world. I mean, in Europe, certainly. But remember that the biggest volume of installation of solar panels is actually being done by far in China. So again, you're going to get a surge in industrial battery demand also from China, as just as we expect in Europe.
Charlotte de Kerpoisson
So as you mentioned, lithium is not actually all that rare and has be subject to violent swings in price over the last five years or so. So why do you expect higher lithium prices in the coming months and years, Edmund?
Edmund Shing
Well, as I said, the capacity cuts on the supply side of of the key element here, the price is simply too low. And lithium and lithium producing companies are just not making money. Uh, if you listen to some of the Australian lithium miners, for instance, they really are operating pretty much, you know, just the only just above breakeven. So they're really not making money. And so that really is, is, is the driving force. And I'll just remind you, Charlotte, if you look at the last two lithium price upswings in the last ten years, the the first time lithium price doubled from the lows and the second time it actually went up four times from the lows. So as I said, the price swings and lithium can be really quite violent. We're at a low right now. Uh, a cyclical low. I would say there's a pretty good chance, given the strength of underlying demand, that we're going to see a very big price upswing, just as we've seen in the previous two up cycles this time around.
Charlotte de Kerpoisson
Finally, let's look at lithium from an investment perspective. We know that there will be higher demand over the coming decade thanks to EV batteries and renewable technologies. It's estimated that by 2026, 90% of lithium demand will come from batteries alone, a massive leap of 38% over a decade. On the supply side, the challenge will be for lithium companies to keep pace with the world's accelerating demand. So, Edmund, do you think lithium companies will succeed in embracing these huge investment opportunities while providing us with a greener future? In other words, is investing in lithium a good bet? And if so, where should investors look?
Edmund Shing
Well, I would say Charlotte. Rather than investing purely in lithium, I would look at the wider industry. I would look at lithium and battery production. And buy into that investment theme as a whole, um, rather than purely lithium producing companies. Now, there are easy ways to do that. The easiest way is to buy funds and ETFs that are focused on, for instance, battery technologies or the batteries that the battery value supply chain. There are funds and ETFs that do that. And this will include investment in the lithium producing companies, but also investment in the battery producing companies such as the Chinese Catl another way to invest would be more broadly to invest in a fund or ETFs that invest in rare earth metals, because that also has, um, a quite a high percentage of its holdings in lithium producing miners. So you can go either via the battery value chain and by funds and ETFs based on that. Or you can go the rare earth metals route and by funds and ETFs that are focused on these rare earth metals including lithium. Thank you very.
Charlotte de Kerpoisson
Much, Edmund. And thank you to our audience out there listening to this podcast. Please like, share and subscribe to our YouTube channel to keep abreast of new investment opportunities
Until next time. Goodbye.