My investment philosophy has always been to find things people can’t live without and then buy them at a price considerably below what’s known as their intrinsic value, or what they are truly worth. In other words, finding necessities at a price that value investing guru Warren Buffet would be proud of. So when 200 of the world’s leaders met recently at the Paris International Climate Conference, it brought up an outstanding opportunity.
Climate change comes mostly from burning fossil fuels and seventy percent of it is used in transportation. And most of that is gasoline for our cars. Eighty million cars were produced worldwide in 2015 and that’s not going decrease any time soon. The economies of China and India are among the strongest in the world and those workers are going to want the second most prestigious thing they can own, an automobile. Right now, there are 800 autos per 1,000 people in the U.S, 100 per 1,000 in China and 20 per 1,000 in India. But China is already twice a polluted as any place on earth, and India is on the rise. You can’t see down the block in China and the government is desperate for anything non-polluting.
The answer is lithium. Now, lithium used to be a suppressant for people with bipolar disorder, and still is. But with the advent of wireless technology, lithium is in every cellphone. And that trend is worldwide, over 2.5 billion people have one and almost all of them are powered by a lithium-ion battery.
A handheld device uses an ounce of lithium. A hybrid electric vehicle (EV) like a Prius uses 20 pounds in their batteries and a fully electric vehicle like a Tesla uses 50 pounds. In 2014, there were 2.7 million light-duty EVs on the road, and the expectations are for 6.7 million by 2023. Global X Funds, who have a Lithium ETF, says worldwide demand for the metal will increase from 165,000 tons to 3,000,000 tons per year by 2030.
Following the big money is usually a good idea. Currently, Vanguard Funds has $221 million invested in lithium already. Janus has $187 million stake while Fidelity is in for $183 million. Elon Musk, Tesla’s creator and CEO has billions invested and Warren Buffett has an electric vehicle plant in China.
Let’s look at Tesla. They are currently building a lithium-ion battery at what they call the Gigafactory outside of Reno. It’s a massive plant covering ten million square feet. The factory will allow them to reduce production costs for their EV batteries and also for their Powerwall batteries that are used to power our homes, offices and factories. Within one week of announcing the Gigafactory, they received $1 billion worth of orders and are sold out for the first year.
The solar powered factory is expected to produce up to 500,000 EVs per year and that alone will use 17 percent of the world’s yearly lithium production. Warren Buffett’s plant in China is of equal size and both expect to grow from here. As time goes on and climate change continues to devastate the planet, electricity will replace fossil fuels. It won’t happen overnight, but it’s going to happen.
This transition to EVs won’t be without problems and one of the biggest will be producing enough lithium. The United States Geological Survey estimates the world has enough resources for 365 years based on current global production of 37,000 tons per year. While that sounds encouraging, if world demand is indeed 3,000,000 tons a year by 2030, then there’s enough lithium for 12 years.
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In fact, with lithium production being where it is, it’s debatable whether there’s enough to meet Tesla’s demand for 500,000 EVs and 1,000,000 Powerwall batteries by 2020. While there are substitutes for lithium, they’re not as efficient. Where there’s a will there’s a way though, if profits are great enough, lithium miners will produce the product.
These problems and potential solutions are down the line. In the meantime, a limited supply and increasing demand is a windfall for investors. Lithium is a necessity whose value can only go up. The era of fossil fuels is coming to an end and the rechargeable one is dawning.
https://www.times-standard.com/business/20160102/moneywatchers-investing-in-lithium