My view is that catalysts for self-driving cars will also drive a transition to battery-powered electric vehicles. A shift from human driver to machine driver will initially add significant new computational costs to the vehicle bill of materials (BOM). One way to accommodate such costs in the BOM is to replace IC engine powertrain with electric powertrain, and allow scale benefits of battery manufacturing to lower that portion of costs over time. Lithium will be required as a raw material for batteries produced in larger scale. Initial signs of a “Lithium Rush” are apparent in market prices for the metal (see chart below), as well as in stock prices for SQM, ALB, and LACDF.

Lithium market prices

According to SQM’s analyst day presentation, Lithium demand (chart below) is expected to increase from ~175k Metric Tons (MT) per year in 2016 to ~400kMT/yr in 2025, a CAGR of ~9%. SQM’s forecast assumes ~8m xEVs in 2025 (i.e. roughly 8% penetration of the global vehicle market). SQM’s Lithium is sourced in Chile today, and SQM has entered into a JV with Lithium Americas Corp (LACDF) to further its growth strategy by mining Lithium in Argentina – the 50/50 JV is called Minera Exar. As a result, LACDF’s stock price today is driven by potential value of Lithium supply capacity expected to come online in 2019, which I think is roughly the time when both EV and self-driving car could start to ramp in higher volume.

Lithium demand forecast

The chart below shows projected 2016 market share of global Lithium makers. China-based Lithium suppliers would capture ~40% of the market, and seem to be stepping up M&A to gain greater access to Lithium resources in other parts of the world. For the larger players like SQM and ALB, Lithium products currently represent less than 20% of total revenues. SQM claims to be the industry cost leader; so LACDF stands to benefit from SQM’s industry-leading cost structure, when it starts supplying Lithium in 2019.

Lithium market share
 

The chart below shows estimated Lithium supply from the different players, according to forecasts shared by SQM.
Lithium supply projections
Preparing for a Lithium rush is one thing, but trying to imagine a world in which a very large number of Lithium-based batteries will need to be recycled or disposed, is a whole other worry left for another day.

THIS ARTICLE IS NOT AN EQUITY RESEARCH REPORT.
Disclosure: As of this writing the acteve Model Portfolio (aMP) held a long position in LACDF, but no positions in SQM, ALB or FMC.
Additional Disclosures and Disclaimer
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