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Is the Lithium Bubble a Myth?

Written by Keith Kohl
Posted October 14, 2016

Now that the lithium revolution is officially underway, the bears have come out in force.

But that was inevitable, right?

Truth be told, nothing should be immune to a bit of criticism now and then.

Those critical pundits see more than a little criticism. They’re calling it a bubble that’s about to burst. The jump in lithium prices recently will lead to a rush of new projects from lithium companies that suddenly pop up overnight.

Personally, I’m not convinced, and you shouldn’t be either.

So, what exactly has struck enough fear into them that they’re predicting a lithium bust?

That’s a good question...

Bubbles Burst

Is the lithium sector in for rude awakening, even if it doesn’t come for another decade?eac1101416

Remember, lithium production has grown by about 10,000 tons per year over the past decade. By 2025, global lithium production will grow another 20%.

Up until now, the market was dominated by just three major suppliers: SQM, FMC, and Albemarle.

Chinese Tianqi has recently joined the cast, and it is planning to build a massive battery-grade factory in Western Australia that will be getting its supply from the Greenbushes mine, which alone supplies about 30% of the world's lithium right now.

Now it's estimated that production from the mine will double with this project online.

Looking beyond the miners, you’ll find a multitude of smaller exploration players feverishly looking for the next major discovery. They’ve sparked a land-rush in Nevada, which some have considered the world’s next major lithium hub.

Their bottom line: too many sources, not enough consumers.

The bubble is predicted to pop within the decade, when excess production catches up to demand and leaves once high-flying stocks in the gutter.

I’ll confess I’m not without a little bias as we wait and see how high lithium production climbs.

But make no mistake; I'm not the least bit bearish on this commodity.

Time is Key

Not only will new production from expanding existing lithium mines take a lot of time and money to extract, but the biggest thing the lithium boom has going for it is surging demand.

Bloomberg says EVs will account for about one-third of all light cars on the road by 2040. That doesn't even take into account the electric trucks and buses that will certainly be commonplace by then.

Right now, Germany is about to pass legislation that will ban fossil fuel–powered cars by 2030. Those are the kinds of dramatic changes that are in store for us further down the road. It’s how Germany will be able to meet its end of the Paris agreement.

Clearly we haven’t seen a peak in battery demand, nor will we for decades.

Yet the batteries themselves aren't the best — explosions aside, I think we can all agree that a boost in energy storage capacity is well overdue. The phone that’s charging next to me agrees.

More than that, it's impossible to tell where demand will be in 10 or 20 years. I can, however, say with a degree of certainty that it won't be going down anytime soon.

And I can't stress this enough: even though there are hundreds of new exploration companies springing up, you can be sure that they’re not all winners.

In fact, this situation is eerily reminiscent of what happened during the beginning stages of the shale boom in 2008. Companies that had no experience in oil couldn’t tell you the difference between oil sands and West Texas Intermediate.

That, dear reader, is what you always need to be on the lookout for.

Look, there’s no question that the lithium sector has been the darling of the energy industry, and it doesn’t hurt having Elon Musk in your corner.

Truth is, it's been the best-performing commodity, and one of the few with a positive outlook over the long run.

Until next time,

Keith Kohl Signature

Keith Kohl

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A true insider in the energy markets, Keith is one of few financial reporters to have visited the Alberta oil sands. His research has helped thousands of investors capitalize from the rapidly changing face of energy. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital as well as Investment Director of Angel Publishing's Energy Investor. For years, Keith has been providing in-depth coverage of the Bakken, the Haynesville Shale, and the Marcellus natural gas formations — all ahead of the mainstream media. For more on Keith, go to his editor's page.

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