Time for Lithium ETFs as Scarcity Deepens?

Elon Musk’s once tagged lithium as “the new oil”. The very phrase emphasized its importance of lithium in the global supply chain and the burgeoning electric vehicle market. As an essential component of rechargeable batteries found in everyday devices, lithium’s demand continues to soar, making it a promising investment opportunity.

However, with the escalating demand for lithium, concerns about supply scarcity have started to emerge. Analysts are divided on when this scarcity might strike, but the consensus is clear: the lithium market is heading for a potential deficit, and this opens up opportunity for gains in lithium-oriented ETFs.

Forecasts Point to Impending Lithium Shortfall

Leading research units and energy experts have warned about the imminent shortage of lithium due to the ever-growing demand for EVs. BMI, a Fitch Solutions research unit, predicts a supply deficit by 2025, citing China’s surging lithium demand that is set to outstrip its supply, as quoted on CNBC.

As the world’s third-largest producer of lithium, China plays a crucial role in the lithium market. China’s lithium demand for EVs alone is expected to grow by an average of 20.4% year-on-year from 2023 to 2032, whereas its supply will only increase by 6% over the same period.

This disparity could lead to serious implications for the global lithium battery supply chain, as indicated on the above-said CNBC article.

Escalating EV Sales and Lithium Demand

S&P Global Commodity Insights forecasts EV sales to reach 13.8 million in 2023, surging to over 30 million by 2030. This rapid growth in EV adoption is set to create a considerable demand surge for lithium.

Corinne Blanchard, Deutsche Bank’s director of lithium and clean tech equity research, echoes this sentiment, emphasizing the faster pace of demand growth compared to supply growth, quoted on CNBC.

Inflation Reduction Act

Climate provisions in the Inflation Reduction Act put the United States back on track toward significant emissions reductions, potentially lowering greenhouse gas emission by 40% of 2005 levels. The Biden administration, for instance, looks to cut the sale of gas-powered vehicles to 50% of all new purchases by 2030.

A Glimpse into Potential Deficits

While the timeline for a lithium shortage varies among analysts, there is consensus that the a deficit is coming. Blanchard anticipates a “modest deficit” by the end of 2025, which could range between 40,000 to 60,000 tonnes. This deficit is expected to widen to a considerable 768,000 tonnes by the end of 2030. Other experts also see a deficit approaching by the end of the decade.

Mining Projects and Exploration to Fail to Avert Crisis

Although the prospect of more lithium mining projects coming online offers a ray of hope, this is unlikely to avoid the impending shortage. Rystad Energy’s estimates indicate that while new projects might extend the supply window for a few more years, the geological complexity and time-consuming permitting processes related to lithium mining projects pose challenges.

ETFs in Focus

Analysts on Wall Street have identified promising investment opportunities in companies engaged in lithium-ion battery production. There are pure-play ETFs as well to invest in this burgeoning market.

Global X Lithium & Battery Tech ETF LIT

The underlying Solactive Global Lithium Index tracks the performance of the largest and most-liquid listed companies that are active in the exploration and mining of Lithium, or the production of Lithium batteries. LIT charges 75 bps in fees.

Amplify Lithium & Battery Technology ETF BATT

The EQM Lithium & Battery Technology Index seeks to provide exposure to global companies deriving material revenues associated with the development, production and use of lithium battery technology. BATT charges 59 bps in fees and yields 4.06% annually.
Global X Lithium & Battery Tech ETF (LIT): ETF Research Reports

Amplify Lithium & Battery Technology ETF (BATT): ETF Research Reports

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Zacks Investment Research

This article originally appeared on Zacks

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