Why Lithium ETF Plunged To Start The Week?

Lithium has witnessed robust gains in the recent past, as bullish trends for electric carmakers have made investors park their money in lithium-focused investments. This is because electric cars are powered by lithium ion batteries and major carmakers across the world have been betting on the said commodity, in order to take advantage of the electric car revolution (read: ETFs in Focus on Tesla (NASDAQ:TSLA) Q4 Earnings Beat, Model 3 Target).

Per an Irish Times article, citing a statement by Milan Thakore, an analyst at Wood Mackenzie, “I think a lot of car manufacturers are almost panicking, in the sense they want to make sure they don’t miss out on the essential materials they need for the battery.” Per a Financial Times article, citing Goldman Sachs’ estimates, a Tesla Model S uses more lithium in its batteries than 10,000 smart phones combined (read: Get Early Exposure to the Electric Car Market With This ETF).

However, the recent week did not start on a positive note for lithium bulls. Morgan Stanley (NYSE:MS) had a role to play in bursting the bubble for people strongly bullish about lithium’s performance in the near future.

What Drove Lithium lower?

The Global X Lithium & Battery Tech ETF (LIT) plunged 3.4% on Feb 26. This plunge was attributed to a Morgan Stanley report that stated that growth in demand for electric cars will not be enough to explain the growing supply of lithium from Chile. Moreover, the report cites analysts expecting lithium prices to fall by 45% by 2021.

According to the bank, new projects and expansion plans related to lithium in Chile might add 500,000 tons of the light metal per year to the global supply by 2025. “We expect these supply additions to swamp forecast demand growth,” the bank said. It expects 2018 to be the last year that’ll witness a demand-supply deficit, moving into a surplus equation 2019 onwards.

Morgan Stanley cited in its research note that it expects lithium prices to first fall to $7.332 a ton from its current price of $13.375 a ton. It then expects the price to sway toward its marginal cost of production of $7,030 a ton. The report stated that electric car sales will have to make up around 31% of total sales by 2025 to account for the expected oversupply, a lot above the less than 2% market share currently held by the segment.

The ratings of the two largest producers of lithium, Albemarle (NYSE:ALB) and Sociedad Quimica Y Minera de Chile (NYSE:SQM) , were downgraded to underweight from equal-weight by the bank. Albemarle declined 7.3%, while SQM declined 8.0% as a result of the downgrade. This was primarily because the two firms are expected to greatly influence the supply of lithium in the near future and add around 200,000 tons a year to the global lithium market by 2025.

According to another news piece, researchers from Bristol University and Surrey University claim to have developed a next-gen material for supercapacitors, which can charge cars in 10 minutes compared with the eight hours generally required by lithium ion batteries. Although this technology is still in its early stages, it might prove to be a negative for lithium ion batteries in case further developments are made in the space.

“If a significant leap has been made in energy density, it would be an important achievement,” Dr Thomas Miller, an expert on supercapacitors at University College London. said to Guardian. “One major consideration that is yet to be proven is the scalability, cost and sustainability of the new technology,” he added.

Let us now discuss the Lithium ETF in detail.

Global X Lithium & Battery Tech ETF (AX:LIT)

This ETF seeks to provide exposure to companies engaged in the lithium industry. This fund has the potential to offer diversification benefits to traditional portfolios.

It has AUM of $1.1 billion and charges a fee of 76 basis points a year. The fund has high exposure to Albemarle Corp, FMC Corp (NYSE:FMC) and Quimica Y Minera Chil-Sp, with 16.6%, 15.8% and 7.1% exposure, respectively (as of Feb 26, 2018). It has returned 38.4% in a year but has lost 9.4% year to date.

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