Is there a lithium boom on the horizon? 

What is lithium?

Lithium is a chemical element and is the lightest known metal. It is also very soft and low in density, able to float on water. 

Lithium has several industrial applications including:

• Metal batteries
• Ion batteries
• Heat-resistant glass
• Heat-resistant ceramics
• Lubricants
• Additives for the production of aluminum, iron, and steel

With the rapid prominence of electrification, clean energy, and electric vehicles (EVs), lithium’s use-case as a battery has increased. Lithium is a key component for batteries which drives critical energy storage infrastructure and is also a key input for the production of EVs.

Current market dynamics

While there has been a theme of long-term undersupply for lithium - given that demand has been surging and production growth remained relatively muted - there may also have been some over-investment in the space based on increased exposure from investors relating to the green-energy transition.

Prices for lithium have spiked thus far in the year, and given the bleak economic outlook, there is a decent probability of a sharp correction in lithium prices. Elevated lithium prices make it difficult for the clean-energy transition to gain momentum as battery producers and EV producers face rising input costs.

As a counterbalance, the U.S. federal government has recently enacted the Inflation Reduction Act of 2022, which was signed into law on August 16, 2022. This Act included an estimated $369 billion investment towards ‘Energy Security and Climate Change’, which will likely act as a catalyst for alternative energy sources.

Long-term investment proposition of lithium

While there may be some short-term volatility for lithium markets, the long-term investment proposition is fairly clear. There is a structural increase in demand from the clean-energy transition and the adoption of EVs, both of which require lithium. There is also a constrained supply as lithium production growth is likely to remain muted due to challenges in scaling mine developments as well as the exploration and monetization of new lithium mines.

The International Energy Agency (IEA) cites that the world could face lithium shortages by 2025. However, technological developments and manufacturing efficiencies could potentially alleviate the issue of supply shortages in lithium.

How to gain exposure to Lithium through ETFs

ETF Central’s fund screener identifies two ETFs that currently offer U.S. investors exposure to the lithium industry:

LIT – Global X Lithium & Battery ETF

• AUM: $3.9B
• 1mo Flows: -$130M
• 1mo Performance: 2.3%
• YTD Performance: -19.6%

BATT – Amplify Lithium & Battery Technology ETF

• AUM: $162M
• 1mo Flows: -$3M
• 1mo Performance: -0.8%
• YTD Performance: -29.1%

Data for this article is as of November 2nd, 2022.

Please note this article is for information purposes only and does not constitute investment advice.