Saturday, February 13, 2010

The Future of the Lithium Market TNR.v, CZX.v, LI.v, RM.v, LMR.v, SQM, FMC, ROC, HEV, AONE, VLNC, F, DAI, BYDDY, BMW, NSANY, RNO, TM, TTM, PC, SNE,

Electric Cars are here, they will be on our roads soon. They will be powered by Lithium and automakers are unveiling model after model of EVs in recent months. Investment decisions in Electric Cars Value Chain will be driven by politics and Supply and Demand in a tightly controlled Lithium market space. Will Lithium market be under control of our "friends" from Bolivia, like oil is now under control of OPEC? Will it be controlled by 3-5 companies with lithium revenue as low as 8%? Or will automakers integrate it into their Supply chain, when diversity of resource base will the dominant drive?

If somebody would like to place future of Electric Cars into the hands of Bolivia and its leaders, they are welcome to try their luck - Japanese Multinationals do not play against Casino and bet on House in Las Vegas: they would like to have secure supply of lithium and REE from diverse sources in stable political regions close to the end markets. They are ready to go the distance and strike J/V deals with Juniors involved in Exploration and Development in Lithium and REE space.

Today we have another research paper from Las Vegas Lithium Supply and Markets conference, it is a Bolivian perspective on the market. There were a lot of talks this year whether there is enough Lithium in stable political locations in order to build next industrial revolution based on lithium-ion technology and whether Bolivia could kill Lithium market when it is on line with its own production. Recent moves by Toyota and Magna confirmed our observation: security of supply and its diversity will be the most important for automakers to make their strategic move into post oil environment. There is place for new Lithium producers, but who will make it to the production stage?

Another take from Las Vegas gathering: we are entering a very important stage of Lithium and REE market, when opportunity is noticeable and existing players are viciously protecting their market.

After recent rush into the sector there are around 60 projects in development phase world wide with most junior companies behind it. Most of the companies do not even have any technical expertise on board and sourcing all work to outside specialist.

Some analysts suggest that the area is very crowded and we agree with it - it will provide opportunities in this consolidation stage for strong teams to pick up promising properties from the companies coming into the Hype stage without technical expertise and capital behind them.

We have talked to a number of participants in Las Vegas conference and have received the following information from International Lithium Corp., Western Lithium and Rodinia Minerals.

One of observations is that there were present all largest Japanese trading houses:

"Sogo shosha (総合商社 sōgō shōsha?) means general trading companies, Japan's unique business, that trade a wide range of products and materials. Not only simply trade products, they also have historically acted as investment banks and private equities of Japan. This phenomenon looks like a business philosophy rather than a visual model[clarification needed]
The seven largest are Mitsubishi Corporation, Mitsui & Co., ITOCHU, Sumitomo Corporation, Marubeni, Toyota Tsusho and Sojitz. They collectively maintain approximately 1,110 offices in over 200 cities around the world and employ more than 20,000 highly-trained specialists who each average more than fifteen years of trading experience.
Sogo shosha deal in general commerce. On one end, they supply large volumes of raw materials goods from large manufacturers or wholesalers to smaller distributors and to numerous small retailers. On the other end, they act as an international sales force for medium and small sized companies who do not have ability to market and maintain distribution channel overseas. They also often act as the linchpin of large consortium contracts ranging from the building of large shopping malls to railway or property projects, coordinating the activities of banks, construction and logistic companies.
What makes them unique is their size, scope, information-gathering capabilities, and functional diversity. A sogo shosha is an economic organization whose functions consist of minimizing the risks involved in transactions through its ability to distribute the risk; reducing transaction costs through its ability to take advantage of economies of scale; and making efficient use of capital. They are Japanese traders, existing at the center of Japan's global economic efforts, and serving as intermediaries for half of their country's exports and two-thirds of their imports."

Other important players were presented as well: LG, Samsung, Renault, EnerDell, Ford, Posco, investment and brokerage houses from U.S., Canada, Europe and Asia.

Main message from the conference:

1. One year ago questions were - will it be Electric Car? Will it be powered by Lithium?

Now it is almost out of the question - we will drive Electric cars after CV before anything else on a mass scale, they are ready, and it is lithium to power them. Question remains - how fast will be the adoption rate? It depends on battery cost, business models of market penetration (lease of the batteries) and government subsidies (they are in place in most markets). With rising scale of production expectations are that cost per 1 kWh will drop from over 1000 USD/kWh to below 500 USD/kWh. GM has announced before that they are expecting to achieve cost below 450USD/kWh in 3-5 years. Secretary of DOE of U.S. discussed estimations that with recent technological advance prices below USD100 per kWh could be a possibility. According to FMC cost of Lithium is less then 1% of battery final cost now.

2. All Japanese companies presented corporate structures with Lithium and REE divisions formed as part of the supply chain for Japanese multinationals. They are all hunting for resources to lock them in. It looks like almost a military operation with divisions on all elements of Lithium batteries and electric powertrain for the production supply chain.

3. Main drive for them is to secure supply with focus on existing dependency on limited region, uneven distribution and demand increase.

4. Recent deals by Magna and Toyota with juniors (by the way both companies are sitting on the same Salar system) spiked a lot of interest to upcoming juniors with solid projects and teams able to advance them. Brines in Argentina and Nevada are of particular interest now.

Existing producers SQM, FMC and Chemetall (all from brines) were defending their position with "thousand of years" Lithium supply - conference was very sceptical: market is not transparent, their lithium share of revenue is very low (some 8%) and production decisions are driven by other mainstream product like potash.

Main concern is security of Supply.

Important note - nobody of major players from battery making or auto making side announced any deals with three majors at the moment. It appears that they are ready to go distance, but become a partners in developing resources necessary for long term production cycle. They are expecting juniors to operate the projects, looking for advance opportunities, but very aggressively studying the market.

5. Major players in the Industry SQM, FMC and Chemetall were addressed as Oligopoly and there is a risk of concerted play against newcomers.

6. Strategic partnership for Juniors will be crucial in order to be successful in timing to market. Demand expected to pick up significantly with Electric Cars coming into mainstream in 2014-2015.

7. Demand for lithium in its optimistic scenario depends on rate of adoption of Electric Cars. There are wide range of numbers and estimations on the market. At the conference all serious participants from Asia noted that level of understanding of development of Electric cars technology and advance in batteries was very poor by the invited "experts". There was no presence of the most advance Lithium market players on automakers side like GM or Nissan.

8. Apart from a few professionals from Canaccord, Byron and Cormark (Canada) analysts or "investment bankers" (US) were presented with specialisation in Lithium/Biotech/Everything else. It is a very early stage in the investment cycle and even supply side of investment banking is still in its education phase.

9. Information was presented that number (basically all of them) of Chinese Lithium projects are running into a technical/chemical/extraction problems, that is why even hard rock producers from Australia still have their market and new projects are under development, new twist is when mines are in Australia and than spodumene transported to China for further production of Lithium carbonate.

10. Of notice was a presentation by Altair Nano "Aplications for advance batteries and grid storage". There is an estimated demand for 40 000 MW of "fast"storage capacity worldwide at the moment. It is not a straight forward conversion, but with 24 kWh battery in Nissan Leaf this capacity will translate into magnitude of equivalent 1.7 million electric cars. Announcements from Panasonic, EnerDell and Mitsubishi showed that grid applications are adopting Lithium technology as well. cost will be the driving factor as well here.

11. Main message from upcoming producers was that the next decade Major Multi-National companies in Electric Space with 280 billion market and Major Companies in battery making space with 70 billion market will depend on SQM, FMC and Chemetall brine lithium production with market under 3 billion.

There is place for another players with focus on Lithium.

"While U.S. spend billions to protect oil communication lines all over the world, China is moving fast into post oil environment dramatically cutting cost of it manufacturing base. China understands that low wage cost advantage will have to give up with time - they need to keep work force happy, but transition in Energy Space will bring China Energy Security, undermine U.S. military machine focused on Oil routes ocean domination and will bring another economic advantage in the form of much lower transportation cost. Nuclear Power developments in China support our point of view. What will be the response from Obama? We all have counted on the banks Too Big to Fail - they have failed and financial system is still in rubbles, now some are counting on "they will lose more if they sell" - is it another Big If in the making? Who can be sure?"

From the report:

"The lithium endeavour in Bolivia faces at least three different kinds of challenges. First, at the political level, the government has decided to go on its own. According to the Project Director, the industrial plant will be completely owned by the state because: (1) Bolivia has the largest reserves of lithium in the world; (2) that is the only way to ensure that the benefits will be reinvested in the region and in the country; (3) Bolivia should guarantee the supply of Li to the world on clear market conditions; and (4) exploitation and industrialization of Li should be sustainable and integral. As plausible as they might seem, these conditions do not seem to conform the basis for a reasonable strategy of development of the lithium resources in Bolivia. However, if the car revolution takes off, chances are the government will be forced to revise its decision to go on its own.
Second, at the physical level, the brine resources in Bolivia need to overcome at least the following hurdles: (1) the low evaporation levels at the Salar de Uyuni ; (2) their high Magnesium-Lithium ratio; and (3) their lack of free access to the sea. As reported at the First International Forum on Science and Technology for the Industrialization of Lithium and other Evaporitic Resources held in La Paz in October 2009, the University of Potosi (with the assistance of the University of Freiberg from Germany) appears to have made important progress aimed at improving evaporation rates at Uyuni using dynamic cones of intensive evaporation. Similarly, both the government's pilot project and the University of Potosi announced that they were able to separate Mg towards the end of the process taking recourse to different chemical procedures18. However, Bolivia's lack of free access remains an important problem because it will most likely increase the cost of transportation of Li carbonate to the nearest maritime port while reducing its competitiveness."

Full report:

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