Thomas White Global Investing
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September 28, 2012
A Postcard from the Americas
Chile: Lithium adds more energy to export growth

Lithium adds more energy to export growth

Lithium based batteries that are lighter and more efficient are powering most of the modern smart phones and other mobile devices. They have also made hybrid and electric cars more convenient to use by dramatically increasing the driving range.

Hybrid cars and smart phones have become some of the most desirable consumer products in recent years. Part of their growing popularity rests on their significant build up in efficiency and durability, from one model cycle to the next. Every new smart phone model manages to perform faster than its predecessor, and is lighter, yet works for longer periods between charging. The most recent models of mid-size gasoline-electric hybrid cars have been rated for combined highway and city mileage as high as 47 miles per gallon. Plug-in electric cars that can be charged directly from a wall socket have already scaled the previously unthinkable rating of 100 miles per gallon of gasoline equivalent, and offer a range of even 300 miles before the batteries run out.

All these advances are a direct result of switching from nickel-based batteries used in the earlier models to lighter and more efficient lithium based batteries found in the latest phones and hybrid cars. Lithium is the lightest of all metals with a high ability to store energy, which makes it the most suitable material to make lightweight batteries than can hold the charge longer. The lightness of lithium is of particular importance in hybrid cars, as it makes it possible to produce high capacity batteries that offer a longer range without making the vehicle heavier and thereby restricting mileage gains. As demand for these products has grown exponentially, Chile, the world’s largest producer and exporter of lithium, has added another lucrative segment to its commodity fortunes.

The strong demand growth has pushed up prices of lithium significantly over the last decade. Export prices have tripled from about $2,000 per ton to nearly $6,000 per ton now, and Chile’s revenues from lithium exports have increased from $63 million in 2003 to over $200 million last year, according to data from the country’s central bank. Though revenues from lithium exports is only a very small portion of the country’s total export revenues, dominated by copper, the rate of growth has been very impressive. In addition, while copper prices are highly correlated to the state of the global economy, lithium prices are thought to be less prone to large declines due to fast growing demand.

Bolivia, Chile, the U.S., China, and Argentina together have nearly 80% of total discovered reserves of lithium globally. Being large consumers of the metal, the U.S. and China do not export lithium in meaningful quantities. That leaves Bolivia, Chile, and Argentina as the only potential sources that can feed the fast growing global market for lithium. Bolivia has the largest lithium reserves, with more than 25% of the global total, but the country produces very little of the metal. The difficult policy environment and poor infrastructure have dissuaded potential investors from developing mines in Bolivia, despite the country’s recent efforts to increase mining output. Chile has taken advantage of this and now provides more than 30% of the global trade in lithium, though the country has only about 15% of proven global reserves. Proven reserves in Argentina are significantly lower than in Chile. Still, lithium producers in Argentina, the second largest exporter behind Chile, have attracted investments from global carmakers such as Toyota.

Chile has another significant advantage that may help the country maintain its position as the top exporter. Mining lithium from underground deposits is not commercially viable and most of the current production is extracted from brine pools and salt flats. Extraction of lithium is easier in drier environments as the brine can be concentrated more efficiently and cost effectively. Chile’s lithium deposits are all in the Atacama Desert, one of the driest places in the world, which gets only a few inches of rain in a decade. The average lithium concentration in the Atacama deposits is significantly higher than the deposits in Bolivia and elsewhere, which helps keep the cost of production low.

Interest in developing Chile’s lithium deposits has heightened and the country has become a magnet for exploration efforts in recent years. There were several international bidders when Chile auctioned a 20-year concession to develop a major deposit recently. The second largest Chilean producer outbid its global competitors and the Chilean government expects royalties in excess of $350 million over the concession period. The potential for growth in lithium has attracted even Chilean government-owned Codelco, the world’s largest copper exporter, which is reported to be considering an entry into lithium extraction.

Surging sales of smart phones and other mobile devices have accounted for most of the demand growth in lithium in recent years. However, most of the future growth will likely come from the increased popularity of electric and hybrid cars, which require much larger batteries when compared to mobile devices. Despite rising volumes, electric and hybrid cars still only have a very small share of global automobile sales. But, as they become cheaper to buy and more convenient to use, it is expected that demand for these cars will climb rapidly. And with every new electric car that rolls out of factories across the world in the future, Chile will continue to benefit from nature’s blessing of yet another valuable metal.


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