Power Metal (AIM:POW) The outlook for lithium is particularly robust right now

It looks like there could be more strength ahead in the lithium market. This is great news for Power Metal Resources (POW.L), given its exposure to this key battery metal.

Author @FirstEquityLtd

Indeed, Power Metals has been careful to spread its portfolio far and wide in terms of both jurisdiction and commodity. But even so, the management believes its exposure to the strategic metal–through the Authier North project in Quebec, the Haneti project in Tanzania, and the Selta project in Australia–looks particularly exciting right now.

You see, just a couple of years ago, a lithium bear market was in full swing. The reasons for the depressed price were twofold: first, electric vehicle demand hadn’t quite caught up with expectations; and second, there were severe concerns about oversupply.

After all, as an element, lithium isn’t all that uncommon, and it seemed like every man and his dog was running towards developing a new lithium mine.

But it turned out things weren’t that simple.

 

 

Covid intervened, supply chains got churned up, and all-of-a-sudden, the long-promised surge in demand from electric vehicles arrived.

From concerns about oversupply, the market suddenly switched to concerns about supply constraints. And that’s still where we are now.

In response to global uncertainty, President Biden has invoked the Defense Production Act to spur the development of critical minerals close to the USA. Meanwhile, running in parallel to this is the increasing build-out, at least in the US, of the necessary electric vehicle charging infrastructure.

It all bodes well for the future of electric vehicles and the satisfaction of the anti-carbon lobby.

But it still leaves questions about supply.

According to McKinsey & Company, demand for lithium carbonate equivalent will rise from approximate 500,000 metric tonnes in 2021 to some three to four million metric tonnes in 2030 to accommodate the burgeoning lithium-ion battery industry. However, in contrast, a Fitch report forecasts that global production will only reach 1.5 million tonnes over the same period.

Is a decade a long time? It depends on your perspective. A lot can happen in an economic cycle, and in political cycles, too. A decade ago was before Covid and the Trump presidency, and the world sure has changed since those seismic events occurred.

On the other hand, from discovery to production, some mines take longer than eight years to build. And with this in mind, all of a sudden, analysts are flipping from their former concerns about an oversupply of lithium, based just on its general abundance, to new concerns about supply shortfalls, as actual developments take time to work their way up the system.

And accordingly, lithium prices have been moving much higher.

An electric future

From a publicity point of view, it doesn’t hurt either that major media figure and entrepreneur Elon Musk continues to broadcast the expansion of Tesla’s production rates to his millions of followers, and has been able to highlight in particular the opening of new gigafactories.

If anyone ever doubted that electric vehicles were here to stay, those doubts are likely gone. After all, Teslas are now a common sight on the roads of the US and Europe, with other electric vehicle brands racing to catch up.

In an area of the US dubbed the ‘Electric Highway’, a 450 mile stretch of highway that runs from Las Vegas to Reno, electric vehicle charging stations are located every 50 miles along remote sections of Route 95.

Of course, if you were going to set up an ‘Electric Highway’, Nevada is the place to do it, considering the proximity of the Clayton Valley producing area and yet another Tesla Gigafactory in Sparks, just to the west of Carson City.

But it also makes sense to roll out the new technology in an area that it’s likely to function well. That way, the teething problems can be ironed out fairly easily. And expansion is already underway. The US now has 44,500 publicly available electric vehicle charging stations and 110,158 charging ports, a 16% increase from January 2021.

Meanwhile, US state and federal policy is increasingly promoting electric vehicles, with significant amounts from the recent post-Covid stimulus packages being allocated to the development of electric vehicle infrastructure.

Still, it may not be politics that decides the issue. According to a Morning Consult poll in December 2021, 51% of US adults are likely to consider purchasing an electric vehicle in the next decade. That’s up from 39% the preceding January.

The effects of that shift in sentiment are already here. Sales of electric vehicles increased by 11% quarter-on-quarter at the end of 2021. Sales of gasoline-power vehicles, on the other hand, declined.

It’s hardly surprising, then, that Ford recently decided to increase production of the Mustang Mach-E series to 80,000 units in 2022, and to increase annual production target for the new F-150 Lightning to 150,000 units in 2022.

Meanwhile, in China, it’s reckoned that around 25% of vehicle sales will be electric vehicles by 2025, and that, overall, this means there will be nearly nine million electric vehicles on China’s roads. In Europe, electric vehicle sales are expected to top six million in the same year, and in India sales are likely to be above seven million. By 2040, its reckoned by some that at least two-thirds of global car sales will be electric.

The momentum now looks unstoppable.

But what does this mean for lithium prices?

This is a notoriously difficult area, in which analysts have repeatedly been wrong-footed. But the clear consensus at the moment is that demand is likely to outstrip supply from the major producers in South America and Australia in the medium term, and that that’s likely to exert significant upward pressure on prices.

reasonable estimate by Seeking Alpha puts lithium carbonate at around US$13,000 per tonne by 2025 and lithium hydroxide at around US$16,500. But as companies continue to switch into and out of different battery technologies, the patterns of demand remain as hard to model as ever.

This all provides a highly promising outlook for stocks such as POW.L  And the bottom line is, it provides Power Metal Resources and its partners with more and more of an incentive to try and unlock further value from our projects with lithium exposure by way of exploration and drilling moving forward.

NB: The above text has been reproduced and edited from “The Power Bulletin” written by Paul Johnson, the CEO of AIM listed Power Metal Resources plc (POW.L), focusing on Lithium and distributed on 14th June 2022 to its subscriber list. 

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