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Gigafactory Plans May Lead to Lithium Shortage

Despite a rocky financial start, Tesla Motors (TSLA) is still planning for the electric vehicle sector to expand.

The company is building a $5-billion lithium-ion battery plant in Nevada. By 2020, the gigafactory will be capable of producing 50 times the amount of batteries Tesla shipped in cars last year and 20 times the total of all lithium-ion batteries shipped in cars in 2013.

But all this lithium-ion battery manufacturing is going cause a shortage of a crucial mineral component of the batteries.

Lithium hydroxide is used as an active cathode in the batteries, and we could see a shortage by as soon as 2015.

Lucky for investors, one company is poised to profit nicely from the shortage.

China’s Demand for Green

Before delving into the specifics of lithium hydroxide, we should examine the demand side of the equation.

The Chinese electric vehicle market is expected to become the world’s biggest starting in 2016. In fact, the government says it plans to have five million electric vehicles on the road by 2020.

All those cars are going to need batteries, and it isn’t just Tesla’s gigafactory that’ll be producing them.

South Korea’s largest chemicals company, LG Chem (051910.KS), broke ground for an electric vehicle battery factory in China on October 30. The plant will have the capacity to produce 100,000 batteries annually.

LG Chem said at the groundbreaking that it expects the global battery market for electric vehicles to grow to $18.24 billion in 2020. That’s more than five times the size of the market in 2013, which reached $3.26 billion.

According to research from Benchmark Mineral Intelligence by Simon Moores, all of this demand will put stress on lithium hydroxide supplies.

The Forgotten Lithium

Moores states that there are several factors contributing to the shortage.

From the perspective of Wall Street, there’s plenty of lithium on the market. But in reality, there’s only a surplus of lithium carbonate. Lithium hydroxide, in fact, is lacking.

You see, most supply expansions in lithium have occurred in the carbonate sector; hydroxide was forgotten. Reason being, there’s much more carbonate in lithium brine deposits (the source for various lithium types). Lithium hydroxide segments are also 2.5 times smaller than the well-supplied lithium carbonate segment. Thus, manufacturers need more deposits in order to get hydroxide, which makes production more expensive.

But with Tesla and others planning to use lithium in their batteries, Moores says the demand for all lithium chemicals used in batteries will increase by as much as 50%.

With little increase in lithium hydroxide supplies, shortages could occur as soon as next year. As a result, prices will increase by as much as 30% from current levels.

We could reach an all-time high for lithium hydroxide prices – the previous record was set in 2012 at $8,000 per metric ton.

And some increases look to be already underway.

A Charged Pick

On November 4, minerals giant FMC Corporation (FMC) announced a 10% price rise for lithium hydroxide (and other lithium salts). That’s not the first increase for lithium hydroxide this year by FMC. In May, it reported that it was raising the price by another 10% for hydroxide (the only lithium product it raised the price for in May).

The forthcoming spin off of FMC – FMC Minerals – will be a nice way for investors to play the coming future price rises in lithium hydroxide.

It has been a supplier in the electric vehicle battery since 1991; its lithium was used in the very first rechargeable battery.

Plus, the company’s minerals business has done well. It reported an 11% gain in revenue for the latest quarter, with earnings for the segment up a whopping 42% year over year, to $39.2 million.

That helped FMC’s overall earnings by 16%, making the company a solid choice.

And “the chase” continues,

Tim Maverick

Tim Maverick

, Senior Correspondent

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