Webinar Replay: What’s Driving Lithium & EVs?
The replay of our webinar, “What’s Driving Lithium and Electric Vehicles” is now available. In this webinar, we discuss how lithium is mined, sources of lithium demand including the growing electric vehicle space, and the composition of the Global X Lithium & Battery Tech ETF (LIT).
Stephanie: Hello and welcome to today’s webcast, What’s Driving Lithium and Electric Vehicles, sponsored by Global X Funds. Today’s live webcast has been accepted for one CFP and one CIMA CE credit. For questions on credit, please use the number on your console. A copy of today’s presentation, as well as additional documents, can be found in the green folder at the bottom of your screen. We also have a brief survey, which can be accessed from the teal folder.
Jay will be taking advisor questions. Please type your question into the box to the right of the slides. We’ll get to as many of your questions as possible. A replay of this webcast will be made available. All registrants will receive replay information by email after the webcast ends. With that, I’d like to turn it over to today’s speaker, Jay Jacobs, Director of Research for Global X Funds. Jay?
Jay: Thanks Stephanie. Hello everyone. Thank you very much for taking time out of your Friday to learn a little bit about lithium and electric vehicles. My name is Jay Jacobs. I’m the Director of Research at Global X Funds. If you aren’t familiar with us, we are an ETF issuer based out of New York. We have $7 billion in assets under management and we have a variety of fund suites, everything from Income to Risk Management, Alpha, SmartCore.
Today we’re going to be specifically focusing on our Thematic Access Suite. Just to take a quick step back before we dive into lithium and electric vehicles, I do want to briefly talk about thematic investing and how we view it. Ultimately, our Lithium & Battery Tech ETF and what we’re going to be talking about today really wraps up into the overall idea behind thematic investing.
What we’re looking at here is the process of identifying powerful macro level trends and then the underlying investments that stand to benefit from the materialization of those trends. Really what we mean here is very powerful, disruptive changes to the world, to the economy and what companies are really going to stand to benefit from that type of change.
There’s a few characteristics of what this means. It tends to be long term in nature, very growth focused. We view it as having to be unconstrained, meaning rather than looking at a typical Sector Fund or a US versus International Fund. Going thematic means going unconstrained and being able to go wherever the opportunity exists.
Specifically within lithium we see a lot of these companies are international, they come from the industrial sector, material sector. The idea is to get exposure to this structural shift of what’s happening in lithium and electric vehicles, not to be constrained about things like geography.
We tend to see that these ideas have low correlations to other growth strategies. Part of that is because they’re very targeted in general. This is not an S&P 500 growth strategy. This is looking at the very specific segments of the market where we see a lot of opportunity. What makes this so much fun for me and so much fun to talk about, and I think what ultimately makes thematic investing just very different from other types, is that it’s very relatable and very tangible.
Obviously in this industry we talk a ton about income investing and smart beta and factors and asset class exposures. Sometimes I think we sometimes get lost in some of the industry jargon. That can be tough for the end client who’s looking at investments and trying to figure out, what is this really mean to my everyday life?
When we talk about thematic investing and things like electric vehicles, it’s very relatable. People obviously see electric cars on the streets. They see chargers. They see them in parking lots. That makes it a much more interesting conversation to have – at least from my perspective around thematic investing.
These are the key characteristics that we see. At the end of the webinar I will circle back and talk about some of the other themes that we’re seeing from Global X’s perspective.
Diving into it, in terms of what we’re going to talk about today, I’m going to spend a few minutes going over lithium basics – what is it, how it’s used, where it comes from. Then we’re going to move on to the demand side of the equation and discuss electric vehicles and how they could dramatically alter lithium forecasts. Then we’re going to save – we’re going to talk a little bit about our ETF, LIT.
We’re going to save hopefully about ten minutes for questions at the end. I know there’s a lot of questions coming in in the Questions box. Please feel free if you have any that pop in your head, please put those in the box and we’ll try to answer those. If we can’t get to them by the end of the presentation today, we will try to reach out to you after the fact and get all of your questions answered. I’m going to pause for just a few seconds here on the Disclosures page.
All right, lithium basics. How is it used? Lithium is the world’s lightest metal and people often call it weight petroleum because of its usage in state-of-the art batteries. If we look at this slide – it can be a little difficult to tell with the black and white coloring, but what we’re really seeing here is if you look at the early part of 2010 to 2014, about 60% of lithium demand came from industrial applications.
This is ceramics, glasses, greases, medicine – fairly slow growth in terms of forecast for what’s going to mean over the next few years. Industrial growth is really often viewed as just GDP growth or slightly off of that. It’s not a massive driver of growth in the lithium segment.
What makes up currently about 30% of lithium demand is portable batteries. These are batteries predominantly used in mobile phones, tablets, laptops, power tools and about 10% of current demand is coming from the automotive segment. If you think about that, 10% of demand for lithium is coming from electric vehicles, which are really not on the road in a big way right now.
The reason why it’s still 10%, which I think is a fairly big number considering how few electric cars are out there, is an electric vehicle uses a ton of lithium. We will go into it later in the presentation, but it uses about 10,000 times more lithium than a mobile phone. You can see how just a few cars on the road are going to dramatically alter the landscape for total lithium demand.
If you look at the right side of this chart you can just see how dramatically that top segment, the automotive segment, is expected to change over the next few years. This is just going out to 2021. I’ll caveat this thing – this is coming from one of the biggest lithium miners in the world, so their perspective is obviously going to be probably a little bit more bullish than some other segments.
In this forecast, they expect that all battery usage, portable batteries and automotive, is going to make up about 75% of demand in just four years and that is a massive change for a commodity demand. Specifically if you compare that to oil, steel, gold – oftentimes demand for these commodities are changing in the single digits. The demand growth that we’re seeing for lithium right now is extremely vast. Truly, that’s going to be driven primarily by the automotive segment.
To briefly get into why are lithium ion batteries so popular? I’m not going to get too much into the science or chemistry of it, but I think it’s useful to compare it to some of the other battery types that are out there. We’ve highlighted lithium ion and compared it to nickel metal hybrids and lead acid.
Really across the board in different metrics you see how much superior the lithium ion technology is. Higher voltage – that’s extremely important if you’re trying to power something that you want to accelerate very quickly such as a car. The energy density is much more efficient, which of course is useful in anything that expects to be mobile whether it’s a car, a cellphone, energy density is very important.
Also the stability and longevity of lithium is also what’s a big differentiator for it. It tends to last for more cycles, doesn’t lose as much of a charge if you’re just letting it sit in your driveway or you’re leaving your phone on your nightstand for the night. We don’t see a ton of discharge there. It can go through a lot of those cycles. People, when they buy a car, often expecting to own it five, ten years, you want to see a battery that’s going to last that time. You obviously don’t want to be swapping out the battery of an electric vehicle after just a year or two.
So that is why lithium ion has really separated itself from the pack in terms of becoming really what is the most common battery in everything from electric vehicles to portable electronics.
Where does lithium come from? I’ll take a step back and just say lithium is not a particularly rare element. A lot of it currently comes from South America, for what’s known as the lithium triangle; a little over half of it is coming from there – that’s Argentina, Bolivia and Chile. Part of it is not even tapped at all in Bolivia. It’s just sitting there and a lot of the geopolitical issues there are preventing its extraction.
We’re seeing a lot of lithium come from other places around the world. Forty percent coming from Australia, China is becoming very active in the lithium mining and processing space as well. We’re seeing junior miners really start to appear around the world. There’ve been some articles about Nevada and the Nevada desert being a hot spot for lithium mining in the US. Canada also has some junior miners popping up as well. Certainly, as lithium demand grows and if prices continue to rise as they have, I think we can expect to see a lot more lithium miners around the world starting to pop up. Because frankly, where they are today are probably the easiest places to extract them, which is why they are where they are. If prices continue to go up, it’s going to make a lot of new areas more economical. There’s just going to be more interest in the space as people start to look for additional supply out there.
I think one of the important things to understand about lithium is how it’s extracted. There’re really two processes. The most common one is a brine process. I find this extremely interesting. Essentially, they pump salt water out of the ground into these very shallow pools in very arid areas, whether it’s the desert like they’re talking about in Nevada or in the Andes in Chile or Argentina. They allow the water to evaporate and what that leaves behind is a concentrated amount of lithium. Now, the trick after that is that it has to be processed for things like glasses and ceramics. It’s not that important to have it processed to extremely fine details for those industrial uses, but when you’re using lithium for batteries, there are very specific requirements for lithium in terms of how it can be delivered. The chemistry of a battery can be very easily thrown off if there are a few spare elements or minerals in there that can really disrupt the chemistry. A lot of people in the industry really compare lithium to a chemical industry rather than a mining industry because so much of the value add comes in the processing stage rather than just in the brine stage where you’re basically waiting for it to evaporate.
The other way, hard rock mining, is much more similar to what people think of when they think of mining, of really separating lithium from other rock materials. The brine process is generally cheaper, which is why it’s more popular. But I will add that from start to finish, if a lithium miner is going out and trying to add more supply on to the market and they undergo the brine process, it can really take about 5-7 years, from the initiation of that process to starting to put that supply on the market. From geological surveys, environmental impact studies, starting to dig these ponds, and pump the water and allowing it to evaporate. The evaporation process alone takes about 18 months. It’s a very long lag. If you compare that to something like the oil markets, a lot of oil markets will talk about duct wells drilled but uncompleted, and if you have one of those wells, it usually takes about 4-9 months to complete that well and bring it online. If you look at the oil market, it’s a very dynamic market. Demand is coming up, and people want to add more supply into the market, 4-9 months later that supply can be on pretty quickly. In the lithium market, if you’re undergoing the brine process, it’s 5-7 years. That can create significant lags in supply, as you’d expect. That can start to create a lot of volatility in prices. What we’re starting to see today is as demand starts to ramp up, supply is trying to catch up. There are a lot of projects that have been planned, but they’re not starting to produce yet. That’s what’s creating a lag in the market, which is allowing lithium prices to rise.
Who is extracting all this lithium? I think it’s pretty interesting. Some people use this term called the Lithium Cartel. The reason for that is it’s, in some ways, not too dissimilar from OPEC. Except in this case, there’s only four producers that control over 85% of the market: Talison in China, SQM in Chile, Albemarle in Australia, and FMC, a US based company. If you think about what that means, with four lithium producers controlling so much of the supply, the other 14% is an aggregation of junior miners, some other Chinese firms as well, but if you have four producers controlling so much of the market, and you start to see demand rise, you start to see prices rise because demand is rising. It doesn’t give a ton of incentive to these producers to flood the market with supply.
I’m not saying they’re not increasing supply at all. They’re actually being pretty aggressive about investing and bringing more supply online, but when you have four producers and concentrate so much power on just a few names, they don’t want to flood the market and drive lithium prices down, even if they were able to. I think what’s going to happen in this market is most of these producers are going to be fairly cautious about not trying to oversupply the market. They’re going to wait for demand to increase, start to bring on supply, again with that pretty significant lag, and start to meet that demand with new supply but in a very cautious way that’s going to allow prices to continue to be pretty supportive to these companies. They simply don’t have an incentive to bring on tons and tons and tons of lithium and drive down the price when they have such high market share.
Now, what could disrupt that is, obviously, the junior miners in the space. If any of these companies in Nevada or Canada really come up to scale and this really four company oligopoly starts to become a five, six, seven, ten company oligopoly, then that starts to breakdown. You’re going to see more fighting over market share, more supply coming out more aggressively but for now, we think this is going to have a limit on bringing too much supply into the space all at once.
Stephanie, I think we have our first poll question.
Stephanie: Great, thank you Jay. Yes, this does bring us to our first poll question. Please, select your answer choice directly by clicking on the screen and then pressing submit. The question is how soon do you see yourself owning your first electric vehicle? First answer choice, I already have one. Second, within the next 5 years, in the next 5-10 years, 10-20 years, or never. Again, how soon do you see yourself owning your first electric vehicle? We’ll give you just a few more moments before we go ahead and take a look at the results, and with that Jay, I’ll go ahead and turn it back over to you.
Jay: Alright, thank you Stephanie. Already, I am extremely jealous of the 11% of you that already have an electric vehicle. I live in New York so I don’t have any vehicle. If I had one, I’d obviously love to have an EV. What’s interesting is, certainly, seeing two-thirds of the respondents saying that within the next ten years, they expect they’ll have an electric vehicle. We will look at some forecast estimates for electric vehicle adoption, but I think this is actually a little bit more aggressive than some of the forecasts that are out there. This is – maybe we’re making some news here with an interesting indicator of pent up demand for electric vehicles.
With the next section of our presentation, we’re going to jump into lithium demand. I think, the most common question we’re getting at Global X these days is, what has changed in the electric vehicle space? People have been talking about EVs for years, maybe even decades. Why is it all of a sudden that lithium and electric vehicles are a hot topic? We’re seeing it in the news all the time. It’s really a two-fold thing. On the left-hand side of the screen, it’s really a question of cost. If we go back just to 2010, 7 years ago, we saw that the cost of a battery per kilowatt hour was about $1000. Over the last 7 years, that’s dropped by about 80%. If you look at just the last 3 years, from 2014 to 2016, that’s dropped by about 50%. The easiest way to look at electric vehicles, in my opinion, is to just to look at the cost curve and try to figure out when it costs $1000 per kilowatt hour, the orange line is what an internal combustion engine roughly costs based off some estimates. That’s about $100 per kilowatt hour. Of course, kilowatt hour is not really the right metric there, but that’s trying to compare the two.
When it’s ten times more expensive, obviously, the electric vehicle space is going to be limited to just early adopters and the affluent. I think that’s how most people have really thought about electric vehicles in the past. I understand the people who are going to buy the electric sports car because it’s cool or the luxury sedan because it’s very stylish. Clearly, what’s going to change this market is when it hits the mass market and when ordinary families, middle class in the US, all the way to emerging market developing countries are buying these as their first vehicle. That’s when the equation completely changes. What we’re seeing is, right now, the expected cost per kilowatt is just above $200. I think it’s around $220, $230, depending on what estimates you look at. It’s really starting to converge with cost parody with internal combustion engines, ICEs. If it drops below 100 – and sorry, that’s without any regulations or subsidies or anything like that. If it drops below 100 and people purely act on their own economic interest, that’s when you will see electric vehicles really start to take a lot of market share from internal combustion engines. We’ve seen various estimates of when that will happen. There’s certainly a range, but in general, I would say the consensus is looking at the early 2020s for when that blue line is going to intersect the orange line there.
On the right-hand side of this slide, not looking so much at the cost, but looking at the policies and the regulations that are accelerating the adoption of electric vehicles. This year alone, this is what’s been really more newsworthy than just the falling costs of batteries, is it feels like every few weeks or so we see another country or another city come out and really start to spell the end of internal combustion engines. As soon as 2019, we’re seeing that China’s going to start limiting internal combustion engines. They want 10% of car sales to be electric. Norway, very aggressive, wants to phase out all internal combustion engines by 2025. We’ve seen much larger car markets in India, the UK, and France following up between 2030 and 2040. This is what’s really starting to drive things in terms of having a lot of automobile manufactures start to take this space very seriously because if they can’t adapt in time for this, in time for when these regulations kick in, it’s going to be very challenging for their businesses. This is really spurring the innovation at the production side of the equation.
I think what’s also interesting is in that second segment there where we list out London, Athens, Madrid, Mexico City, and Paris; a lot of cities are taking this regulation into their own hands, not waiting for national level regulation. Some cities at the Mayoral level are saying we have very bad air pollution issues and one of the ways we’re going to start to cut back on this is looking at zero emission vehicles or near zero emission vehicles. What that really comes down to is essentially, hybrids and electric cars. I would say if you’re following the news, look out for these cities which have millions of people and millions of vehicles going through them each day and see what they’re doing on the regulations side as well. It’s not going to be maybe as huge as an entire country banning the sale, but it is very impactful. This can affect everything from light delivery vehicles to taxis, etc.
Then one last component to consider is also the regulations going into place for internal combustion engines. There’s been some very aggressive regulations coming in about fuel economy standards, which some analysts have said are going to raise the cost of ICEs simply because the technology has to get better to meet those fuel economy standards. It’s going to require more features in the car to limit those emissions. That orange line on the left-hand side, where we’re showing it as a flat line, but that could actually start to increase if the cost of internal combustion engines do rise because of those regulations. That could actually further accelerate that cost parity point as well.
I think this slide is in my mind the best proof point for why we think this is really starting to happen. If the automobile manufacturers were not on board, obviously electric vehicles would be very much facing a headwind. Frankly, a lot of these automobile manufacturers have very little incentive to want to convert their fleets to hybrid and electric vehicles. It’s going to cost them a fortune. They have to invest in a ton of technology. It could reshuffle the order of who has advantages in which parts of the market. And yet, what we’ve seen is actually very aggressive announcements from these various automobile manufacturers about how they’re going to adapt to this new reality. I think it’s one thing to look at some of the higher-end manufacturers like Mercedes, and BMW, and Jaguar, but looking at the mass market manufactures: GM, Ford, Volkswagen, coming into this space and announcing fleets of vehicles that are going to be electrified – whether they’re a hybrid, plug-in hybrid, or electric – investing in battery technologies, investing in electric vehicle technologies as a whole. I think this is a really strong proof point as to where the market is really going because these companies are not investing this money simply as a headline or to look nice for people who care about environmental standards. This is their business model and they’re announcing how it’s changing.
I’ll also add, this is just a side note, but when you build a webinar like this, it usually takes a little bit of time to gather all the information and get the various compliance approvals and all of that. This is the one slide that frankly, as I was going through the process trying to build this presentation it felt like it was always one step ahead of me. I was always adding whatever the new news was coming out from each of these manufacturers. It seems like in particular right now, there’s new news coming out every day. I think a lot of these companies are trying to one-up each other with investments and things like that. This is an interesting space to monitor as well going forward: what are the manufactures saying?
Alright, poll question number two.
Stephanie: Perfect, thank you. Next question is which electric car feature is most important to you? Answer options: zero emissions, performance (acceleration/handling), cheaper fuel and maintenance, cutting-edge technology, and last option choice none of the above. Again, the question is which electric car feature is most important to you? I’ll give you just another moment or two before we again take a look at the results. With that, Jay, is this what you were expecting to see from the audience?
Jay: This is certainly interesting. I think the cheaper fuel and maintenance goes back to the slide we were talking about around how cost parity is really going to be the biggest driver here. I think we certainly have some early adopters who are excited about the performance features, excited about the zero emissions part, but the vast majority of people are really looking towards, frankly, savings: not paying for gasoline, having less parts to take care of, and a simpler engine design. Frankly, I think this is representative of probably how the broader market is looking at it.
We’ll jump into the forecasts. This is an interesting part around lithium because I specifically choose from a Bloomberg article these forecasts from OPEC, British Petroleum, and the IEA also compared to Bloomberg’s new energy finance expectations for a couple of reasons. One is OPEC, BP, and IEA are some entities that are probably the least in favor of electric vehicles. They’re certainly keeping a very close eye on what this means for oil demand around the world. They’ve set their expectations at a certain level. The interesting news around this is that the IEA doubled their forecast recently and OPEC multiplied their forecast by 5x, completely changing how they thought electric vehicles were going to be adopted. That’s a pretty massive revision to forecast.
What you can also see is a couple of interesting things here. One is if you were to plot out the ends of these lines on the curve, you tend to see that this is really almost shaping up like an exponential line in terms of time. From now until 2020, 2025, expectations are relatively low. These are just the point-to-point estimates, so that’s why we’re not showing the curve there. The nearer term estimates show less adoption. The longer-term estimates show much higher adoption, which is building that frontier of adoption. It’s really going to be based around 2030 to 2040. That goes back to the last slide we showed around those regulations kicking in when China, Norway, France, UK, India, all start to ban the sale of electric vehicles. We believe we’re going to see massive adoption at that point.
The other point on the slide that I would just touch on is the difficulty in the markets in terms of forecasting future events. I think when the market is trying to forecast something that’s happening in 2040 it’s very difficult. You have so many different actors in the market who are looking at everything from the next quarter to the next two decades and everything in between. When you have a variety of forecasts across a variety of different timelines, it introduces a lot of price discovery. A lot of different people with different expectations making different bets on these stocks to try and figure out what should the price today be for something that might have exponential growth in the future, might have somewhat more muted growth in the near future. It’s a difficult thing for the markets to price in and I think what’s fascinating to watch, it does result sometimes in more volatility in the prices of these stocks simply because a new forecast coming out, a new revision, new auto sales numbers can dramatically change these forecasts and it’s very distant in the future. If you’re trying to build a model to build that out, that can have a very big impact on the present value. I do think when you’re looking at this space you do have to consider that these forecasts are exactly that. There’s forecasts with a wide range between them and they tend to be fairly far off. That’s going to most likely contribute to more volatility in the space rather than something that’s very predictable, very consistent cash flows.
How much lithium are we talking about? I alluded to this a little bit earlier in the presentation, but I wanted to just give a sense of the scale here when we talk about electric vehicles. As we showed before about 30% of current lithium demand is coming from personal electronics: phone, tablets, laptops. We don’t have power tools on there, but they do have a little bit more lithium usage than the laptops. If you look at an electric vehicle, really a state-of-the-art long-range electric vehicle, what you’re really looking at is 10,000 times more lithium than a typical smartphone. If you do some back of the napkin math, 10 billion smartphones, which is the number some people estimate is the number of smartphones that have been built is equivalent in lithium demand to about a million electric vehicles. To give that number some context, the Tesla Model 3 has presold about 400,000, so about 40% of that number with a single electric vehicle. When you look at the disruptive aspect of electric vehicles, that 10,000 times more lithium number is why you can see such a big delta on lithium demand versus what we’ve seen in the past with smartphones, tablets, and laptops.
What I would not overlook as well as hybrid vehicles, only about a thousand times more than a smartphone. Somewhat of a misconception in the electric vehicle space is that everyone’s going to go from a midsize sedan internal combustion engine to a midsize sedan electric vehicle. I think the reality is that that’s simply not going to be the case. I think there’s going to be a lot of hybrid vehicles. There already has been a lot, but I think we’re going to see even more adoption there. I think plugin hybrid vehicles that allow people to run on electricity around the neighborhood, maybe 20 to 40 mile range while having a gas backup engine for longer range trips could become increasingly important as well.
If you look at the emerging markets, midsize sedans aren’t really as much of a concept out there. A lot of times they use what’s called neighborhood electric vehicles, NEVs, which are much smaller, easier for more crowded and congested streets, or closer built together buildings and are going to use less lithium. They are going to have a smaller range, but they’re really designed to have city cruising. I think this chart doesn’t quite capture the nuance of how many different types of vehicles are coming out or that they’re all going to be just one type of electric vehicle that uses 10,000 times more grams than a cell phone. It certainly going to be more of a range in our opinion.
The chart on the right also tries to give a sense of scale of what different adoption rates for electric vehicles – this is based off of the bottom electric vehicle, 40,000 to 80,000 grams – would mean within the context of current lithium supply. Essentially, you can see 5% penetration almost completely equals all of current lithium supply today. If you start to move that out to 10, 20, 30% adoption, that’s when you see the lithium demand from these vehicles starting to be a multiple of all the lithium supply that’s on the market today. This is to really just get a sense of the scale of the disruptive aspect of how much lithium demand could be needed if electric vehicles really do start to reach cost parity with internal combustion engines and become a huge portion of global sales.
Another question we tend to get is, okay, so that’s a lot of lithium. If that’s the case, if we see a lot of adoption of electric vehicles, do we have enough out there or is this a shorter term theme that’s going to be limited by current reserves? A couple numbers to throw at you, we have about 235 years of lithium at current production levels, which is equal to about 700 million of those state-of-the-art long-range midsize electric vehicles or 8.5 billion hybrid electric vehicles. Again, I don’t think the entire market is going to go to just one type of vehicle. All of these long-range vehicles, I do think there’s going to be a spectrum, so the number is probably somewhere between that 700 million and the 8.5 billion vehicle range. What I would also point out is this is based off current estimates for reserves. We have seen a few revisions in the last few years as to what that total reserve number is. That’s very simply because more people are out there looking for lithium these days. It’s tough to estimate, could that number keep growing and how much it could. We anticipate there is some upside potential, if you will, to that number continuing to grow as more people look for lithium out there.
The second thing I would look at is – and I saw a couple questions in the Q&A come in about this, is about battery recycling technology. That technology absolutely exists. That’s the ability to reuse those raw materials that went into the battery in the first place so that we don’t exhaust supply; that you would be able to reuse them. Right now the technology exists, it’s simply just not economical to do so, but if you saw lithium prices rise to the point where it was economical to do so, I do think we would see more lithium and battery recycling.
There’s been some interesting proposals in this space, which is – I think when most people think about recycling it’s you wore your battery down to zero. Can you break it apart, separate the elements again, and rebuild a fresh battery? The reality is I don’t think people are going to be doing it that way. One proposal is that there’s a point when a battery no longer becomes useful to a car because it starts to lose its power and its voltage, but it still has plenty of life left in it for lower voltage uses. Some people are suggesting that you could go from taking car battery packs and turning them into things that are a little bit more common stable uses of electricity, such as backup power for houses or even putting it on the grid as backup power for the grid as a whole, so repurposing that battery; not breaking it apart, but repurposing it for a second stage of its life into something that’s a little bit less intensive than a car.
Alright, I think this is our third poll question.
Stephanie: Yes, third and final poll question. The question is what do you think is the most important development for large-scale EV adoption? Cost roughly the same as internal combustion engine vehicles; driving range and refueling speed similar to internal combustion vehicles; more EV-specific infrastructure such as supercharger networks, repair shops, etc.; increased environmental regulations or final option, none of the above. Again, the question is what do you think is the most important development for large-scale EV adoption? I’ll give you just another moment or two to get your answer choices in. Again, you can click directly on the screen and then press submit to submit your response. With that, Jay, what are your thoughts on these results?
Jay: Okay, interesting. Actually, based off of the last response I would have thought we would have had more people responding to the cost roughly the same as the internal combustion vehicles, but actually, it looks like people are really focused on driving range and refueling. This speaks to what people call range anxiety or being able to have an electric vehicle that can operate the same way you use your car today, which is typically being able to drive 200, 300 miles on a single tank and then fairly quickly being able to refuel it. That’s certainly interesting. I do think that also speaks to advancements in battery technology as a whole in terms of getting more power density and building up a supercharger network so somewhat related to that infrastructure question. The more supercharger networks around the country, around the world, and the faster they can charge a battery, I think that would also help to alleviate some of those driving range/refueling speed answers there.
Okay, just a couple more slides until we open it up for questions. Just a quick reminder, if anything has popped in your head along the way, please do feel free to use that questions box at the bottom of the screen. We will try to get to a few of those questions in a few minutes.
This is our brief commercial for the lithium and battery tech ETF LIT. This is one of our thematic technology funds specifically trying to play what we believe is this electric vehicle theme and the disruptive nature of how many batteries are going to be required for electric vehicles, as well as continued growth in personal electronics, and some growth as well in the renewable energy storage space. Specifically, within this fund, it is looking at the full lithium cycle: mining, refining, and battery production. The first part of the fund is really looking at lithium miners. We showed some of those names on the screen earlier. These companies really stand to benefit not only from increased lithium output, but also if lithium prices do continue to rise, so that’s applying demand imbalance. It’s a play both on the price and the output, which is why I like to think about them as the upstream space within the lithium cycle.
The second part is battery producers. A lot of these are industrials companies or technology companies. There are a few automobile companies in here that are very active in battery production as well. I think about this as the midstream space of the lithium cycle because they’re really going to benefit from increased output of batteries. We have gotten a few questions of what does it mean if lithium prices really start to take off and get very expensive. What does that mean for battery production? Does it start to make batteries less competitive? I did pull an interesting stat. This was from a Bloomberg article called, “We’re Going to Need More Lithium.” Essentially, they looked at it and they said that lithium if it tripled in price would increase the cost of a battery by only 2%. The reason for that is that lithium is just a very small part of the total cost of a battery. A lot more of that cost is going into the production of it, the technology going into the battery, as well as some other raw materials, so we don’t see a very elastic relationship between lithium prices and battery prices, and especially if that trend continues that we saw in an earlier slide about battery prices coming down. Historically, that has far superseded the increases in lithium in terms of what’s really driving down the cost of batteries: increased scale, great competition, better technology – those are massive components of continued battery cost reduction.
The last slide before we open it up to Q&A. I like to see how lithium fits within our thematic map if you will of our various thematic ETFs from our technology and people suite because I don’t think these themes happen alone. Lithium is not just happening in an environment separate from some of the other trends that we see that are very disruptive in the space. Specifically, we like to look at the combination of lithium along with robotics and artificial intelligence, and the internet of things. These three themes are really coming together into self-driving autonomous vehicles. If you think about it, autonomous vehicles largely will require batteries because it’s much easier to recharge a battery car then to figure out how to fuel a combustion engine autonomously. Robotics and artificial intelligence, obviously, some of the machinery and brains that will be powering autonomous vehicles. The internet of things, which is really looking at sensors that are going to be on the outside of vehicles where they can start to do imaging of their environment around them is a very important component as well.
We also see lithium in the longevity space, interacting with medical device implants, wearables such as fitness trackers combining with health and wellness there. Lithium is really – if you look at this thematic map, it’s touching a lot of different themes that are all starting to emerge at once, which I think just makes it all the more powerful in the sense that if human-driven electric vehicles became less popular, perhaps autonomous vehicles can help step in and provide some of that demand. We think there is going to be increased demand still in the personal electronics space from those fitness trackers and medical device implants, so a lot of things coming together to drive lithium into the future.
Alright, that’s the end of our presentation for now, so I want to give everyone a minute to ask some questions. Stephanie, do you have a few things to run through before we get to Q&A?
Stephanie: Yes, thank you. At this time I want to thank Jay for such an informative presentation. Before we jump into Q&A, I do want to remind the audience that there’s a copy of today’s presentation, as well as additional documents that can be downloaded from the green folder at the bottom of your screen. We do appreciate your feedback. Please take a moment to fill out our brief survey located in the teal folder. Jay has mentioned earlier, we have received quite a few questions thus far. Thank you all for those. If you do have a question, please submit that by typing it into the box to the right of the slides. We’ll do our best to get to as many questions as possible, but in the event your question is not answered on today’s call, a member of the Global X team will reach out to you directly. With that Jay, I’ll turn it back over to you to take our first question.
Jay: Excellent, thank you. A lot of questions coming in here. We’ll try to pick off a few of these before we run out of time. I’m going to try to group together a couple of these questions that are coming in. A lot of these are getting at, what’s the best way to invest in this lithium revolution.
There’s a few different ways of looking at lithium and I think it depends on which way you want to look at it, obviously. If you’re looking at specifically just the price of lithium appreciating because you see a supply and demand imbalance, I would say that lithium mining companies would stand to benefit the most from that. They are really the upstream source of lithium production. They sell lithium oftentimes at pre-contracted values but those contracts are going to be determined by what the stock price is as they are signing new contracts or renewing those contracts. They are certainly impacted by the price. Battery producers are going to be a little bit more output related.
In our Lithium ETF we have both. We think it’s important to have the full lithium cycle. Lithium prices I think are going to fluctuate. As we talked about, there’s certainly going to be volatility in the space given the supply lag, given different forecasts. We do think that directionally lithium prices are going to benefit from increased demand and battery producers are going to benefit from increase to output.
A couple people have asked about lithium futures. There currently are not lithium futures on a major exchange. There’s been some discussion about that but it’s probably a little bit of a ways away. If you look at futures, it’s different from investing obviously in the mining and battery companies because futures are really a play on near term prices. It could be subject to the role of the futures curve. It likely would not change that much with rises in output, really just in differences in between supply and demand. It’s really looking at lithium prices more directly rather than looking at the overall theme of increased output of lithium.
Okay, another question. This is a question I really like because I have a slide for it. I did not plant this question. This is just having a useful appendix. We got the question of, how do you choose the ETFs that you launch for our thematic suite? I’ll actually go back to the slide. We have a series of funds in our thematic-tech and thematic-people suite. Tech includes lithium, robotics & artificial intelligence, internet of things, social media and Fintech. We also have our people suite on the left hand side, longevity, health & wellness, and millennials.
I think we have a very useful framework for thinking about we launch these. In thematic investing I think there’s a couple of important things to look at. One is, how likely do you think it is that this theme is going to play out? As we looked at with the lithium theme, we believe it’s very likely because of what we’re seeing on the call side, what we’re seeing with regulations, what we’re already starting to see play out in the space. Obviously if you’re going to do thematic investing one of the most important things is the theme has to happen. If you get it wrong that’s the end of that theme.
The second thing to look at is investability. You might have an incredible idea for a theme, but if there’s no way to invest in it, specifically in a liquid way or in an ETF in a diversified way, then the theme is not accessible. It would be very challenging to benefit from it. That’s a key second ingredient as well.
The third thing is to look at timeframe.
I like to segment themes between cyclical and structural. Cyclical themes occur with the business cycle – they come and go. If you look at the long term they probably revert to some sort of average. You could say that’s the case with interest rates. If you’re trying to bet on rising interest rates that’s a cyclical theme that will probably revert to some average in the future. A structural theme has no reason to revert to any historical average. It’s a complete change in the dynamic of the economy or in demographics or in technology.
Therefore, the timing of it doesn’t matter as much. It tends to be longer term in nature. It can be slow to start and then you can see more rapid adoption. We really want to look for those structural themes to try to take the timing element out of it more so than those cyclical themes – really look for these longer term trends that don’t require so much active management around when you determine to buy it.
We answered a few questions already on how recyclable are lithium batteries. Just to reiterate, it is possible. The technology exists, it’s just very not economical right now so it’s not very prevalent. But I do think it is very interesting to see the reuse of lithium batteries in different capacities because we talk a lot about electric vehicles but what we have not touched too much on is renewable energy storage. Solar and wind obviously are intermittent and need to be stored for whether you want to run power at night or in the windless day. Batteries are becoming an increasingly important part of the utility side of the equation as well. That migration of using old batteries from cars to utility renewable energy, I think, is a really interesting trend that we’re certainly going to keep an eye on.
Yeah, there’s a few more questions about when is the right entry point for lithium. Sticking with this idea of longer term themes – any investment is hard to say when the right entry point is. I think by nature, looking at longer term themes is generally better for someone who’s worried about an entry point. I think what we’ve seen today is pricing and the information that’s available to the market, which I think is still really underestimating the dramatic influence that electric vehicles are going to have in the future.
It’s very difficult to price in and I think the closer we get to that major change in lithium demand, I think you’re going to start to see again, more volatility. You can see ups and you can see downs but really as we get closer to that major point of the adoption curve, which we really target between 2025 and 2040, I think that’s going to be when this theme really starts to express itself. That’s what we’re keeping an eye on, but certainly we do expect some ups and downs along the way.
All right, I think I’m going to end it here. We’ve kept everyone pretty long for a Friday afternoon. I do apologize. There’s a lot of questions here that are excellent, haven’t even scratched the surface, but we will do our best to follow up. Really appreciate the engagement with everyone today sticking on the line.
If you do have more questions about lithium or you’re interested in the space, we do have a lot of research that’s out there if you visit www.globalxfunds.com/research or for the fund page, which is /lit. Please go there and we will certainly do our best to answer any questions.
Stephanie: That concludes today’s webcast. Again, thank you Jay, for your presentation and thank you to everyone who was able to join us on today’s webcast. Thanks again and have a great day.
For current holdings in LIT, please click here.