Excess Capacity Could Hinder Lithium ETF

Supply growth for lithium has been on the rise, which could potentially lead to an overcapacity of the metal threatening the industry and pushing prices down and possibly sending the Global X Lithium ETF (LIT) into a tailspin. 

According to lithium consulting group, TRU Group Inc., production of lithium has escalated to nearly double what industry demand will need over the next ten years.  To put it into perspective, the consulting firm states that lithium pipeline projects and expansions could increase capacity by about 40,000 tpy Li-contained in the next decade, while existing lithium chemical producers have the in-ground resources and ability to meet nearly all market requirements by expanding capacity.

As for demand of the metal, it is expected to be supported by the metal’s numerous uses.  Lithium is one of the most important natural resources in the world, and can be found in cell phones, aircraft parts, nuclear weapons and medical applications, just to name a few.

Additionally, lithium plays a vital role in the alternative energy sector. The metal has the capacity to store electric energy more efficiently than any other metal, which is essential in generating solar and wind power as well as in powering electric and hybrid cars. 

At the end of the day, there is expected to be more than ample supply to meet demand for lithium, resulting in a potential imbalance resulting in excessive supply, which could result in negative price support for lithium.

The Global X Lithium ETF (LIT) is an equity play on lithium and seeks to replicate an index which tracks the performance of the largest and most liquid companies that are active in the exploration and/or mining of lithium or the production of lithium batteries.   Top holdings include Socieadad Quimica Y Minera De Chile (SQM), FMC Corp. (FMC) and Rockwood Holdings Inc. (ROC). 

Disclosure: No Positions

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