Ask a bear what he is and he will tell you, “I’m a realist.” No one wants to be bearish let alone admit it. Being bearish is the mental state of mind equivalent to a socialist government. Simply, it taxes you.
With each sand castle global leaders build, you pay the realist in you another fine. To think about the world in such simplistic terms can be enlightening but also painful. Especially when the mistakes are this large and this obvious.
As a person who has witnessed countless kingdoms of sand built in front of a rising tide, I can tell you that I’m tired of being bearish. I don’t want to have 60% of my portfolio in gold and US treasuries. I long for the day I buy into an equity market that I BELIEVE is headed higher not because central banks dictate so but because it is supported by rising technological, demographic, and economic trends.
Alas that day is not yet here. As a self described realist, I am forced to make the best with what I’ve got, and what I’ve got is a hill of batteries. Lithium ion batteries to be specific.
These high energy density batteries have received much of their attention due to Elon Musk’s flamboyant comments about taking the entire world’s supply just to satisfy Tesla’s demand. But readers who stopped at the page on electric vehicles (EVs) have missed most of the story.
Which is why the market’s reaction to Tesla’s bid for Solar City was so harsh. Tesla is no longer a car company. With the world’s largest battery factory, Tesla has become a battery company. It’s potentially a great pivot for a company that makes less than 100,000 cars a year at a massive loss.
Car manufacturing is a low margin business with future demand slowing due to technological and social trends, but batteries , where the demand rises as the costs fall, is a high margin business that is growing rapidly.
Now I’m not opining on the viability of this transition. I’m just pointing out that Elon Musk who is a smart man with inside knowledge appears to have staked his future on batteries and not cars. That should be noted.
The cost of lithium ion batteries is falling while the efficiency and energy density are rising. It’s a beautiful combination and as the trends continue, the uses and demand for batteries will explode.
Grid storage will be the largest market for batteries. Already smart batteries can help control the flow of power through the grid during peak power demand which dramatically cuts costs. But for the past five years, battery technology and its adoption has lagged behind both solar and wind power.
The demand for grid storage is already there, but only now are batteries reaching the point where they can technologically satisfy that demand. As battery tech improves the demand from grid storage will rapidly increase.
Batteries will also have a positive impact on the viability of both solar and wind power as well. Wind and solar are not viable as base load power, and I’m not saying they will be in the next 5 years, but in an increasing portion of the world, the combination of solar or wind power and a large battery will be more than sufficient for household needs.
The battery story seems like a great one, but these days stories rise and fall on the whims and demands of the Chinese people. Fortunately for this story, the China’s rapid growth over the past two decades has only been matched by its capacity to pollute.
Since social stability is key in China, massive strides are being made to placate the growing middle class that wants to live in a clean environment. As a result, no country on earth is investing more into green technology and infrastructure than China is.
Obviously this has led to inefficient uses of capital and some 30% of China’s wind power is sitting idle in the south west. But the point is that China is shifting its demand. And the materials it will consume over the next twenty years will look different from those of the last twenty years.
There are many “new age” metals that will benefit from technological trends and right now lithium is the flavor of the month. Humanity has been a carbon powered race for over 100,000 years but as time progresses, and people expand their horizon they will discover that Lithium is not the only character in this story.
Currently lithium makes up about 2-3% of the overall battery’s cost. That could rise slightly as the demand for such a tightly controlled metal explodes, but it won’t drastically affect the overall cost of the battery.
From a weight standpoint, lithium ion batteries should really be called cobalt graphite batteries. Per weight, there is more than 10x as as much graphite than lithium in a lithium ion battery.
When it comes to graphite, China is the world’s largest producer, making up 70% of global production, in a market that is currently oversupplied. A lot of this production is done by small unregulated highly polluting companies. Needless to say, China is in the process of consolidating and cutting these inefficient means of production. Thus overall supply is falling in to a market that is seeing demand rising rather dramatically.
There are nuances to every market and the graphite market is no different. Although currently oversupplied, the graphite market is a tale of two purities. The low end market is oversupplied but the high end market which is used in batteries is not.
High purity graphite is not only expensive, but is dirty to make, once again contributing to the hesitation investors and governments associate with this space. A very large graphite resource out of Mozambique will come online later this year further adding to the oversupply and complicating this market.
Just because the graphite market may not be as clear as the lithium market doesn’t mean there aren’t some hidden gems to be found. Just like hydro-fracking technology was to shale, resource companies are finding new and more efficient ways to extract and manufacture high purity new age metals. Graphite, lithium and even silicon are benefiting from these potentially revolutionary technologies.
For example, solar grade silicon is currently mass produced using technology from the 1990’s. Lithium brines are still being extracted using the sun to dehydrate water. The technologies for extracting these metals has lagged the technologies they go into. But that is changing, and that is where I am investing.
For the purpose of brevity, although I’ve now run over 1000 words, I am cutting the post here. In the coming weeks I will dig a little deeper into the specific markets for some of the new age metals such as graphite and graphene, silicon, and uranium. If you would like to know more, stay tuned.