Will lithium pop like the cannabis bubble?
By Tim Worstall
12:38, 19 December 2022
It’s clear and obvious that lithium is the sexy mining story of our time. But as with the sex appeal of any individual, it does fade over time. The only interesting question is – how long will it take? So, when considering the varied lithium miners we can buy into or trade, how long is it going to take for this story to fade in attraction?
One answer might be that it already has. We had a boom in lithium mining investment back in 2013/14 and one of the graduates of that, Altura, has already gone bust. It did get to production, but just couldn’t carry the costs of having got there.
There’s no doubt that the energy revolution – those electric vehicles and all that – is going to increase lithium consumption. But that’s not what makes a good investment, not at all. What matters is the balance between new demand and new supply – those little diagrams on page one of the economics’ textbook do actually describe the real world.
What is your sentiment on SNDL?
Sundial (SNDL) share price chart
A lesson in highs and lows
While we try to decide who’s blowing smoke, let’s talk about smoke, namely the cannabis industry. Humans like getting blasted and have been getting blasted on cannabis sativa for millennia.
But only in the past few years has it been legal to grow and sell the stuff in rich nations. So, of course, pent up demand, a vast market, newly legalised – folks have been making like bandits, right?
Well, no, that’s not been the experience at all. Sundial (SNDL) is down from $106 at one point to $2.27, Tilray (TLRY) has fallen from $148 to $3.26 and Canopy (WEEDca), which hit $67 at one point, is $3.55. Even a company you might think would be hit by legalisation – for example, someone selling hydroponic kits – like iPower (IPW) has done better than that.
So, what’s going on here? One part is that the bureaucrats and politicians decided to show us how a properly regulated and organised market would work – which means they’ve achieved the unlikely feat of making the legal stuff both worse quality and higher priced than the still-available black market stuff. All of which is impressive – especially since the quality point means you can now only be arrested for having really good shit. You know, the stuff that obviously cannot possibly be legally procured.
But that’s not really why everyone’s finding it so hard to make money here. The cause of that is something much more fundamental. Growing cannabis is so easy that any dope can do it. And when it’s legal, near anybody does. Supply roars up much faster than demand and, as those first couple of pages of ‘Econ 101’ explain, there goes the price and any hope of profits.
Tilray (TLRY) share price chart
Is lithium set to go up in smoke?
What we want to know about the lithium market is, well, will it be like this? The answer is yes – we just don’t know when. This means that just as with cannabis, there’s a lovely market bubble to ride. But we need to know that it’s a bubble and that there will be a deflation. That’s OK – we can make money on the way down too, we just have to be correctly positioned.
The big secret of minor metals (essentially, all those your grandmother hasn’t heard of, not copper, iron and zinc, but lithium, tantalum and so on) is that there are lots and lots of them out there. I once wrote a whole (free) book pointing this out. The point of which is that we can have shortages at some point in time because we’ve a shortage of people digging it up. But we can solve that problem – firehose more capital and we’ll have more mines and so more of our desired metal or mineral.
This is indeed what’s happening, but that firehose (that’s the capital markets allocating more cash to quoted companies to go mine lithium), umm, means that supply is going to rise, the price will crater and we’re back to where we are now with doobies.
OK, why might this be wrong? Because not enough of those new mines are going to come to market. But the current lithium price is something like $70,000 a tonne. That’s just too juicy for people not to go mining. So, more mines are going to come online.
Some companies will be fine for a goodly time. Albemarle (ALB) and SQM (SQM) are producing right now – at those humongous margins; margins that their current share prices might well not reflect properly.
Albemarle (ALB) share price chart
But, but, but… I know of one mountain that actually has two separate companies trying to mine it – Zinnwald Lithium and European Metals.
There are people looking at extracting from geothermal waters (Cornish Lithium, Vulcan, several at the Salton Sea, Wearside) and there’s at least one guy who insists he can mine the Red Sea (he’s right too, but unlikely at a profit).
Then there is Atlantic Lithium, Bradda Head and, well, have a look at the lower levels of any of the global markets, you’ll see a rash of lithium companies. One of those rashes that’s not amenable to a little topical cream either. I can think of perhaps 50 and that’s without really hunting.
Facing up to overproduction
There’s going to be – to my mind at least – overproduction of lithium. And that’s before we start talking about different battery technologies, or solid state lithium, fuel cells, even synthpetrol. On that last one, well, given the current lithium price it’s already true that electric vehicles are more expensive to own and run than petrol and that’s before we consider taxation.
So, go short right? Bet on downwards price movements? No. Not yet at least. The point being that just like those cannabis stocks there was money to be made on the upward surge. As there’s also been much to make on the downward slide. The big question is not – again, to my mind – whether the switch is going to happen.
The thing we don’t know is when. When should we go from bull to bear on lithium stocks? Umm, sometime. Don’t forget, it’s not when the market moves into oversupply that matters, nor when prices start to fall. Rather, when everyone else thinks that either or both will happen. Stock markets are, after all, forward looking.
The real point I’m making here is that demand calls forth supply. While markets are really great things, they do (often enough) call through more supply than will sustain the price. As investors we need to know this of course. And as traders we need to try to work out when. Which is where the difficulty arises of course.
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