COULD A LITHIUM SHORTAGE DERAIL THE ELECTRIC CAR BOOM?

We’ve gone electric, and there’s no going back. Lithium is our new fuel, but like fossil fuels, the reserves we’re currently tapping into are finite — and that’s what investors can take to the bank.

You may think lithium got too popular too fast. You may suspect that electric vehicles (EVs) are too much buzz and not enough real future. And yet, despite this scepticism, lithium demand is rising steadily and sharply, and indications that a shortage may be looming are very real.

It won’t be a shortage in terms of “peak lithium”; rather, it will be a game of catch-up with the electric car boom, with miners hustling to explore and tap into new reserves.

Consider the number of battery gigafactories that are being built around the world. We have all heard about Tesla’s Nevada facility that is expected to produce enough batteries to power 500,000 electric cars per year when it reaches full capacity by 2020.

This, as the carmaker proudly notes, is more than all global total lithium ion battery production for 2013. That’s a pretty impressive rate of demand growth — but this growth also represents the culmination of a sea change in the way we think.

Lithium is powering most everything on which our present depends and our future is being built. It’s a viable alternative to petrol, and in consumer electronics alone there is no sign of contraction — only expansion. Think the Internet of Things, or smart houses, or smart cities. All are powered in some way by lithium.

But the real and present coup has been launched by EVs, which will be increasingly in demand as people around the world are encouraged to cut their carbon footprint. According to Lux Research, the EV market will grow to US$10 billion within four years. Navigant Research sees EV sales rising from 2.6 million last year to more than 6 million in 2024.

Indeed, says Nevada Energy Metals executive Malcolm Bell, “It may be time to start worrying about a shortage, but it’s not a question of whether we have enough lithium — it’s a question of tapping into new reserves.”

It may seem to many people now that the world has a fair amount of lithium. According to global estimates by the US Geological Survey, there is enough lithium — 13.5 million tonnes of it — to last us over 350 years in batteries. But this calculation takes into account only the current rate of lithium ion battery usage. It does not account for the entry of EVs into the mainstream. And it certainly doesn’t account for a pending energy revolution led by lithium.

The present is clear: demand is growing faster than production, and for now this new demand is coming increasingly from the electric vehicle industry.

Tesla’s is by no means the only battery gigafactory. There are others being built around the world (at least 12, according to Benchmark Mineral Intelligence) and they will raise global demand for lithium batteries to 122 gigawatt-hours by 2020. That’s up from 35GWh currently.

In addition to the Tesla gigafactory, LG Chem is planning a complex in Nevada. Brine-based lithium production in the US is concentrated in Nevada because it is the only confirmed place with lithium deposits. The biggest actively mined area is the Clayton Valley, with presence from both mining majors like Albermarle and smaller, pure-play lithium miners like Nevada Energy Metals. This makes Clayton Valley ground zero for the US lithium rush, but it’s the pure-play miners who are set to explode onto this scene from an investor’s perspective.

Those with foresight are diversifying their Nevada holdings and banking on geological clues that suggest there is plenty more lithium in Tesla’s backyard, and whoever gets to it first will be far ahead of the game.

How to play lithium: The best way to secure a foothold in lithium right now is to think outside the box and look for companies that see the bigger picture but are also smart enough to keep one foot in the proven lithium hunting grounds.

But you also have to understand the supply and demand picture here. Macquarie Research estimates that in 2015 demand for lithium already exceeded supply, while this year, lithium output will again fall short of demand.

In 2017, thanks to so much new production capacity the metal’s fundamentals will approach an equilibrium, which will last for about a year before deficit rears its head once again — but this time the deficit will stick. Despite new efforts to ramp up supply, it will take a while before supply accords with demand.

The future is pretty clear: we’re looking at a period of shortage, and shortage is where the savvy investors make real money. The lithium feeding frenzy has only just begun. Consumer electronics keeps it safe and steady; the EV boom skews the demand picture dramatically, and the evolution of energy storage and powerwalls takes it over the edge.

Lithium has the purest fundamentals of any commodity, and the next oil barons look set to be lithium barons. In fact, in this respect, EVs will likely be the cause of the next oil crisis.

Demand and supply are simple and shockingly visible, and that means there’s a lot of new money floating around for lithium exploration. If you’re not a believer, the immediate future will sweep you off of your feet.