Lithium: From Hot Commodity to Big Short

Summary

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Podcast Summary:

WSJ Your Money Briefing
Episode: Lithium: From Hot Commodity to Big Short
Date: August 16, 2018
Host: Charlie Turner
Guest: Amrith Ramkumar (Wall Street Journal markets reporter)

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Episode Overview

This episode tackles the dramatic rise and sudden fall of lithium as an investment commodity. Once a star performer thanks to the electric vehicle (EV) boom, lithium quickly became one of 2018’s largest short bets. Host Charlie Turner and WSJ reporter Amrith Ramkumar discuss what drove prices up, why sentiment shifted so quickly, and the future for investors in the lithium market.

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Key Discussion Points & Insights

The Rise of Lithium Investments (02:59–03:43)

• Bullish Sentiment on Electric Vehicles
  Lithium, vital for batteries in EVs and smartphones, saw prices soar in 2017 driven by optimism about EV growth.

  "The key really was bullish sentiment around electric vehicles." – Amrith Ramkumar [02:59]

• A Nascent, Volatile Market
  Lithium’s market is small and particularly sensitive to investor sentiment, “subject to quick changes in sentiment,” resulting in exaggerated moves both up and down.

  "It's a really nascent market. It's very small and really subject to quick changes in sentiment." – Amrith Ramkumar [03:00]

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2018: Rapid Turn into a Big Short (03:51–04:59)

• Oversupply Fears and Confusing Signals
  Increased investment led to new producers jumping in, making it hard for investors to assess which companies were viable. Even firms backed by major players (Tesla, SoftBank) saw shares punished.

  “Even some of the supposed winners in the lithium market... investors have punished those shares.” – Amrith Ramkumar [04:22]

• Opaque and Fragmented Pricing
  Reliable pricing for lithium is hard to come by, with regional disparities, e.g., prices in China plummeting while global prices seem stable.

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The Morgan Stanley Catalyzer (05:15–06:22)

• A Negative Analyst Call
  A late-February 2018 Morgan Stanley report predicted a move from lithium undersupply to oversupply, accelerating the downturn.

  "If you look at the chart, it's pretty striking. In late February, when Morgan Stanley started calling for oversupply... that's really when a lot of this accelerated." – Amrith Ramkumar [05:15]

• Debate on Supply vs. Demand
  Morgan Stanley's thesis was that a giant Chilean producer (SQM) would ramp up supply faster than expected. Some investors doubted this was possible due to logistical and technical challenges.

  "Some investors don't think that's possible given some of the logistics and infrastructure and challenges even ramping up supply." – Amrith Ramkumar [05:40]

• EV Adoption is the Wild Card
  The whole debate hinges on how fast electric vehicles will be adopted—a major unknown.

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Investment Vehicles and Stock Moves (06:22–07:32)

• Key ETF: Global X Battery and Lithium Technology ETF
  This ETF surged nearly 60% in 2017, but is down about 20% in 2018.

  "It's down about 20% this year after rising nearly 60% last year." – Amrith Ramkumar [06:56]

• Biggest Producers and Casualties
  Shares of major lithium producers have fallen 25–30% in 2018; some small companies down as much as 70%.

  “Among some of the largest producers, they're down usually around 25%, 30% this year. In some cases for small companies it's up to 70%.” – Amrith Ramkumar [07:05]

• Market Direction Remains Uncertain
  The market remains small and sentiment-driven; dramatic reversals are possible at any time.

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The Most Shorted Lithium Stocks & Upcoming Tests (07:32–08:41)

• Top Short Targets
  Albemarle (US), Galaxy, Orocobre (Australia) are heavily shorted, with about 20% of shares sold short.

  "Those are some of the favorite shorts of the market at the moment. Almost 20% or so of their shares are basically being shorted." – Amrith Ramkumar [07:52]

• Upcoming FMC Lithium IPO
  FMC is spinning off its lithium business and planning an IPO in October, which many see as a barometer for investor sentiment in this sector.

  “That really will kind of test how investors feel about this market.” – Amrith Ramkumar [08:09]

• Investor-Corporate Disconnect
  While investors turn cautious, big tech and auto companies (like Tesla and SoftBank) remain bullish, worried about future supply shortages of a critical resource.

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Notable Quotes

• “It's a really nascent market. It's very small and really subject to quick changes in sentiment.”
  — Amrith Ramkumar [03:00]

• “Even some of the supposed winners in the lithium market... investors have punished those shares.”
  — Amrith Ramkumar [04:22]

• “If you look at the chart, it's pretty striking. In late February, when Morgan Stanley started calling for oversupply... that's really when a lot of this accelerated.”
  — Amrith Ramkumar [05:15]

• "Among some of the largest producers, they're down usually around 25%, 30% this year. In some cases for small companies it's up to 70%."
  — Amrith Ramkumar [07:05]

• “Those are some of the favorite shorts of the market at the moment. Almost 20% or so of their shares are basically being shorted still, even after they've come down a lot...”
  — Amrith Ramkumar [07:52]

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Key Timestamps

• 02:59 – Lithium’s Bull Run and EV optimism
• 03:51 – Market composition and confusion
• 05:15 – Morgan Stanley’s oversupply call and its impact
• 06:32 – Stock/ETF performance and market volatility
• 07:32 – Top shorted stocks and upcoming IPO as sector barometer

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Tone and Takeaways

The conversation is analytical and measured, with a sense of the uncertainty and complexity at play in the lithium market. The focus is on explaining the factors behind the extreme swings, the opacity and unpredictability of the sector, and the continuing push-pull between short-term traders and long-term industry giants. As the episode closes, the key message is: in such a young and volatile market, the next chapter remains unwritten.

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Transcript

[A]

This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day. Washington Wise from Charles Schwab is an original podcast that unpacks the stories making news in Washington. [e-mail] Washingtonwise your money briefing Money and

[B]

market stories from the Wall Street Journal. Welcome to your Money Briefing. This is Charlie Turner in New York. In a moment, we'll talk about why Lithium has turned from a hot investment into one of the biggest short It's

[C]

a really nascent market, it's very small and really subject to quick changes in sentiment. So that's why we saw kind of exacerbated moves last year, and now we're kind of seeing the flip side of that.

[B]

We'll talk with the Wall Street Journal's Amrit Ramkumar in a moment. First, here are some money headlines. You may know that billionaire investor Warren Buffett has largely steered clear of investing in tech companies instead, as he has said, opting to invest in companies he understands. The one big exception to this is Apple, which makes a product that Buffett understands the iPhone. The Wall Street Journal says Buffett's Berkshire Hathaway continued to load up on Apple in the second quarter. Berkshire increased its holdings of Apple stock by 12.4 million shares in the quarter, taking its stake to $46.6 billion by the end of June, according to a new securities filing. Berkshire has repeatedly added shares of the iPhone maker, including more than doubling its stake in early 2017. As of March 31, Berkshire was Apple' a shareholder after Vanguard group holding nearly 5% of Apple's stock. The Wall Street Journal's Robin Friedman writes that many homeowners dream of hosting a mortgage burning party as they approach retirement. But paying off the mortgage isn't always the best strategy. Sometimes it's better to keep that money in the bank for other purposes, such as building retirement savings or paying down higher interest debt. In other cases, paying off a mortgage makes sense, especially when you have ample retirement savings and plan to stay in the home for a while. Your decision depends on the mortgage, the amount of your savings and your expected retirement income. Find Robin Friedman's article When Retirees Should Not Pay off their [e-mail] Next Lithium, last year's Wall street darling, is this year's big short bet. This is your Money briefing from the Wall Street Journal. Welcome back. What a difference a year makes for lithium, the metal used in making batteries that power electric vehicles and smartphones. Lithium was one of the hottest investments of as prices for the commodity rose, as did shares of the companies that produce lithium. But this year has been a different story. Lithium has become one of 2018's biggest short bets. Joining us with more is Wall Street Journal markets reporter Amrit Ramkumar. Well, Amrith, so much for going long on lithium. First, why did prices for lithium rise sharply in 2017?

[C]

The key really was bullish sentiment around electric vehicles. So, like you mentioned, lithium is a commodity that's used in rechargeable batteries that go into smartphones. But people are really looking at the growth for EVs as the catalyst that could really push prices higher and support some of these companies that are producing it. People say there was really just a rush into them and that the higher prices led to all this excitement, which then incentivizes more producers, as you can imagine, to start looking for ways to bring on more supply to take advantage. It's a really nascent market. It's very small and really subject to quick changes in sentiment. That's why we saw exacerbated moves, and now we're kind of seeing the flip side of that, with some people trying to take advantage of the rapid swings.

[B]

So this expected demand and short supply for lithium, that boosted stocks of lithium producers rather exponentially.

[C]

Right. And the key is there are a few large producers that control a lot and already have a lot of production currently available. And they currently have deals with battery companies and the tech and auto companies that use this stuff. But there are also a lot of small companies that are rushing to take advantage of this boom. So it's a challenge for investors, investors to determine which ones are more legit, which ones are able to secure funding. That's why I think some people were really caught off guard by what they saw last year and saw it as an opportunity to go short. The interesting thing this year is that even some of the supposed winners in the lithium market, some of the companies that have gotten investments From Tesla, from SoftBank, these are junior miners that have secured funding for their projects. Even investors have punished those shares. So people are looking at this and are a little confused about what's going on, because as I mentioned before, it is a small market, opaque. It's hard to get even reliable, consistent lithium pricing data. For example, people have talked a lot about how the price in China, for example, for lithium and even cobalt and other battery metal, they've gone down a lot in China, but globally, they seem okay. So people are looking at a lot of these conflicting signals.

[B]

Stocks basically have fallen this year as traders have made short bets and by short we mean betting the price of a stock will fall. Wasn't this really sort of prompted or spurred by a negative review that was delivered by Morgan Stanley 100%.

[C]

If you look at the chart, it's pretty striking. In late February when Morgan Stanley started calling for oversupply and said this was the last year that demand would exceed supply. That's really when a lot of this accelerated. Some of these oversupply worries were out there like they usually are for a lot of commodities at this stage in their market development. But that was really a catalyst, I think, and a lot of people paid attention to that and, and there's been a really big debate going on because Morgan Stanley's thesis is basically that sqm, this giant company in Chile that is the largest producer, will really ramp up supply a lot more quickly than people expect. Some investors don't think that's possible given some of the logistics and infrastructure and challenges even ramping up supply. A lot of this also has to do with turning lithium into battery grade materials, which are often very specific. And so there are a lot of really complicated factors at play. And so there are all of these different supply and demand projection. So that was Morgan Stanley's, but a lot of other analysts are still kind of bullish. And a lot of this again comes back to how quickly electric vehicles will be adopted, which is anyone's guess at this point.

[B]

Talk about some of the lithium producers whose stocks have fallen this year, as well as some of the exchange traded funds that allow investors to bet on lithium.

[C]

Sure. The big ETF is the Global X Battery and Lithium Technology etf. It kind of took off a bit last year. It's one of the main ways investors can get access to this commodity again. There are no publicly traded futures contracts as the case for other commodities like oil or copper. That's a way a lot of investors bet on it. It's down about 20% this year after rising nearly 60% last year. The losses among some of the individual stocks divide based on their size. Among some of the largest producers, they're down usually around 25%, 30% this year. In some cases for small companies it's up to 70%. Really like I said, at the sentiment is driving the market as it did on the way up and now on the way down. So people are kind of looking to see what happens next because since the market, like I said, is so nascent and the smallest signals seem to set it off, it could quickly reverse or it could continue on this path. It's really Interesting.

[B]

Yeah. We're talking about shares of companies that have gone short, I guess, like Albemarle in Australia, Galaxy and Orocobra, companies like that, that really have had short positions. So as you say, it remains to be seen what happens next with this. They keep shorting. Are we going to hit a bottom? Are the short bets going to be caught up short?

[C]

It really remains to be seen. You mentioned those three companies. Those are some of the favorite shorts of the market at the moment. Almost 20% or so of their shares are basically being shorted still, even after they've come down a lot and investors have reaped gains from their short bets. It's really unclear. Another thing to keep in mind is that fmc, another US Company, is basically spinning off its lithium business and planning to do an IPO in October. That's opportunity. People say that really will kind of test how investors feel about this market because there is a divide, it seems like, between how investors feel and how, again, corporates feel in terms of companies like Tesla SoftBank. These, like large tech and auto companies, see the possibility that there could be supply shortages and they don't want to be caught on the wrong end for something they need for a vital product.

[B]

Wall Street Journal markets reporter Amrith Ramkumar. Thanks a lot, Amrith.

[C]

Thanks for having me.

[B]

And that's your money briefing. This is Charlie Turner from the Wall Street Journal.

[A]

This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day. Washington Wise from Charles Schwab is an original podcast that unpacks the stories making news in Washington. [e-mail] WashingtonWise.