The Global X Lithium ETF (NYSEArca: LIT), previously one of this year’s best-performing equity-based commodities exchange traded funds, is lower by nearly 4% over the past month, but that decline arguably declines some favorable fundamentals in the lithium space.
LIT tracks a diversified group of companies involved in the “full lithium cycle,” from mining and refining the metal through battery production. Lithium is utilized in batteries for their high charge density, or longer lasting life.
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“Lithium now appears to be at a crucial moment in time: The moment when profits in the industry begin to elevate market valuations, and when consolidation starts to boost gains for all those junior explorers who have been scooping up land in the world’s lithium sweet spots,” according to OilPrice.com.
Lithium is “An essential component in the advancement of alternative energy is the ability to efficiently store power,” according to Global X. ” Renewable energy sources such as solar and wind require generated electricity to be stored because they provide power inconsistently throughout the day. Overhauling the transportation industry to run on electricity, rather than gasoline, requires enough energy storage to power vehicles for hundreds of miles. To meet these energy storage demands, advanced batteries are made from Lithium.”
Due to their close ties with the commodities market, the materials sector are susceptible to cyclical demand and volatility in raw material and energy prices. While the sector’s sensitivity to business cycles can expose investors to greater risks, the area may also offer attractive returns during periods of strong growth.
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With the economy recovery maturing, the materials sector, which is closely tied to the prices of raw materials, have traditionally done well as inflation rises and late-cycle economic expansions help support demand.
“Lithium demand is rising fast, but those that understand the product lifecycle and development stages see that we are on the cusp of something much bigger. As more and more countries cross the electric vehicle chasm, demand will explode. This is not even considering grid storage, which is set to outstrip electric vehicle demand, and the rising use of consumer electronics,” reports OilPrice.com.
With more lithium battery factories coming online, production of the metal could triple over the next five years.