Since late March of this year, by and large lithium mining stocks are up considerably, while the metal itself is still languishing near all-time lows.
For example, Albemarle Corporation (NYSE: ALB) has shot up from $52.70 on March 30 to a closing price of $84.11 on July 14.
Sociedad Quimica y Minera de Chile S.A. (NYSE: SQM) has jumped from $16.04 on March 20 to a July 14 close of $30.10.
And the Rio Tinto Group (NYSE: RIO) has gone from $36.57 on March 16 to $60.84 on July 14.
So why is lithium down so much, while the price of miners is rising?
The answer can be found in the supply chain dynamics of lithium.
While most metals are processed fairly quickly into something close to their final form, lithium has a relatively long supply chain.
Basically, production of lithium for use in batteries is comprised of five distinct steps - mining, chemical production, cathode production, lithium battery cell manufacturing, and application.
I'm not going to go into detail about each of these steps, but to put it simply, right now the upstream (mining) end of the supply chain is still relatively well supplied, while the downstream (battery application) end is tightening sharply.
But that situation is likely to balance out soon because what happens at the downstream end of a supply chain usually has a way of filtering back upstream.
In other words, in all likelihood, the price of lithium will rise due to the demand for lithium from battery manufacturers.
The origin of the current mismatch between the two ends of the lithium supply chain can be traced to 2019, when automotive demand in China plunged.
That plunge was part of a worldwide automobile sales slump, as the number of vehicles sold across major global markets dipped to 90.3 million last year (2019), according to analysts at LMC Automotive.
That's down from 94.4 million in 2018, and well below the record 95.2 million cars sold in 2017.
Adding to the automobile industry's woes is the COVID-19 pandemic, which Cox Automotive predicts will cause a 24.2% drop in sales for the first half of 2020.
But now there are numerous tailwinds that should reverse the fortunes of the automobile industry, particularly EV manufacturers.
For one, China has said it will not cut EV subsidies this year, as had been previously announced in 2019.
Other countries, including the U.S., Canada, Spain, France, and Italy have also implemented EV subsidies in order to reduce dependence on gasoline and diesel.
In addition, the EU has approved 3.2 billion euros in funding for lithium battery projects.
And on top of all that, Germany has committed to phasing out coal power by 2038, while the UK has moved up the date for a proposed ban on the sale of all new gasoline, diesel, and hybrid cars to 2035.
Industries are also boosting lithium demand.
For example, LG Chem (a private company in South Korea) and General Motors (NYSE: GM) have agreed to invest more than $2 billion in a lithium battery factory in Lordstown, Ohio.
Tesla is also considering building a $2 billion battery factory (in Shanghai, China) to support the production of 250,000 EVS a year - and that's just in the plant's first phase.
And in Europe, Volkswagen is targeting 1.5 million new EVs by 2025 (including hybrids). It also plans to build a $2.5 billion EV plant with its partner, SAIC Motor.
As a result of all these developments, Bloomberg New Energy Finance forecasts that there will be over 500 EV models available worldwide by 2022, and 8.5 million passenger EV sales by 2025.
That represents an increase of 347% from the 1.9 million passenger EV sales in 2019.
It doesn't take a rocket scientist to see that all of these new EVs are destined to boost lithium prices.
So, what's the best way to play this development?
Yes, you could buy any of the lithium miners I talked about earlier, but mining is a dirty business fraught with risk.
It's better, I think, to invest in a vehicle that has its hands in all five steps of the lithium production supply chain.
That's why I like Global X Lithium and Battery Tech ETF (NYSE Arca: LIT), which does just that.
Right now, LIT is on a tear, up 104% since March 20 of this year, skyrocketing from $18.13 to $37.16 on July 14.
That's a rise of 104%.
I expect this bullish trend to continue as lithium prices rise in the face of heightened EV demand.
I view this as a long-term play, as demand for lithium is likely to grow throughout this decade and beyond, so I recommend buying the security outright.
If you're looking for a way to identify other high demand securities on a regular basis, I highly recommend you check out Chris' free live event.
During this event, he'll reveal how you can "spy" on moves made by the biggest firms in the market for huge gains.
Don't miss out. Check out this free presentation before it's taken down.
That's it for this week.
To your trading success,
Doug Fogel
Editor, True Market Insiders
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