KEY TAKEAWAYS
  • Global auto sales have peaked in the current cycle. But there’s a bright spot coming: The electric vehicle market is in the early stages of scorching growth. EVs have the potential to transform the cities of the future with lower emissions.
  • Smart investors will step outside the noise around car manufacturing and focus on the more interesting field where the future is being decided: The massive imbalance between supply and demand for lithium, which will keep prices aloft for years to come.
  • Specifically, watch how shares of the world’s largest lithium miner can pay off. There’s a smart lithium ETF play to ponder as well.

When you look to the future of cities, you know it will include a space for cars — but they won’t be ones you’re used to seeing on the roads. The global auto industry is facing flat sales in 2018. Where the boom times are: Global sales of electric vehicles (EVs) are expected to rise around 40% this year, to around one million cars sold.

That’s just the beginning. As demand grows for more environmentally-friendly vehicles, global EV sales should continue to rise sharply year after year. According to the International Energy Agency (IEA), there will be 20 million EVs on the road by 2020 — and nearly 80 million EVs on the road by 2025.

Everyone knows Tesla and Prius, which were the early entrants, but incumbency won’t go far. A growing slate of car makers plan to offer EVs across their line-up: Mercedes-Benz, Volvo GM, Nissan, Volkswagen, BMW and many other makers will crowd into the market.

Who’s going to buy up all those electric vehicles? Most likely, it’s China. In a bid to fight air pollution, the Chinese government has drawn up regulations that will spur rapid growth in EV demand. In fact, sales of EVs in China are poised to rise 44% per year through 2020, according to Aegis Capital.

Since the field for automakers is so crowded, smart investors will look deeper when betting on the future of this trend — as deep, in fact, as the earth. All those electric vehicles, particularly the most advanced hybrids, need lithium ion batteries, and that means lithium will be in demand.

It’s also a concentrated market for lithium, in which more than half of the world’s lithium is supplied by a handful of mines in the Andean salts flats of South America. And 80% of global lithium mines are controlled by just four companies.

Here’s the risk: There simply may not be enough refined lithium to meet demand for rechargeable batteries in coming years. Total global demand for the lightest of all metals should reach about 400 kilotons when all uses are accounted for.

Trouble is, the world’s lithium mines are maxing out production now at around 260 kilotons.

It takes years for each new lithium mine to get up and running, which suggests it will be quite some time before the supply catches up to demand for this crucial element. And that’s a recipe for firm pricing.

Albemarle Corp. (ALB) stands out as the best way to play this powerful trend. The firm is the world’s largest publicly-traded lithium producer and controls the best, most highly-concentrated deposits of lithium. In fact, Albemarle has the lowest mining cash costs of any producer. The firm has seen lithium mining profit margins rise from 38.5% in 2013 to around 45% today. Profits may grow at least 15% per year in coming years.

For investors that prefer to invest in the lithium theme more broadly, consider the Global X Lithium & Battery ETF (LIT). Albemarle and its domestic rival, FMC Corp., account for around one-third of this fund, though the ETF also has strong stakes in South American and Asian commodity and processing firms, as well as EV makers such as Tesla and BYD.

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