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'Speculative frenzy’ over electric cars and battery tech as investors mull lithium futures

The future of electric vehicles has led several investors to view lithium as the hot new commodity.

Governments and car manufacturers alike have taken steps to electrify fleets and further phase out the combustion engine. In turn, a number of traders now believe lithium to be a high-return investment as demand soars.

This is no surprise; lithium is a vital component to lithium-ion batteries. These rechargeable batteries are used in devices as common as smartphones and laptops. They have increasingly become popular with electric car manufacturers due to being able to produce more electricity per unit than conventional batteries.

"Any consumer behavior is going toward electric vehicles so the market is forced to come with them," Brian Paes-Braga, CEO of Lithium X, told CNBC via phone call last month. "I'm absolutely a believer in electric vehicles."

But trading lithium is no easy task.

"There's very few ways to play the space. You've got to provide investors with the opportunity to play this revolution that's happening in the transportation business and energy business," Paes-Braga said.

Traders can buy the physical metal but there is not yet a single lithium commodities exchange in existence.

One alternative is to bet on a fund that tracks a basket of lithium producers and battery tech manufacturers. The Global X Lithium & Battery Tech ETF (LIT) has climbed at least 50 percent in the last 12 months.

"It's not exactly a lithium ETF (exchange traded fund). It's an ETF of companies that have exposure to lithium, and it includes both producers and consumers of lithium," Jeffrey Christian, managing director at CPM Group, told CNBC via phone call last month.

But now analysts believe there could be an alternative to investing in lithium, one that would allow traders to make hedge investments to reduce risk, or bet on possible movements in the price of the commodity.

Exchanges discussing lithium futures

A lack of avenues into buying and selling lithium is an issue that has led some investors to believe a lithium futures contract might one day be possible. There has been increasing discussion about the possibility of lithium futures contracts, according to a Bank of America Merrill Lynch study published last month.

Analysts have echoed this sentiment.

"It's possible that there will be a lithium futures contract, I know some of the exchanges are talking about it," CPM Group's Christian said.

"A well-run exchange is going to take a lot of time to consider a lot of implications, including the diversification and the number of companies on the supply side as well as the demand side, the potential for investor participation in it, storage issues, whether there are sufficient inventories to support a futures exchange."

Futures contracts allow commodities traders to agree to buy or sell a particular commodity at a predetermined price at a later date. This enables price movement speculation and the avoidance of volatility in the market.

Tesla automobile plugged in and charging a Supercharger rapid battery charging station for the electric vehicle company Tesla Motors, in the Silicon Valley town of Mountain View, California.
Smith Collection | Gado | Getty Images
Tesla automobile plugged in and charging a Supercharger rapid battery charging station for the electric vehicle company Tesla Motors, in the Silicon Valley town of Mountain View, California.

As well as this, it would allow lithium producers to lock in prices and thereby secure an immutable return, so long as they produce the agreed amount of an asset.

"As lithium becomes an increasingly important metal to the tech and transportation industries, we anticipate there will be efforts to create futures contracts for the metal," Jay Jacobs, director of research at Global X, told CNBC via email last week.

"A lithium futures contract would allow producers and users of the commodity to help mitigate risks associated with price fluctuations."

He noted that investors were better off buying lithium mining stocks for the meantime.

"We see the upstream lithium miners as the biggest beneficiaries in this market because they have the most exposure to lithium prices. Miners are compensated on the price of lithium and the amount of output."

Jacobs said indications that China could set a deadline for sales of fossil fuel-run cars to come to an end had driven up the demand expectation for lithium-ion batteries.

He added: "With that being said, battery producers have benefited from this trend as well as they play a key role in supplying the staggering amount of batteries that will be necessary for a growing electric car fleet around the globe."

'Speculative frenzy'

This trend will however be faced with difficulties, analysts noted.

Billionaire Elon Musk's Tesla is one of the most notable firms included in Global X's lithium-related fund - but skeptics claim that profitability is a concern for the electric car maker.

If the business model of automakers falters on a reining in of petroleum and diesel, this could take its toll on both the supply of lithium and demand.

"There are a lot of uncertainties about how it will all shake out, and any transformation away from petrol-powered vehicles to electric vehicles is going to take a long time to evolve," CPM Group's Christian said.

"In the meantime, you clearly have a speculative frenzy related to lithium and the idea of electric vehicles. So there are any number of people who are investing in lithium and companies related to lithium as if there's going to be this massive transformation. It's probably going to take decades to occur, and something else might come along and change it all."

A number of automotive players have made significant moves towards electric vehicles.

Last month, Carlos Ghosn, chairman and chief executive of the Renault-Nissan-Mitsubishi Alliance, said the group of carmakers would introduce 12 zero-emission electric vehicles by 2022.

In an interview with CNBC, he addressed concerns of "bottlenecks" in production that could arise from refining capacity shortfalls for lithium miners.

He said: "This is a risk. I think it's very remote. We have evaluated the capacity of production of lithium and the capacity that can be made available very quickly. We don't think this is going to be a bottleneck at least for the next five-to-six years."

Tesla added to concerns of production "bottlenecks" Monday, after the firm admitted it had delivered just 220 of its new Model 3 vehicles in the third quarter — well below analyst expectations.

But Global X's Jacob said investors should be "patient" with the pace of electric car and battery storage developments.

"We believe this is a multi-decade theme as battery costs fall and electric vehicles eventually replace combustion engine vehicles," he said.

"Therefore, we believe investors should be patient to allow this theme to fully develop as well as seek broad exposure to the full lithium cycle, including lithium miners and processors, as well as battery producers."

And Lithium X's Paes-Braga said that, although lithium remains a "small market," he could see a futures contract on the way.

"I don't think (it will happen) yet – but I do believe that at some point there will be a futures market for sure. It (lithium) is not unlike other markets," he said.

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