Investors see a future in battery technology, with rising demand for Lithium ETF

As concerns about climate change and greenhouse gas emissions from fossil fuels increase, the demand for sustainable energy alternatives is rising. However, the infrequency of conventional substitutes typically associated with green energy, such as solar and wind power, is recognised as a key setback due to a potential energy shortage. The solution which has caught the attention of investors is battery power, which is being used in many areas but mainly energy storage and electrical vehicles. The Paris Climate Agreement, which took place on 22nd April 2016, concluded with goals to keep global temperature rises below 1.5 degrees Celsius, and the EU aims to be climate neutral by 2050. Therefore, it is likely that support for battery power technology will continue to increase.

Exchange traded funds (ETFs) are a basket of securities relating to a specific sector or commodity, for example, traded on the stock market. According to the Financial Times, shares in the Global X Lithium and Battery Tech ETF (LIT) have increased by 170% in the last year. This ETF includes companies involved in the whole cycle of lithium battery production, ranging from the mining and refining of lithium to the construction of the batteries themselves.

Figure 1: Graph showing LIT ETF prices. Financial Times

Figure 1 shows the prices of the LIT ETF over the past year. COVID-19 had a temporary negative impact on the market in early 2020 as demand fell in China, the second largest participant in the market, and the production of electrical vehicles declined. However, there has been significant growth in prices since this slump. According to Yahoo Finance, the electric car manufacturer Tesla, is one of the top 10 holdings of LIT, with 5.21%. Others include two of the largest producers of lithium globally, Albemarle Corporation with 12.5% and Ganfeng of China holding 6%. These firms have all seen rapidly increasing demand for their products. The Financial Times outline the benefits of lithium-ion batteries, including their rapid response time in providing power, as seen through their use in electric vehicles, and their generally effective storage capacity in the short term. In the UK, the existing large-scale lithium-ion batteries can provide energy for 30-90 minutes.

Despite current progress of battery technology, there are concerns among stakeholders about sustainability in the long term. The metals needed in lithium-ion batteries include cobalt, nickel, manganese, copper and lithium. Therefore, the future of this sector is highly reliant on the availability and supply of these materials. It is expected that there could be a short-term shortage of key metals, caused by rapidly growing demand for the batteries overwhelming the existing infrastructure and supply chains. This creates a risk of price volatility. To avoid this, investment into the sector is rising and there are currently major efforts to find new deposits of the metals. Firms need assurances that their technology will not be limited by the inexistence of vital components. Unfortunately, many of them are found in the earth’s crust, and sourcing these materials may come at significant environmental cost, such as disruption of the deep-sea floor.

In 2019, IBM announced their development of a successor to the lithium-ion battery, which outperforms existing models, with higher energy efficiency and lower costs. It also avoids the use of heavy metals that are vital for current batteries, like cobalt and nickel. The supply of cobalt is a well-known controversial aspect of the lithium-ion batteries. It is mined for primarily in the Democratic Republic of the Congo, with Trafigura estimating that 72% of the world’s cobalt was supplied from there in 2019. However, there are serious problems with the infrastructure of the whole operation, with very poor working conditions and child labour. The new battery technology from IBM should avoid the negative impacts of mining, using components derived from seawater instead. This suggests a positive future for battery technology, but it is still in the process of testing before being brought to market.

To summarise, there is undeniable potential for lithium-ion batteries in light if the global commitment to carbon-neutrality, and this potential has been recognised by investors. However, problems with mining and the lifespan of the batteries, as well as the limited availability of components creates problems for the future of the technology. There may still be scope for a more sustainable alternative.

By Beth Pittman

Sector Head: Sophia Li

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