Could Chinese volatility fuel a lithium-price rocket launch?

January 21, 2016 01:03 PM

When China's stock market started cratering at the beginning of the year, veteran investor and newsletter writer Chen Lin was rubbing his hands in anticipation of the opportunities that would be opening up, particularly in lithium and natural gas.

In this interview with The Energy Report, the author of What is Chen Buying? What is Chen Selling? shares his insights on what pushed battery-grade lithium prices up fourfold and which companies could benefit from a continued supply-demand imbalance.

As a bonus, he also lists the three companies he thinks could take advantage of high overseas natural gas prices to actually return money to investors in the energy space.

The Energy Report: The year started with a very volatile Chinese stock market. Are we in crisis mode?

Chen Lin: That was actually mostly related to the Chinese currency. Every Chinese citizen is "entitled" to exchange $50,000 per year. At the end of last year and the beginning of this year, people rushed to use their quotas. I heard reports that the banks were crowded, the website was too busy, and people couldn't get their exchanges completed in time to catch the trend before it went down further.

Yes, there was a little bit of panic in China that likely led to the stock market drop. Also, you need money to exchange for the U.S. dollar, so some investors may have sold stock. All this led to a very volatile Chinese market.

Are we in a crisis mode? That's hard to say. It's really up to the Chinese government and how it handles this situation. Right now, my view is as long as the Chinese renminbi goes down in an orderly fashion, we should view it as a positive for the rest of the world.

China is in the very same situation Japan was in the early 1990s. There is a housing bubble and overcapacity. It took Japan about 20 years to slowly deflate its bubble. China probably needs to go through the same process. The only thing going for China is that the Chinese renminbi is depreciating. Japan didn't have that luxury. Japan's currency was appreciating when the bubble deflated, and it actually made it much worse. As I said, as long as it's orderly, it should be helpful for everybody.

TER: Let's talk about the impact on some of the commodities. You recently shared with your readers an upward-climbing Chinese industrial lithium price chart. Do you still believe that China's prices will lead to stimulus activity that will further boost lithium prices?

CL: I believe there will be more stimulus coming. Rumor is that China's president, Xi Jinping, wants to be the Reagan of the East. He's going to work on the supply side. There will be a huge deficit in spending coming this year and reduced taxes, supposedly. Hopefully, he stimulates free enterprise. We will see.

One of the most burning issues when you talk to Chinese citizens is pollution. How do you reduce pollution? Electric cars are probably the only logical solution and the government could focus on that as an area for stimulus. Even today, lithium production cannot meet the demand. If more demand for lithium batteries is created, the supply problem could get much worse.

TER: There are two types of lithium. We talked about the industrial lithium, but how about battery-grade lithium? Is there even more upside for that in China and the U.S.?

CL: The spot price in China for battery-grade lithium already jumped, even with the weakness of the Chinese yuan. If you put it back in U.S. dollars, it quadrupled in a few weeks. It's a classic supply/demand imbalance issue. Industrial lithium didn't go up as much, but it has more than doubled. So it's still very strong. For those companies that can sell lithium at the spot price, their margin probably will lift to $10,000/ton or more. That is dramatic.

Lithium has been trading around $6,000/ton for many years, and suddenly it quadrupled. Many of these lithium miners and producers are producing for costs of something like $5,000/ton. That means if their margin was $1,000/ton before, suddenly it becomes $10,000/ton or more. It's a dramatic increase.

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