China to join Japan, South Korea in Bolivian lithium resource development
Comment of the Day

August 18 2011

Commentary by Eoin Treacy

China to join Japan, South Korea in Bolivian lithium resource development

This article by Dorothy Kosich for Mineweb may be of interest to subscribers. Here is a section:
If the lithium deposit meet's CITC's criteria, the company will submit a proposal to establish a joint venture for lithium extraction, CITIC Guoan Information Industry Co Ltd has announced.

The manager of Empresa Boliviana de Recursos Evaporiticos (EBRE), Luis Albertino Echazu, told official Bolivian state news agency ABI that CITIC's study will quantify reserves in Coipasa. He added that CITIC will pay for the study and if the result is negative, the Bolivian government will have no further obligations in the deal.

However, if the CITIC study is positive, the Chinese company will submit a plan for development for lithium production from the salt flats. China will also establish a trade representative office in the city of La Paz, as well as establish offices in the department of the Altiplánico de Oruro and at Coipasa.

In the salt flats of Coipasa Andes, Bolivia is believed to have a resource of 100 million metric tons of lithium, the world's largest estimated lithium resources in the world. Bolivia hopes to exploit this resource as the market for lithium batteries increases, particularly in the auto industry.

However, the Morales Administration has made it clear that the state hopes to retain overall ownership and control of the lithium resources. The Bolivian President said he had agreed with his Chinese counterpart Hu Jintao to form a high-level bilateral committee to begin meeting in September to promote the development of Bolivia's lithium resources

Eoin Treacy's view China has demonstrated with energy, industrial resources and rare earth metals that it is intent on gaining and retaining access to the resources critical to its moving up the value chain in terms of manufacturing. Lithium batteries are increasingly ubiquitous in handheld devices where China is beginning to compete. Chinese companies, often using the launch pad of generous government supports are also increasingly dominant in the solar panel and wind turbine sector.

If we imagine ourselves as flies on the wall at a Chinese long-term strategic planning meeting, we can see someone saying that lithium batteries are the future for handheld devices and potentially cars. Someone else will say that if wind is ever going to be capable of meeting base load it will have to be used in conjunction with industrial sized batteries, which are most likely going to contain lithium as a major component. Someone else will say that China doesn't have the lithium required to manufacture and profit from these technologies. Conclusion: let's go get some.

Much of the hype surrounding the lithium bull market has been focused on electric cars. However it is questionable whether electric cars will ever become widespread because of the problems with refuelling, the cost of the battery and the power to weight ratio. I continue to maintain that natural gas is a considerably more attractive alternative transport fuel.

Why do batteries have to move? Certainly handheld devices are portable by definition but power plants aren't. Apart from noise and threat to bird life wind turbines don't work when there is no wind. If this problem is ever gong to be overcome a battery will have to be charged during low demand periods for use in high demand periods. Such a battery does not currently exist. Will it ever?

In Comment of the Day on March 8th I wrote an extensive piece on the Jevons Paradox and how it applies to the energy sector which is now available in the Public Archive. Here is the proposition:.

The Jevons Paradox is the proposition that technological progress that increases the efficiency with which a resource is used tends to increase (rather than decrease) the rate of consumption of that resource.

If we look at how price factors influence innovation we come up with some interesting conclusions. When prices are low, producers come under pressure to innovate. Those who fail to create efficiencies are much more likely to disappear. At the lower side of the oil price cycle in the 1980s and 1990s, hydraulic fracturing and horizontal drilling were introduced in an effort to get the most oil possible from a single well. During the oil spikes of the 1970s consumers were under the most pressure to innovate. They cut back on consumption and the popularity of alternatives such as ethanol increased.

At present oil prices are high. Therefore the search for alternatives has become quite intense. In my opinion, natural gas in the leading candidate for a number of reasons but chief among these is because it requires the least technological innovation and infrastructure build to make it work. Capital has also been flowing into battery technology development as a demand side solution to the problem of high energy prices. The odds are stacked in favour of a major innovation in this sector over the course of the next decades.

Asian companies have so far been dominant in battery innovation. However, share prices for the sector have struggled as the reality of electric cars has not met with consumer expectations. Fears of being stuck in the middle of the freeway without a charging point in sight are all too realistic. This Performance Filter of related companies illustrates how troubled some of these companies have become. Korean companies have been among the best performers but a number have lost momentum over the last year and they all experienced further technical deterioration over the last month.

Samsung SDI lost momentum in late 2009 but continued to hold a progression of higher reaction lows. It broke that sequence two weeks ago and while it has bounced back relatively well, technical damage has been done and a sustained move above KRW180,000 would be required to reassert medium-term demand dominance. LG Chem and Cheil Industries had trended more consistently but they broke their progressions of rising reaction lows two weeks ago which had been the hallmark of their advances.

In the USA Johnson Controls has been the best performer but it too has sustained serious technical damage, falling below the 200-day MA three weeks ago.

Two Japanese companies have held up better, not least because they rallied less. Mitsubishi Chemical and Toray Industries continue to form first steps above their respective bases.

Of the other battery companies contained in the above Performance Filter, consistent downtrends have been in evidence for some time and progressions of lower rally highs would need to be broken to question potential for additional weakness. BYD is a representative example.

While a pattern of general weakness is evident in the battery sector, there is a clear dichotomy between the leaders and laggards. This is no less evident in the lithium mining sector.

Socieda Quimica Min de Chile (SQM) has been the sector's leading share for quite some time. It pulled back to test the 200-day MA two weeks ago but rallied impressively last week. Some support building is likely required before a move to new high ground can be held but a sustained move below $50 would be required to complete a medium-term top. Rockwood Holdings has a relatively similar pattern.

FMC Corp has so far failed to bounce following its decline two weeks ago and has also broken its progression of higher reaction lows. A sustained move back above $80 would be required to question medium-term top formation completion.

Elsewhere in the sector, and particularly among the smaller participants, downtrends are the defining characteristic.

Innovation in battery technology is a probability more than a possibility in my opinion. However picking which company is likely to benefit most from such enhancements is extremely difficult. On the other hand, whichever company invents a highly efficient lithium battery, they will still rely on raw materials to build it. Leading miners in the sector may be worth monitoring for signs that they are finding support from the perspective of a medium to long-term investor who is interested in this sector and subject to their own due diligence.

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