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Stock Strategist Industry Reports

Electric Car Demand Juices Lithium's Prospects

The metal has one of the best growth profiles of the commodities that we cover.

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We recently initiated coverage of lithium producers  Albemarle (ALB),  Sociedad Quimica y Minera de Chile (SQM), and  FMC (FMC). Lithium is a great way to gain exposure to the electric car market, providing investors with a play on the high-growth industry. Lithium has one of the best growth profiles across all the commodities that we cover. We expect at least high-single-digit annual demand growth; this requires that electric car sales achieve a market share of just 1% by the end of the decade, up from approximately 0.25% in 2014. Narrow-moat Albemarle is our preferred way to play the lithium market, since it has the most upside to growing volume. Its shares currently trade at a discount to our fair value estimate. We think SQM and FMC are fairly valued at their current share prices.

Although lithium volume growth should be strong, we are less optimistic about pricing. Lithium producers have increased capacity in anticipation of healthy demand growth. As a result of this plentiful capacity, we expect lithium carbonate prices to fall from $5,700 per metric ton in the first half of 2015 to real midcycle prices of $5,500 per metric ton, based on our estimate of the marginal cost production. Still, prices remain elevated compared with recent years as a result of strong demand growth.

David Wang, CFA does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.