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Published: October 14, 2010
I have a little quiz for you.
I'll describe one of the most lucrative
commodity plays I've ever seen, and you tell me which one
I'm talking about. Ready?
- This commodity is one of the most versatile on the
planet. It can be used as a lubricant or a propellant --
it's even used as a coolant for nuclear reactors and in some
medicines.
- It's actually so widely used that I'd bet most people
reading this are within arms reach of some of this metal.
- The element is light enough to float on water. It's also
soft enough to be cut with a regular kitchen knife.
- Despite soaring demand, this commodity doesn't trade on a
major exchange. That hasn't stopped its price from tripling
between 2005 and 2009.
Given the returns, I'd venture many of you
are thinking the answer is a precious metal -- gold or silver or
platinum. But if you said lithium, go to the head of the class.
Lithium is a unique element that has been endowed with several
curious properties. You don't need to be a chemist to appreciate
the fact that this alkali metal has half the density of water,
or that it has the highest specific heat of any solid.
Industrial manufacturers are willing to pay hundreds of millions
each year for these eccentricities.
You don't hear about lithium as much as you do other raw
materials, mostly because it doesn't trade on any of the world's
commodities exchanges. But the market is beginning to take
notice. As I mentioned, lithium's price tripled between 2005 and
2009, and producers are spending big bucks on expansion projects
to extract even more from the ground and the seas.
A trio of powerful catalysts
As the Chief Strategist behind StreetAuthority's premium
Market Advisor newsletter, I'm always focused on
catalysts -- the unique factors behind an idea or investment
that can spur it to tremendous heights. And lithium has plenty
of catalysts.
Lithium is a versatile product with as many uses as duct tape.
You can find it in fireworks, aircraft, glass cookware and even
medicine cabinets (it's an effective treatment for bipolar
disorder).
These applications drum up steady demand each year, but they're
not what excite me. The real magic is that, pound for pound,
this metal can store more electric energy than just about any
other material. That has made lithium the battery maker's best
friend.
When you think about the mountain of cell
phones manufactured each year, it's easy to see what's driving
demand. In China alone, nearly 1.9 billion lithium-ion batteries
rolled off assembly lines in 2009, an +82% surge from the prior
year's production. And output hit 306 million units in just the
first two months of 2010. Just within the Apple (NYSE: AAPL)
family, these batteries are used to power iPads, iPods and
iPhones. Oh, and the MacBook Pro line of laptops uses advanced
lithium-polymer batteries that are ultra-slim and capable of
running 10 hours on a single charge.
But electronic gadgets aren't the only place where lithium
batteries are needed. Think about the trend toward
hybrid/electric cars. Falling oil prices temporarily lulled this
movement to sleep. But the tragic oil spill in the Gulf of
Mexico has been a loud wake-up call, one that has precipitated
another $6 billion in federal subsidies.
Even before the disaster, President Obama was an outspoken
champion for the adoption of hybrid and plug-in vehicles. He
outlined an ambitious goal of putting one million electric cars
on the road by 2015, and 10 times that amount by 2018. The
government is bankrolling the transition with some heavy
incentive dollars.
The high cost of electric vehicles has been a potential
roadblock. But anyone thinking of driving home a fuel-efficient
new Chevy Volt or Nissan Leaf will have $7,500 in tax credits to
influence their opinion. Meanwhile, Uncle Sam has also dished
out $2.4 billion for battery development and $25 billion to help
get automakers on board.
That cash will help grease the wheels and provide ample
incentive to get electric vehicles from the R&D stage to the
showroom floor. More important, it will facilitate the shift
from oil to clean, dependable lithium batteries. (This is why I
call lithium the "oil of the 21st century.")
That's just here in the United States. As market penetration
rates rise, global production of electric/hybrid vehicles could
surpass 200 million units per year by 2020. That's a lot of car
batteries -- and another reason why the world has become
increasingly hungry for lithium.
Action to Take --> How do
you invest in lithium? Many have done well with Sociedad
Quimica y Minera (NYSE: SQM), the world's largest producer
of the metal. This Chilean company has delivered a sizzling
return in the past few years. The only problem with is that this
stock is far from a pure play.
I wrote about lithium in my October issue of
Market Advisor, where I identified two of my favorite
pure plays in the business. One company saw profits spike +270%
last year. If you subscribe today, you can receive my latest
issue and favorite lithium picks.
Get the details here.
-- Nathan Slaughter
Editor
StreetAuthority Market Advisor, The ETF
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