Christmas shopping in our family is one of those things we dread from one year to the next. What do you get for someone who already has everything (as seems to be the case for every man, woman and child in Australia)?

It took me ages to work out what to get for my wife. After weeks of deliberation I settled on a gift that keeps on giving – a Bosch hedge trimmer. Now this isn’t just any hedge trimmer. It is powered by a rechargeable lithium-ion battery, which the guy at the hardware store assures me is the way to power the future. Some of the machine was manufactured in Poland and some in Hungary, which I also found very interesting. Who would have thought that the salesman at the local hardware store would be so excited about the potential for renewable energy and the future of battery powered equipment?

In 2010, I devoted many hours to reading about the future of the motor vehicle industry and where the price of oil will head to over the next few years. Maybe the local guy in the local hardware store has the answers so I went back over my readings and notes to revisit the outlook for lithium power.

Increased electrification is bullish for two strategic materials about which we have written extensively: lithium and rare earth elements. Lithium is the key element in next-generation batteries. Although other technologies compete in the laboratory, variants of lithium-ion batteries have come to dominate vehicle electrification initiatives.

Lithium is both highly chemically-reactive and the lightest-weight solid at ambient temperatures. These fundamental chemical properties give lithium tremendous intrinsic potential for high-power, lightweight batteries. The amount of power available while discharging and the speed with which batteries can be recharged depends largely on the amount of surface area available for the chemical reactions that take place inside batteries.

Nanotechnology allows markedly greater surface area to be created from each kilogram of material, leading us to expect ongoing improvements in lithium-based batteries over time.

The extent to which mass production will curb the cost of lithium-ion batteries is hotly debated. A study last year by the National Academies of Science was pessimistic about the ability to cut battery costs. However, industry leaders like Sanyo, A123, Johnson Controls, and Nissan expect to slash the cost of automotive lithium-ion batteries by half or more over the next five years.

China plans to produce at least one million electric vehicles per year by 2020. With government estimates that China’s auto sale saturation point is at least 30 million vehicles per year, even a penetration rate of only 10 per cent implies a future Chinese market for three million battery-powered vehicles per year. Rampant air pollution in China’s enormous cities makes it likely that future regulations in first-tier cities will require vehicle electrification.

Intent on making China the world-leader in hybrid and electric cars this decade, Beijing plans to front $15 billion and engineer collaboration among 16 leading state-owned enterprises. Although one may wonder if Western resolve will survive debt crises in the absence of higher gas prices, there is little doubt that China can orchestrate this great leap forward domestically. The only question may be if China is able to outpace competitors to make hybrid and electric vehicles the new source of high-tech exports it craves.

Deloitte predicts that “by 2020, EVs and other ‘green’ cars will represent up to a third of total global sales in developed markets and up to 20 per cent in urban areas of emerging markets”. A new Pike Research study expects the Asia-Pacific region to adopt 1.2 million EVs and PHEVs over the next five years. Contactless charging through Inductive Power Transfer Systems from under the pavement may begin eliminating the primary objection to all-electric vehicles thereafter.

J.D. Power and Associates uses what we consider highly unlikely assumptions to offer one of the most pessimistic forecasts. If oil prices don’t rise significantly and governments don’t coordinate policy to encourage hybrid and electric sales, then hybrid and electric vehicles will command only a 7.3 per cent share of global auto sales by 2020, it opines. While China’s plans make this projection look extremely conservative and most proponents of electric vehicles expect market share to surge much more rapidly, even such a tame projection would require more than a five-fold increase in battery propulsion and electric motors.

Although the global financial crisis devastated sales in the U.S. and Europe, sales have continued to surge in developing countries as millions of newly-middle-class citizens bought their first new automobile. Registrations in India have risen more than 30 per cent this year, while sales in China are up 35 per cent on last year’s record.

J.D. Power and Associates expects global auto sales this year to set an all-time record of 71.1 million vehicles – one per cent higher than the 2007 peak. Global auto sales are expected to rise about seven per cent next year – including around 20 per cent in China and 12 per cent in the U.S.

The urgency of securing supply has led to a host of developmental lithium projects. Galaxy Resources (GXY) is advancing towards production, while junior Orocobre (ORE) is looking to secure financing and off-take agreements.

The millions of advanced hybrid and electric vehicles that are heading towards roads around the world will each need a compact high-power motor. The most powerful motors are made from rare-earth-based permanent magnets. Vehicle electrification will cause demand to soar for neodymium, dysprosium, and terbium, benefitting rare earth miners globally. Inner Mongolia Baotou Steel Rare Earth Hi-Tech is best positioned to meet China’s need for neodymium, but all the dysprosium and terbium produced in China may be inadequate to meet demand in as little as three years.

Lynas Corp (LYC) and its high-grade Australian resource will be the first major producer outside China to meet the need. With production less than a year away, Lynas will be transitioning from a speculative junior miner to one whose share price is driven by fundamentals. If prices remain elevated as is widely expected, Lynas will be wildly profitable. Recent volatility related to industry dynamics and concerns about possible slowing growth in China make Lynas quite attractive on pullbacks.

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