EV boom: should I invest in UK lithium shares amid explosive demand?

China is reporting a huge spike in lithium ore prices. What does this mean for UK lithium shares on my watchlist and should I make an investment today?

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Electric cars charging in station

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In 2021, 6.4m electric cars were sold, which is 98% higher than in 2020. Global manufacturing powerhouses are stepping up battery production to keep up. And lithium prices are skyrocketing in China, where the demand is at an all-time high. The cost of battery-grade lithium is up over 20% since December and closing in on the US$40,000 per tonne mark. Does this demand mean that lithium shares will see exponential growth in 2022 as well?

The lithium market supply chain is not a straightforward one, where companies can simply increase supply to quell demand. Natural resources come with a multitude of governmental restrictions and lobbying which makes this tricky to call. Here I will look at the pros and cons of investing in lithium today and two UK lithium shares on my watchlist that could benefit.

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Will the lithium demand cool down?

China controls a majority of the global lithium production and supply, which gives the nation a lot of pricing power. But the US and Europe recognise the need to establish other supply routes to prevent China from having a lithium monopoly. The Biden government released a National Blueprint for Lithium Batteries 2021-2030. This highlights ways in which the US can gain a competitive edge in the lithium market.

In fact, analysts are expecting a global lithium regulatory body in the coming years that will govern the global supply chain. All these developments could affect lithium prices in the future. But the estimates suggest that demand for lithium will remain high throughout 2022 given EV backorders and new model launches.  

But EV tech is growing fast, which means recycling methods and alternatives are not far behind. This puts lithium firmly in the price discovery phase right now. Also, a single mine can take 10 years to mature into expected production levels and seasoned analysts are unsure on how lithium supply can quickly grow to meet demand. The 548% jump in lithium carbonate price since 2020 could just be the start or a reactionary jump that could stabilise in the coming years.

EVs are here to stay

Despite making up just 4% of the automobile market in 2020, EVs have received governmental backing after COP 26 and engineers expect the tech to grow rapidly. And battery production has to match demand in the wider EV market.

What does this mean for UK lithium shares? Well, I think the growing demand for lithium as an opportunity for focused miners like Zinnwald Lithium. Its mining project in Germany has the capacity to produce and process 665,238 tonnes of lithium carbonate over 30 years. But mining efforts can be subject to strict regulations, highlighted by the Serbian government’s decision to revoke licenses from mining giant Rio Tinto’s $2.4bn lithium mine in the Jadar Valley.

This brings me to Ilika, a battery R&D company specialising in solid-state battery technology for a wide range of applications including EVs. This could replace liquid-based lithium batteries in EVs, which could improve battery recyclability. And the tech is widely applicable across multiple sectors.

But again, Ilika is still in its infancy and remains loss-making. The company raised £2m last year and could take two years to reach production. But the technology the company is working on could be very valuable, which is why its share price has jumped 322% since 2020. Both lithium shares could benefit from the demand, which is why I would consider a £1,000 investment if the EV market remains healthy. 

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Suraj Radhakrishnan has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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