The Most Valuable Commodity is Not Oil or Gold

First GM needed a bailout.

Then AIG.

Then the banks.

Now, the country that sits atop the world's largest oil field says it needs one, too.

Saudi Arabia says it will lose $19 billion a year in oil revenue beginning in 2012. OPEC stands by the claim. Oil ministers fear that new environmental treaties that increase fuel efficiency for automobiles will cut into oil demand and their bottom line.

I know, I know. My heart bleeds, too.

And while increased fuel efficiency and electric cars -- and higher costs that could result from legislation like the cap-and-trade bill -- are all bad news for the Saudis, they represent a stunning opportunity for one company.

After all, it's not like that $19 billion is just going to disappear. That money will still be spent. It will just go somewhere else. And a lot of it is going to be used to buy a commodity that will, in many ways, replace oil.

More than 70% of oil is used for transportation. President Obama, like his predecessors, wants to end that reliance on foreign oil. New regulations proposed by the Obama administration mandate new vehicles average 35.5 miles per gallon by 2016. This increased fuel efficiency will conserve an estimated 1.8 billion barrels of oil.

One thing that will help America meet the new, higher fuel economy standard is more electric vehicles. Mr. Obama is pushing for a million electric vehicles on the road by 2015. Obama is also fueling demand for electric cars by offering a $7,500 credit to buyers of electric vehicles, such as the Nissan Leaf, which can go 100 miles before using a drop of gasoline.

The secret to these vehicles is their batteries, which use an ultra-light metal that can store more energy than was ever imagined. The metal is "energy dense," yet light enough to be used in cell phones, laptops or electric cars.

 

The metal is lithium. The price has jumped from $3 a kilogram in 2005 t! o $10 in 2009. Most of the price increase can be attributed to demand for lithium-ion batteries for portable electronics, which has driven demand for lithium up +25% a year.

Gadgets like the iPhone are expected to continue to drive such growth in the future. Electric cars will magnify the uptrend.

Obviously, a car battery is significantly more powerful than a cellphone battery, and it's also substantially larger. The power source in an electric car is 100 times larger than the power source in a laptop. As more electric cars roll out with lithium-ion batteries, prices for the metal should continue to increase.

Most of the world's lithium supply is found in the Lithium Triangle, a small area in South America where Chile, Bolivia and Argentina meet. These three countries are home to more than 75% of the world's lithium.

Incredibly, Bolivia doesn't produce any lithium, and it's not willing to sell the rights. The government has made it clear that it is "not going to hand over [lithium] at the whim of the companies." The Bolivian government itself plans to invest about $300 million in a plant that will go online in 2014.

Chile is the world's No. 1 lithium producer. All of Chile's production comes from plants on a salt flat called the Salar de Atacama, which is the second-largest lithium deposit on earth.

Three companies control 77% of lithium production. The rest is produced in China.

Company (Ticker)	Recovery Cost per kg	Market Share
Sociedad Quimica de Chile (NYSE: SQM)	$1.10/kg	30%
Rockwood Holdings (NYSE: ROC)	$1.65/kg	28%
F MC (NYSE: FMC)	$2.43/kg	19%

Sociedad Quimica de Chile (NYSE: SQM) produces about 30% of the world's lithium-carbonate, the grade of lithium that is used in batteries. Best of all, it does it at the lowest cost.

Brine is collected at Sociedad's salt flats and dried in solar ponds, then the lithium is extracted, along with other valuable minerals. The company's brine is especially desirable because of its high concentration of lithium. The site where the brine is dried is the hottest place on earth, and it stays hot all year. The combination of extreme heat and extremely high lithium concentration makes for lower costs and higher margins.
 
Low-cost producers always have an advantage when it comes to price. Sociedad said Wednesday it would cut lithium prices by -20%, which instantly sent share prices of its competitors lower. The company's strategy is a shrewd attempt to boost its market share while deterring new producers from entering the business.

SQM is not a pure play on lithium; it's a play on the best lithium producer.

Growth-oriented investors interested in profiting in the inevitable lithium boom should consider shares of Sociedad.