Lithium operations: What is upstream and downstream, and which of the 2 is better to invest in?

When it comes to lithium operations, what is the difference between upstream and downstream? And does it really matter? Yes it does. The difference is that the former involves activities related to finding and extracting lithium from geological deposits, such as mining, quarrying, drilling and well completion. The latter involves chemical treatment, purification and reshaping of the raw mineral into a product for various applications.

In this article, we delve into these in more detail and consider where it is better for a company to be and therefore where is better for you to invest in?

What is ‘Upstream’?

Upstream refers to the extraction and processing of lithium-containing raw materials, such as brine or ore.

Lithium deposits are found in relatively few places around the world, with the majority located in the “Lithium Triangle” region of South America. The process of extracting lithium can involve significant environmental impacts, including the diversion of water resources and pollution of local ecosystems. Furthermore, the demand for lithium is rapidly increasing due to its use in lithium-ion batteries for electric vehicles and other applications. This has led to concerns over the sustainability of lithium mining and production and the need for responsible and efficient management of lithium operations.

In addition to extraction and processing, upstream also encompasses the transportation and distribution of raw materials to downstream manufacturers and suppliers. As such, ensuring a secure and reliable supply chain for lithium products is critical to meet the growing demand and support the transition to a low-carbon economy.

So, as far as ASX lithium shares go, the bulk of them are upstream as either explorers and producers.

‘What is downstream’?

Downstream, in the context of lithium, refers to the processing, manufacturing and distribution of lithium products, primarily lithium-ion batteries. After the lithium-containing raw materials are mined and processed, they are refined and transformed into various products. This phase is just as critical in terms of environmental impact, energy consumption and overall sustainability.

The manufacturing of lithium-ion batteries, which is the primary end use of lithium, requires significant amounts of energy and often involves complex supply chains that can further exacerbate environmental and social issues. Additionally, the disposal of lithium-ion batteries has become an emerging concern, as these batteries contain toxic chemicals that can leach into the environment if not disposed of properly.

Recycling and ESG

Therefore, companies today need to implement comprehensive recycling and disposal policies to mitigate the potential negative impacts of lithium production. It is imperative for them to consider the full lifecycle of lithium products, from extraction to disposal, in order to address the environmental and social issues associated with this essential mineral, and to maintain their right to claim that they are as ESG-friendly as they claim to be.

As we mentioned before, most lithium shares are active in upstream operations, but there are a handful of downstream stocks that investors might consider. The largest of these is Arcadium Lithium (ASX:LTM), which is is an all rounder lithium company. It used to be known as Alkem and was a specialty lithium chemicals stock before it merged with Livent, in a deal completed in January 2024. Arcadium Lithium is capped at over US$5bn and is traded on the ASX as a CDI.

Of these lithium operations, where is it better to be?

It depends on the situation. Upstream operations can provide significant economic benefits from lithium extraction, but also carry a high risk of environmental pollution and contamination. Downstream operations provide more stability in terms product demand since they rely on a steady supply of raw material, as well as improved safety due to reduced exposure to hazardous chemicals. Companies here can pick and choose which lithium companies to do business with.

Each sector has its own advantages and disadvantages that should be evaluated before deciding which is better for you to look at for investment opportunities in the lithium space.

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