Wesfarmers Ltd (ASX: WES) shares have performed well in 2024 and are up 28% this year.
The conglomerate has been making headlines lately, not just for its retail operations but also for its moves into the lithium sector.
Naturally, investors are questioning whether this conglomerate is a worthwhile addition to their portfolios, especially for those seeking exposure to the battery metal.
Let's break down why Wesfarmers might call itself a lithium share in years to come.
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Wesfarmers shares for lithium exposure?
Wesfarmers has positioned itself uniquely in the lithium space with its Mt Holland operations in Western Australia, in partnership with Chilean-based SQM.
Unlike some of its peers, Wesfarmers isn't just dipping its toes in lithium mining. It's diving deep into producing battery-grade chemical materials.
Chief Executive Rob Scott highlighted the company's focus on developing their hydroxide plant, which is nearly complete and expected to produce its first hydroxide product by mid-next year. According to the company's recent AGM:
WesCEF is continuing to make good progress towards its interim target to reduce emissions by 30 per cent by 2030, relative to its 2020 baseline.
In WesCEF, we're evaluating expansions of sodium cyanide and ammonium nitrate production, and moving into production of lithium hydroxide. These kinds of investments will be critical for Australia if we are to expand and diversify our exports in the decades ahead.
Alongside our joint venture partner, we have commenced the commissioning phase of our lithium hydroxide refinery in Kwinana, and are working towards achieving first product in the middle of calendar year 2025.
This focus on high-quality lithium production arguably sets Wesfarmers apart in a competitive market, especially in the current state of the market.
Lithium prices have remained depressed throughout 2024 amid a global supply glut and substantially lowered demand for electric vehicles (EVs).
Prices recently touched CNY 71,500 per tonne, their lowest mark in more than 3 years. According to Trading Economics, "overcapacity for electric vehicle batteries in China drove producers to lower asking prices for inputs across the supply chain."
Subsidies from the Chinese government triggered a large wave of oversupply of EV batteries and drove carbonate prices to fall 23% this year after an 80% plunge in 2023.
Despite the glut, market players expect global supply to soar by nearly 50% this year as hopes of eventual balance drove producers to search for new projects.
In this vein, Wesfarmers isn't making any more off lithium sales, a point that CEO Robb Scott acknowledges. Per the AGM:
In WesCEF, strong plant operating performance has continued. Losses associated with depressed global lithium prices on spodumene sales, pursued before the product is used by the hydroxide plant, will impact earnings.
Still, even with its optimism on the Mt Holland site, the company opted not to provide royalty relief for it. According to The Australian, the company likes Western Australia's current royalty structure.
What about outside of lithium?
While lithium exposure is a key focus, Wesfarmers continues to grow across its core retail operations, which has impacted its shares in 2024.
Businesses like Bunnings, Kmart Group, and Officeworks remain strong pillars of the conglomerate. According to my colleague Tristan, each contributes significantly to its profitability – especially Bunnings.
Sales and profits grew for the franchise in FY24, where it produced a more than 69% return on capital invested into the enterprise.
These businesses are each well-positioned in their respective markets, and Wesfarmers sees growth along each division. Time will tell if the conglomerate is right or not.
Foolish takeaway
Wesfarmers shares could also be lithium shares if the conglomerate converts on its plans at Mt Holland. Whilst it's early days yet, and lithium prices remain compressed, the company is moving in this direction with conviction.
In the last 12 months, the stock has rallied more than 28%.
