Australian lithium-focused miner Pilbara Minerals (ASX:PLS) has announced it will begin paying dividends to shareholders. The company made the announcement as it continues to benefit from favourable market conditions for lithium. It is targeting a payout ratio of 20%-30% of free cash flow, and will apply the dividend to the current 2023 financial year. As of September 30, the company has a cash balance of A$1.375 billion ($929 million), a strong position for Pilbara, allowing it to implement the dividend for the first time since its inception 15 years ago.

The dynamics in the lithium market are pushing prices higher for a few important reasons. Lithium is notoriously difficult to mine, with high costs and a low production rate. This means that the market is currently dominated by a small number of producers. A small number of companies are reportedly responsible for the vast majority of production, allowing them to control output. Many of the largest lithium deposits are 100%-owned by a handful of companies, making it difficult for the industry to begin new exploration.

The market for lithium is also growing rapidly, with an estimated compound annual growth rate of 9% over the next five years. This is due to a number of factors, including the development of green energy and the increasing demand for batteries for electronic devices.

Technology is changing rapidly, and new applications of lithium are being developed all the time. This is likely to drive the demand for lithium even further in the future. Lithium is used in many important products, such as smartphones, laptops, and electric vehicles, and it is important that the supply is able to meet the demand.

As the electrification of the global economy continues, more lithium will be needed for the lithium-ion batteries used in these devices. This is good news for investors in companies like Pilbara Minerals, as it means that the demand for the mineral is likely to remain high for decades.

Spodumene, used in the manufacturing of high-purity lithium-ion batteries for electric vehicles and electronics, is the key material for the future of the lithium industry.

Pilbara Minerals reported production of 377,902 dry metric tonnes (dmt) of spodumene concentrate in fiscal 2022. That market a 34% production boost over 2021, and the company forecasted between 540-580,000 dmt of production in fiscal 2023.

Companies are also trying to speed up their plans for mining lithium to reduce dependency on China for EV battery raw materials. The fragility of the supply chain and the potential for geopolitical disruptions means that there is significant risk in investing in lithium production, but rising prices continue to motivate lithium miners to invest in new exploration and projects.

Despite these risks, there are a number of companies that are still willing to invest in the lithium industry. Pilbara Minerals is one of these companies, and its announcement that it will begin paying dividends is a positive sign.