ELECTRIC VEHICLES – THE METALS & THE MEANS TO INVEST IN THEM

09/10/2017

What’s all the noise about…?

There is a movement. It’s not going away. Its application may be imperfect, but it’s not going away.

It might still seem a fair bit off, especially considering that Electric Vehicles, or EV’s, currently only make up 1% of the worldwide car market. But what we will attempt to address here is not whether it will likely happen and at what speed, but what metals will be likely impacted and how investment managers and traders are currently able to get a piece of this ever-expanding electric pie.

Electric Vehicles, in various forms, are likely to make up a large portion of all cars on the road in as little as twenty years. I’m not just talking about in developed economies, but in developing economies as well;   

  • UK is looking at all cars being either electric or ultra-low emission by 2040.
  • France is to ban sales of sales of petrol and diesel cars by 2040, with Emmanuel Macron’s decision coming a day after Volvo announced it would only make fully electric or hybrid cars from 2019 onwards.
  • The Netherlands has mooted a 2025 ban (petrol & Diesel).
  • India is considering a phase out by 2030.
  • China has started “relevant research” in terms of a policy to ban fossil fuel cars that would be implemented in “the near future”, according to Xin Guobin, vice-minister of industry and information technology who spoke on the matter recently.

Notice any major world power missing from above...? Begins in ‘U’ and ends in ‘nited States’. However, it appears the country’s hardworking and entrepreneurial population is doing the work anyway, in spite of the pro-carbon burning rhetoric emanating from the administration.

Where are we now...?

The macro, or top-down, is in EV’s favour. Governments around the world are altering regulations in order to be less pollutant, having been pressured from a more than ever environmentally conscientious public.

Bottom-up is also applying pressure by the seemingly unstoppable advancement in technology, increasing EV’s battery life and power - and equally important, decreasing the cost.  

Elon Musk’s (Tesla) decade old goal to accelerate the transition from a carbon-powered economy to a solar and electric powered one, seems to now be within touching distance. However, to store the energy and power in the cars, some previously lesser known metals and materials are now highly sort after…

Common metals used in EV batteries;

Lithium, Nickel, Cobalt, Rare Earths, Copper, Graphite, Aluminium, Manganese.

Between the different options within EV’s currently, the use of the above metals changes in both variety and volumes used.

Cathodes, which make up a very important part of a cars battery and what most of the discussions raw materials are used in, can be designed using a variety of formulas of metals.

For example, The Chevy Bolt uses an NMC cathode formulation (nickel, manganese, and cobalt in a 1:1:1 ratio), versus Tesla vehicles which use NCA cathodes (nickel, cobalt, and aluminium, in an estimated 16:3:1 ratio).

Some of the more popular EV models;

The Upshot…

Markets in Lithium, Cobalt, Graphite and Rare Earths are small and less established. Any material increase in production of EV’s will likely continue to send these markets skywards.

UBS recently conducted a thorough examination of what the world would look like in a 100% EV world and the demands that would put on the raw commodities that make up the vehicle. Their case study was based upon the components of the Chevy Bolt.

Below is the subsequent hypothetical result in terms of increased raw material demand in a 100% EV world;

The Demand Spike…

The important bit…

So how does one access these metals?

Options are limited. The very reason that the prices have spiked in so many of these raw materials is because they are in an underdeveloped market, that has constraints in terms of current production capacity and availability of instruments in which to invest.

The main choices available being 1) picking up listed equity holdings in mining companies that produce the raw materials. 2) Physically buying the metals 3) Trading in the derivatives space. 4) Or by simply heading down to your nearest car dealer and picking up the latest model to hit the roads.

As a former Sydney-based buyside broker I covered various Aussie commodity companies. From the large miners of BHP Billiton and Rio Tinto, which tend to focus on the larger raw materials featured in this article like Copper, Nickel and Zinc, to smaller niche players such as Lynas Corp, which deals in rare earths, or Orocobre Ltd - a stock I watched and held for a long time, which runs a brine-based lithium operation out of Argentina.

Orocobre (ORE.ASX) is a company I followed from small-cap explorer through to major producer, with the lithium carbonate ore supplied from its flagship Salar de Olaroz project first being delivered from early 2015. Just in time for the EV boom.

*Please note neither I, nor my associates, have any personal interest or shares in any of the above companies!

In terms of physically trading metals, this is most likely out of the remit of a standard investor. Unless you have the means of storage and the relationships to access, this route is reserved for the likes of Trafigura and Glencore, as well as large industrial users.

On the derivatives side, which is where we at Arion engage, the market is constantly evolving. 

Traders are seemingly coming to terms with increased volatility and volume in some of the larger EV markets. However, there is still some way to go before you could claim that markets have absorbed these flows, at least in terms of the lesser traded EV metals with the current rally leading to increased volatility.

The recent push and price spikes in some of these metals has led to the market experiencing various fluctuations.

“We hear rumours of option related hedging flows in Nickel, driven by EV manufacturers. This pushed up both underlying prices and implied volatilities - but increasingly this flow seems to have been processed by the market and prices are settling into a range.”

– Darius Tabatabai, Portfolio Manager at Arion Investment Management

This increased volume and general interest in some of these EV driven metals has led to various market participants looking for new ways to either trade in these sectors, or to supply the means in which to trade them.

The London Metals Exchange (LME), for example, is in the midst of working out how to offer access to a few of these new markets with a potential new contract for lithium - a metal in which demand, according to consultancy Roskill, is set to increase 4 times.   

Though the LME’s traditional business still lays on the most part with physical trading as a means to hedge, increasingly investment funds, such as ourselves, are looking for ways to exploit the move in these markets.

According to the LME, they have “been approached by industry users regarding the introduction of an LME lithium contract, which we are exploring. We would hope to be in a position to launch a lithium contract within two years”.

They are also considering the launch of a cash-settled cobalt contract, settled to an index price, to complement its existing physically-settled offering.

Watch. This. Space.

Conclusion…

The powers that be have still to work out a few technicalities before a world, such as that addressed by the UBS report previously mentioned, comes into fruition.

Yes, EV’s significantly reduce air pollution in their local proximity. However, you have to consider the emission intensity of the power source used to charge the vehicle. i.e. if the power is sourced from a coal fired power station, it’s probably not that environmentally friendly…

"The electric car has great potential for improvement, but ultimately what will make it a success or failure from an environmental standpoint is how much we can clean up our electricity grid - both for the electricity you use when you drive your car, and for the electricity used for producing the car."

– Guillaume Majeau-Bettez, of the Norwegian University of Science, following a recent study that actually found that in some cases EV’s can have a greater impact of global warming than conventional cars.

Also, consider the efficiency of the vehicle and energy wasted in the charging process. The willingness of the population to switch from their favoured classic (or just old) cars. The issue of what to do with half tonne lithium-ion batteries when they wear out. The list goes on.

That aside, and assuming the likes Elon Musk and his ilk continue to improve the processes involved in making the batteries for EV’s, the majority of ‘experts’ continue to see demand for the raw materials that go into the various versions of the technology.

A question mark still appears over at what speed and how efficiently this occurs. But you should be in no doubt. It is occurring.


Author, James Purdie: Head of Investor Relations


Disclaimer: Although this document has been issued by Arion Investment Management, it is important to note that the views of the author may or may not represent that of the company. The document has been derived from sources believed to be current and accurate as at the date of release. The comments made are general in nature and do not take into account anyone’s personal needs, financial situation or requirements and past performance is not an indicator of future returns. Before acting upon anything associated with this document we would recommend seeking advice from your financial advisor.  

About the company; Arion Investment Management Limited is a commodity focused investment management company, based in London. The company is authorised and regulated by the Financial Conduct Authority (registered no. 742037).