Hitching a Ride on the Electric Vehicle Revolution
The most valuable car company in the United States isn’t General Motors or Ford.
That crown belongs to Tesla Inc., which unveiled the first production Model 3 sedan on July 28. The all-electric automaker lost almost $700 million last year and delivered 22,000 cars during the second quarter of 2017—a fraction of the 725,000 cars GM sold during the same period.
Despite meager production, Tesla has a market cap of around $50 billion. Much of that value is derived from future potential—its expected position in a world where electric vehicles (EV) will rule the roads.
Faced with increasingly strict emissions standards, the entire auto industry is going electric. Top automakers such as Volkswagen, Ford, and Toyota have invested heavily in EV and battery technologies. Volvo announced last month that all of its new models would have electric motors beginning in 2019. Even Bugatti, manufacturer of the world’s fastest production car, admitted to Autocar magazine last month that its next vehicle would have to be a hybrid.
Governments are also mandating the change. On July 25, the United Kingdom announced a ban on the sale of new gasoline and diesel vehicles beginning in 2040, a few weeks after France enacted similar measures.
Globally, 2 million EVs were on the road in 2016, or less than 0.5 percent of all vehicles, according to the International Energy Agency. By 2020, there could be between 9 million and 20 million EVs deployed. While estimates vary, many experts believe that within a decade, EV production will be multiples of what it is today.
This long-term strategic shift in the auto landscape will alter existing industries and create new ones. So who stands to benefit from the advent of electric cars?
The biggest and most obvious beneficiaries of increased electric vehicle production are commodities used in lithium-ion battery production.
Nickel is a major chemical ingredient in two of the three most popular lithium-ion EV battery cathode technologies—the nickel-manganese-cobalt (NMC) formula GM uses and the nickel-cobalt-aluminum (NCA) formula Tesla uses. A third battery type, lithium-iron-phosphate, is prevalent among Chinese EV makers.
Today, nickel is predominantly used in steel production. Weaker Chinese demand for steel has led nickel prices to languish over the last few years. But demand for EVs could change that dynamic.
“We think that electric vehicles could offer a renaissance for the nickel market,” UBS analysts wrote in a July 20 research report. “EV battery manufacture could drive a massive +10–40 percent of incremental nickel demand by 2025.”
UBS analysts estimate that nickel spot price could increase to $6 per pound in the long term, from $4.6 per pound as of July 28.
Investors should note that only around 50 percent of all nickel produced is suitable for battery production, so not all nickel miners will profit from EV adoption. According to UBS, Norilsk and Independence Group are the best pure mining bets in this space. Glencore and Vale also stand to benefit, but they are more diversified and bigger miners.
Cobalt Gains 70 Percent
Another metal used in battery production is cobalt.
Forty-two percent of the world’s cobalt is used in battery production. The biggest producer is the Democratic Republic of Congo, a country mired in ongoing political turmoil. Due to supply shortages and increasing demand, the spot price of cobalt per pound has already risen by more than 70 percent since Jan. 1, from under $15 to $26.08 as of July 28.
Investing in cobalt isn’t very easy. The volume of futures contracts traded on the London Metal Exchange is low. There are very few companies developing cobalt-only mining projects. Most of the world’s cobalt is generated as a byproduct of nickel and copper at much larger mining operators like Vale and Glencore, where cobalt makes up a fraction of their annual revenues.
So deep-pocketed investors, like Swiss mining-focused hedge fund Pala Investments, are buying physical cobalt from miners and storing it in warehouses. “By buying physical stock, you actually own the metal that’s going into the batteries,” Anthony Milewski, a managing director at Pala, told the Australian Financial Review. “It’s a much more attractive option, and we’re not the only fund out there doing this.”
Battery and Chemical Groups
Global chemical giants are ramping up their production of battery materials to support the expected demand for EV batteries.
Shares of LG Chem Ltd., the South Korean chemical giant, have gained more than 25 percent year-to-date. LG is a leading supplier of batteries for the Korean auto industry and GM’s Chevrolet Bolt EV. The company was also selected as the exclusive battery supplier for next year’s Apple iPhone 9, in a departure from Apple’s traditional multivendor strategy.
Europe is also investing heavily in EV battery technologies. German chemical giant BASF announced plans to invest 400 million euros ($470 million) in a new European plant to produce cathode materials for EV batteries, with materials supplied by Russian mining giant Norilsk Nickel.
Umicore, a Belgian materials company and a key supplier in NMC lithium-ion batteries, announced in May it would invest 300 million euros ($353 million) to increase its production of battery materials sixfold by 2020. Most of the investments will be directed toward the company’s facilities in South Korea and China.
Japanese automaker Toyota Motor Corp. said July 25 it was close to finalizing a new EV battery technology that is superior to existing lithium-ion. Toyota is working on “production engineering” of a new solid-state battery design that is smaller, lighter, and can hold a higher charge than existing battery technologies, according to a Wall Street Journal report. The new batteries could make their way into EV production in the early 2020s and could prove to be a game-changer for EV development.
Opportunity for Utilities
The struggling U.S. utilities industry isn’t usually thought of as a beneficiary of EVs. But in the long run, if EV sales overtake gasoline vehicles, electricity demand will increase.
Utility firms—power generators, distributors, and grid operators—generally must balance supply and demand. During peak demand, utilities can’t keep up, while excess capacity plagues low demand periods. New power infrastructure investments are costly. If EVs become mass market, it would raise the floor of electricity demand permanently.
But so far, utilities have stood on the sidelines, leaving auto manufacturers to design and manage the rollout of complex EV charging infrastructure.
The effort to eventually replace the country’s vast network of gas stations could be a costly missed opportunity for utilities.
Regulators initially gave EV charging infrastructure projects to non-utility companies, believing increased competition benefits their development more than the largely monopolized utility companies. “However, these markets have been slow to develop and some early entrants have gone bankrupt, largely because charging infrastructure is extremely costly,” according to a recent report by the Rocky Mountain Institute, a nonprofit engaged in promoting renewable energy. “Some regulators are beginning to reconsider the advantages of utility-owned charging infrastructure, and are considering performance-based incentives for utilities to support and enable the deployment, if not also the ownership, of charging stations.”
How California utilities respond will offer a blueprint for the entire industry. Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric all proposed plans to build fast-charging stations for cars, trucks, and buses. Many of the infrastructure costs will be shared by existing customers. In Edison’s case, its $355 million development plan will be funded by increasing residential electricity rates by 0.3 percent.
The effort will be challenging, as utilities must consider optimal charging locations and distribution load on the grid while balancing cost. And pushback from existing customers and politicians is expected.
But therein lies the opportunity. A solution to managing future electricity distribution could be an innovation as significant as the electric vehicle itself.