Beneficiaries of the Electric Vehicle Boom
The future is electric. The declining costs of batteries, stricter emissions norms and regulatory incentives all support the trend toward battery-powered vehicles.
Over the next five years, demand for electric vehicles (EV) and electric storage systems (ESS) is expected to record a compound annual growth rate of 20 percent and 10 percent, respectively.
Technological developments and the maturing of battery technology as a viable source of power have led to new requirements in terms of natural resources. Lithium, cobalt, graphite, nickel, aluminum and copper are highly likely to benefit from surging battery demand.
Battery Boom, Why Now?
The declining costs of batteries, stricter emissions norms and regulatory incentives (tax exemptions and subsidies) all support the trend toward battery-powered vehicles. The EU passenger car emissions target of 95 g/km for 2020, the USA's target of 93 g/km by 2025, Japan's 105 g/km by 2020 and China's 117 g/km by 2020 will be close to impossible to meet without adding EV to all fleets, which currently produce emissions of around 200 g/km. At the same time, technological developments have pushed the energy density of batteries significantly higher and costs significantly lower over the past decade. In 2008, the cost per kilowatt hour for batteries was about USD 1,000. In 2015, the International Energy Agency defined the cost at around USD 250 and forecast it to come down to USD 150 by 2022. This should help the industry wean itself off purchase incentives. We also have a sea change happening in power generation, with renewables expected to contribute to almost half of incremental global power generation through 2035. Renewable energy comes with storage issues, and lithium-based battery technology is being used to deal with load and frequency management issues. Global storage capacity currently stands at about 250 MW and is expected to grow to 14,000 MW by 2023.
Lithium-Based Batteries – "The Salt on the Salad"
Tesla's founder and CEO, Elon Musk, famously answered "...it's like the salt on the salad, "when asked if he was concerned that the boom in EV could lead to a supply squeeze for lithium. "Our cells should be called nickel graphite," he said. While his answer was meant to allay concerns about the heavy dependence on lithium, it actually also highlights the potential for a squeeze in nickel and graphite prices. What is clear is that the battery technology for EV and power storage has matured and is focused on a range of lithium-based cathode technologies. Cathodes form about 30 percent of the battery and require lithium, nickel and cobalt. According to the Credit Suisse Global Equity and Credit Research team, lithium carbonate demand will rise from about 200 kilotons (kt) today to over 500 kt in 2025. Anodes form about 8 percent of the battery and require spherical graphite, with current graphite demand at around 90 kt and seen expanding to 400 kt by 2020.
How to Gain Exposure to This Theme
Battery-grade raw material supply lags demand, and prices have started to rise in response. This supply/demand imbalance is likely to intensify with the construction of up to 12 new battery mega-factories, which are forecast to triple battery manufacturing capacity by 2020. Given the rapid rise in battery demand, we expect a shortage in the supply for lithium, graphite and cobalt. However, copper and aluminum should also benefit from this trend. EV are up to three times as copper-intensive as internal combustion vehicles, while alumina (aluminum) is used in light-weighting (to increase range) of a vehicle as well as a separator in EV batteries. Beyond the miners, battery materials makers should also profit from this trend. Additionally, auto suppliers (especially those with power management solutions) with relevant products and limited exposure to traditional engines should benefit from an accelerating shift to EV. Lastly, though at a nascent stage, companies investing in charging infrastructure (charging stations) are expected to benefit from the EV boom.