SII: COMMODITIES - ELECTRIC VEHICLES - COBALT SQUEEZE
Electric vehicles - Resources squeeze
With the Tesla revolution and bullish forecasts for EV sales blanketing the media, the future looks bright for a cleaner, quieter future in autos. However, with predictions of a rise in the global EV fleet from 600k today to 65 million by 2040, the major stumbling block remains battery supply, or more specifically, resource availability.
In The Hack September 15th, we looked at a popular lithium ETF and the dearth of pure-play lithium mining opportunities. Lithium supply looks stretched given current high demand for batteries. However, other battery elements are arguably rarer and in even tighter supply conditions:
EV Leadership in Metals
Electric vehicle commodity race is in full swing
Source: The Bear Traps Report
Cobalt – out of the blue
Cobalt is one of the most important elements used in EV battery production. It’s in scarce supply, and miners that produce it are happy to exploit their dominant position. VW recently tried to tender for 5+ years of cobalt supply at prices below the current market – unsurprisingly, they struggled for takers, since prices for cobalt have surged 80% this year.
In the tight cobalt market something must give. Will it be new mines and supply, substitution in batteries, or significantly lower than projected EV volumes in the future? The Bear Traps Report, published on RVP this week, takes a fascinating deep dive on the issue:
The world produced 123K MT of cobalt last year and about 50% is used for super-alloys in gas turbine engines and an equal, but rapidly growing share of supply goes into rechargeable batteries. The Democratic Republic of the Congo (DRC) is the world’s leading source of mined cobalt, supplying more than one-half of world cobalt mine production. Most cobalt is mined as a by-product of copper or nickel and due to the lacklustre demand growth in the last few years, the industry has invested little to expand capacity.
The tightness of future supply is a major headwind to widespread adoption of EVs. The investment case is compelling, and The Bear Traps Report takes you through the broad implications for the lithium and nickel industries, too – both in the West and China – plus the fallout for the oil industry; so be sure to give it a full read.
Jump on the bandwagon?
With a number of junior mining prospects trying to get in on the action, the cobalt boom is in full swing, and the world is awash with hot reports promoting ideas to investors in the space, such as this one from The Assay, which, whilst promotional, is a good read on the sector:
Source: The Assay- Battery Materials Report
No cure for high prices
While the hot market in lithium, cobalt, and nickel looks set in stone, for investors hoping to ride the secular trend in EVs, The Bear Traps Report has a constructive but sobering reminder for investors in ‘no-brainer’ resource booms:
Over the long run, we believe that taking a position in a basket of mining equities with concentrated exposure to the EV space makes a lot of sense – JUST NOT TODAY. We are monitoring this space for the best entry point. In EVERY secular trend, there are shakeouts and periods of disruption. We believe this is the best way for investors to participate in the EV adoption frenzy.
So maybe hold your horses before jumping into this one. Battery resource plays are clearly going to have a bright future, but the potential for technological innovation and for the substitution of more common minerals for those that are rare and expensive may mean that those projected supply deficits are not the determining factor as to whether EVs are really going to take off.
It will be during the dark times of negative news flow that investment opportunities arise, not during periods of peak sentiment when every major manufacturer is clamoring to release the next killer EV.