By Jeremy Thurm, CFA, Senior Research Analyst
China recently joined the UK and France in announcing plans to ban the sale of vehicles that run exclusively on gasoline or diesel fuel, further sparking a potential revolution in electric vehicles (EVs). However, this is not just an auto or energy story. It will also create winners and losers for certain basic materials names as price volatility of the underlying commodities increases. In addition, companies will need to make difficult capital allocation decisions with less-than-certain estimates of EV penetration rates. Changing battery technology must also be factored into investment decisions as improvements to the cathode material are necessary to make EVs competitive with internal combustion engines (ICEs).
Exhibit 1 illustrates the magnitude of EV-driven demand growth for certain metals if EVs reach 41 million units by 2040, which is estimated to account for 34% of total global vehicle sales. These are relatively conservative projections, with some estimates suggesting penetration rates as high as 50-55% by 2040.
The projections used in Exhibit 1 translate into an approximate 20% compound annual growth rate in EV end-market demand for each of these metals through 2040. However, the demand for each metal from EVs as a portion of total demand of the metal differs significantly for each, implying different outcomes for supply and demand dynamics. It is anticipated EV demand will be much more influential on prices of metals such as cobalt, graphite and lithium rather than the more widely used base metals (Exhibit 2).
The recent price volatility in cobalt and lithium highlights the step change in the EV-driven demand currently factored into the market. As supply security is an issue with cobalt, which is highly dependent on production in the Democratic Republic of Congo and China, high prices might drive substitution by new technologies. On the other hand, lithium resources are abundant but the rush to develop them will have implications on the current market structure, where Chile dominates supply.
For copper, use within the vehicle will increase in an EV relative to an ICE vehicle. There will also be incremental demand resulting from infrastructure needs such as charging stations, as well as from new copper required in the electrical grid. While EV-related demand for copper is expected to be rather modest relative to total global copper demand, the new source of demand has the potential to create a sustained acceleration of total demand growth.
On the flip side, EVs could create some demand destruction for certain metals. Lead demand is anticipated to face headwinds as the metal is used in starter batteries for ICE vehicles. In addition, prices for platinum group metals may also be pressured as approximately 40% of platinum demand and 75% of palladium demand are derived from emission control catalysts that are used in ICE vehicles.
EVs are anticipated to have a more nuanced demand effect on other commodities such as steel, aluminum and coal. Steel and aluminum will likely continue to battle it out based on their ability to meet the needs for light weight car production, which allows for longer travel distance on less power. As coal still accounts for a significant portion of the generation mix, demand may increase since more and more vehicles will be powered from the grid rather than via petrol.
For long-term investors, the overall shift from ICE vehicles to EVs, as well as the build out of the necessary charging infrastructure, has important implications for metals demand and the underlying companies that mine and produce these commodities.
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