Driving Disruptions in the Metals Markets

2 minute read

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.

Exhibit 1

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.

Exhibit 2: Demand Impact & Effect on Large Producers

Download as a pdf 

 

 

Disclosures:

This material is to be used for institutional investors and not for any other purpose. The enclosed information has been developed internally and/or obtained from sources believed to be reliable. This material contains current opinions of the manager and such opinions are subject to change without notice. Aegon Asset Management US ("Aegon AM US") is under no obligation, expressed or implied, to update the material contained herein. This material contains general information only on investment matters; it should not be considered a comprehensive statement on any matter and should not be relied upon as such. If there is any conflict between the enclosed information and Aegon AM US's Form ADV, the Form ADV controls. The information contained does not take into account any investor's investment objectives, particular needs, or financial situation. Nothing in this material constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to you. The value of any investment may fluctuate. Past performance is not indicative of future results.

The information presented is for illustrative purposes only. Individual accounts may vary based on restrictions, substitutions, cash flows and other factors.

Specific sectors mentioned to not represent all sectors in which Aegon AM US seeks investments. It should not be assumed that investments of securities in these sectors were or will be profitable.

Aegon AM US may trade for its own proprietary accounts or other client accounts in a manner inconsistent with this report, depending upon the short-term trading strategy, guidelines for a particular client, and other variables.

This document contains "forward-looking statements" which are based on change to the firm's beliefs, as well as on a number of assumptions concerning future events based on information currently available. These statements involve certain risks, uncertainties and assumptions which are difficult to predict. Consequently, such statements cannot be guarantees of future performance and actual outcomes and returns may differ materially from statements set forth herein. In addition, this material contains information regarding market outlook, rates of return, market indicators and other statistical information that is not intended and should not be considered an indication of the results of any Aegon AM US-managed portfolio.
Recipient shall not distribute, publish, sell, license or otherwise create derivative works using any of the content of this report without the prior written consent of Aegon Asset Management US, 4333 Edgewood Rd NE, Cedar Rapids, IA 52499.


©2018 Aegon Asset Management US. 1991330.1.

}