Government support for tighter emission targets is necessitating a faster move towards electric vehicles (EVs) than previously anticipated. Not only will this have far-reaching implications for the global vehicle industry, it will also impact a number of commodity markets over the long-run.
The biggest global theme thus far in 2017 is disruption - yes, Trump is old news by now. And, in terms of possible disruptors, few new technological advances beat the electric vehicle. With the EV30@30 campaign targeting a 30% market share for EVs by 2030, big markets such as China, France, and the UK have recently announced that they plan to ban internal combustion engine ("ICE") vehicles in the near future. The EV evolution is at hand. This then begs the question:
Which commodity markets will be the winners and losers of the EV evolution?
1. Battery materials are set to boom
The raw materials that are used in an EV’s lithium-ion battery will likely experience significant increases in demand. Apart from lithium, these commodities include nickel, graphite, copper, aluminum and cobalt.
The markets for cobalt, lithium and nickel are still small (relative to aluminium), with changes in expected demand resulting in massive swings in their prices. However, most of these materials do not suffer from significant supply constraints, which means that increases in demand should be met by increases in supply. Lithium is a good example, as its price has recently spiked, but it is forecasted to decline in 2019 as new supply comes online.
Cobalt might well be the commodity to experience the biggest secular increase in price due to EVs. Today, 40% of cobalt is used to make rechargeable batteries and this is expected to rise to 55% in 2019. The supply of cobalt is what differentiates its prospects from other metals, as 65% of global cobalt is located in the DRC - a country with a volatile political environment and persistent supply issues. In the event that supply cannot match demand, the price of cobalt could skyrocket.
2. More copper and aluminium, less steel
The body of an electric vehicle, such as the mass-produced Chevy Bolt, contains more copper and aluminium compared to a typical ICE-vehicle, such as a VW Golf. Apart from its usage in rechargeable batteries, copper is used in EV motors, inverters and charging points. Aluminium is lighter and this increases the mileage of an EV (which remains its major shortcoming). Copper and aluminium should therefore be positively impacted by the EV evolution.
The incremental drop in demand should not affect the steel industry materially, because it is massive in size and vehicle usage accounts for a tiny proportion of global steel demand. Furthermore, steelmakers are fighting back by attempting to use nanotechnology to make lightweight vehicle bodies.
3. Platinum and palladium are the likely losers
Both platinum and palladium are currently used to curb the toxic emissions of traditional ICE engines. In a future where at least 30% of vehicles are electric, there will be less demand for both metals. Although their demand/supply dynamics is not expected to change much up until 2021, platinum and palladium should be the losers of the EV evolution over the long term.
While commodity companies in general are not regarded as high-quality long-term investments, we do believe that some are reasonably well placed to benefit from the secular tailwind that the EV evolution will bring.
In this regard, multinational miner Glencore is in a good space. It’s main revenue source is copper; it is the world’s largest producer of cobalt; and holds a key supply position in nickel. These commodities are essential components of an EV and Glencore’s CEO, Ivan ’the Terrible’ Glasenberg, has smartly positioned the company for the coming evolution.
It is difficult to envision a world a hundred years from now in which the ICE engine will still be in widespread use. EV’s provide just too many benefits for the environment, and the hurdles of getting EV’s into mass production are abating - with battery technology increasing at a rapid pace.
Of all the raw materials that feature in an electric vehicle, cobalt looks like the one with the potential to provide the best returns.
Sources: Benchmarkminerals; UBS Evidence LAB, businessinsider.com, visualcapitalist.com
 Although there are many exciting battery technologies, lithium-ion batteries are expected to make up the vast majority of the rechargeable battery market by 2025
 UBS Evidence Lab Electric Car Teardown
Wim Prinsloo, CFA
Portfolio Manager at True North Capital Management
Wim Prinsloo serves as portfolio manager at True North Capital Management. He holds an honours degree in investment management from the University of Pretoria and is a CFA charter holder.
Wim’s work at True North includes the management of the firm’s equity and property unit trusts, development of its investment processes and ensuring best-in-class service to clients. He benefits from 7 years of experience in the investment industry and is a member of the Investment Analyst Society of South Africa.