Electric vehicles: Part of the biggest investment theme of a generation

Green energy. Carbon neutral. Decarbonisation. Net Zero. The Circular Economy. Renewables. All are linked with the “electrification” theme that’s widely tipped to become the biggest investment opportunity of a generation, estimated at a brain-melting US$50 trillion.

Part of this collective theme – EV battery materials ­– was the topic of a November 2021 article that became one of Livewire’s most widely read articles, drawing almost 30,000 clicks and 87 likes.

Given the previous article was published more than 18 months ago, it’s time to revisit the topic. Kicking off this three-part series, the following wire discusses:

• The size of the opportunity
• Recent breakthroughs – and the biggest challenges.
• Which industry sectors and regions of the world are in pole position
• Perspectives of investment banks Morgan Stanley, UBS and Goldman Sachs.

In part two, Kerry Sun delves into the next generation of ASX lithium stocks including two companies that have flown largely under the radar.

And later instalments will detail the downstream segment of the EV industry, including an update on how some of the world’s leading automotive companies are positioned within the investment theme.

What’s driving EV enthusiasm?

At the highest level, maybe it was the global pandemic that sharpened our collective senses. Or perhaps, in Australia at least, it was the devastating wildfires of late 2019 and early 2020 – bookended by last year’s floods across much of the country – that displayed in stark reality the effects of global warming. These are just some of the events that underpin the step-change in environmental sustainability awareness among corporations and those who invest in them.

There are strong tailwinds from government programs and corporate spending as organisations rush to “decarbonise” their operations.

What is the investment thesis?

Electrification is a broad theme that potentially touches on almost every part of the global economy. That’s because we all rely on power, from the smallest suburban household to the largest industrial manufacturer. But for the purposes of this editorial, we’re focusing solely on one part of the story – personal transport, or in other words, the automotive sector.

Even in the early 1900s, not long after the first petrol-powered cars rolled off the production line, there was discussion around alternative fuels – with ethanol- and electric-powered motors used in limited capacities even then.

Another bump in demand for non-fossil-fuel power sources occurred on the back of the 1970s oil crises, which spurred research into biofuels, natural gas and hydrogen as petrol and diesel substitutes.

In the 1990s and into the 2000s, concern grew about air pollution and greenhouse gases. This saw increased efforts in the production of biofuels, electric vehicles, and hydrogen fuel cell vehicles. And it was in this period that the concept of Net Zero emissions emerged.

The last decade has seen a renewed surge in the development and adoption of alternative fuels. Jim Farley, CEO of Ford, discussed its EV strategy and some of the challenges, including the supply of battery materials, in a recent Bloomberg interview.

The biggest EV challenge

He touched on the different battery types – including the lithium-ion CATL battery. He emphasised that the largest challenges in this space are on the supply side, with the output of materials such as copper, lithium and nickel as the main economic variable.

It’s not in the upstream where the Ford boss sees constraints but in the mid-stream area of processing.

“What we have to do as a company is reduce the bill of material cost,” Farley told Bloomberg.

“You can lock up all the mining capacity — which we’ve pretty much done for two million EVs — and the pricing pressure with that, given that it’s limited, is always going to be there. But what people need to understand, it’s onshoring the processing that’s going to be the most important controller of costs, and also politics.”

Farley notes that 80% of the processing of nickel and lithium is done in China – something huge customers such as Ford and other US competitors are keen to localise, or at least move into other “friendlier” jurisdictions.

We’ll discuss this more throughout this editorial series, where we also discuss where the rubber meets the road including the biggest manufacturers of EVs. But it’s worth noting there are currently 250 manufacturers of Hybrid and Electric Vehicles in the US – the number growing 12.5% since last year.

Most manufacturers rely on suppliers such as Panasonic Corp, CATL and LG Energy Solutions for their batteries.

But in an effort to minimise the above challenge, Ford and others – not least of which, Tesla – are bringing their battery manufacturing in-house. Ford itself is planning to open a battery plant in Michigan, USA.

A little over 12 months ago, Elon Musk set a hugely ambitious target for Tesla to build its own batteries within the next year. He’s also spoken about the need to focus on a specific lithium iron phosphate material (LFP) which is lower cost than alternative lithium types.

Broker views

On the raw material front, several investment banks regularly report on the state of play within some of the largest EV material-producing regions.

Morgan Stanley

On 24 May, Morgan Stanley discussed key observations from a recent lithium research trip to China. Analysts noted an improving demand outlook for the material and rebounding battery cathode production.

Goldman Sachs

Goldman Sachs analysts recently travelled to Argentina to assess some of the nation’s ongoing production, development and exploration activity. They observed a growing interest in Direct Lithium Extraction - one of the newest extraction technologies – which has the potential to significantly increase the supply of lithium from brine projects.

Comparing the potential positive impact to that of shale production on traditional oil production, the GS analysts believe it can “nearly double lithium production on higher recoveries, accelerating production ramp up, and improving project returns, though with the added bonus of offering ESG/sustainability benefits, while also widening rather than steepening the lithium cost curve.”

GS notes that several lithium projects in Latin America are utilising, or planning to introduce, DLE. Among the names behind larger projects, companies mentioned in the report include:

• Allkem (ASX: AKE)
• Lithium Americas
• Livent
• Zijin Mining.

“Our site visits highlighted the remoteness of these projects and the associated logistical challenges; however, with a growing number of projects in the region, these challenges may be increasingly overcome,” write the GS analysts.

On the regulatory environment in Argentina, the team also believes that the risks are overdone.

“Consistent feedback across stakeholders improves our confidence around the policy environment in Argentina, where we reiterate our view that the perceived risk is overdone, as we highlighted following the recent Allkem site visit,” it writes.

“The three predominant Argentine provinces for lithium development (Catamarca, Jujuy, and Salta) have also created the “Lithium Region” in order to coordinate joint development, ensuring clear rules and legal certainty and predictability for investors, where stakeholders continue to view all three as favourable mining investment jurisdictions.”

UBS

On 23 May, UBS provided an update on Chile’s evolving lithium supply policy, on the back of an investor call with lithium producer SQM.

Key takeaways from the call included:

• An acknowledgement of the tougher environment during the March 2023 quarter, but SQM’s belief the market has now turned and is confident for the remainder of the year at least.
• Policy ambiguity remains in Chile, but management is working towards a growth target for production capacity
• The recent supply agreement with Ford (though management was sparse with details).

“While near-term risks to Chilean lithium supply look to have been allayed, we remain conservative on potential supply growth,” writes UBS.

“While the region has resource potential, project development times of 5-7+ years limit how quickly it can respond to the higher pricing environment.”

The investment bank recently upgraded ALB to a BUY “in recognition of an apparent stabilisation in the current market.”

And among the ASX-listed lithium names, it rates the following companies:

• Pilbara Minerals (ASX: PLS) - BUY
• IGO (ASX: IGO) – BUY
• Mineral Resources (ASX: MIN) – HOLD
• Liontown Resources  (ASX: LTR) – HOLD

The following wire in this series will explore some of the local market's biggest names in lithium and the insights of Wilsons’ senior metals and mining equity analyst, Sam Catalano. This includes the flurry of M&A activity in the space, some of the risks, and the prospects of a re-rate for several lithium producers.

This article was first published on Market Index on Tuesday 30 May 2023.