Where to invest in the battery metals boom

With the global electric vehicle (EV) market forecast to grow 10-fold by 2025 and 50-fold by 2030, and rising demand for energy storage, there’s never been a better time to be a lithium miner. Fortunately, Australia has a number of quality mining businesses for investors to consider.

When it comes to electric vehicles it appears a tipping point has now been reached and investors have been profiting from the tidal shift in sentiment with Australia’s wealth of natural resources ensuring there’s no shortage of opportunities.

Earlier this year, Porsche, Audi, Skoda and VW owner, the Volkswagen Group’s Powerday presented the company’s roadmap for battery and charging technology up to 2030. The company had already nearly tripled deliveries of EVs in 2020 to over 212,000 and now it intends to deliver a million EVs in 2021 and invest more than €46 billion in EVs over the next five years.

Major competitors have responded swiftly

General Motors recently revealed its plans to sell more than a million EVs annually by 2025 and will spend US$35 billion by 2025 on EV (electric vehicle) development. That’s up nearly a third on the spending plan announced just on six months ago.

Not to be outdone, Ford announced in June it will spend US$30 billion on EV development by 2030, sell 1.5 million EVs that year, while aiming for 40 per cent of its global model range to be electric.

According to Ernst & Young, EV sales in Europe, China and the US will outstrip internal combustion engined vehicles (ICEs) by 2033, which is five years earlier than previous projections. As I have previously explained, government mandated climate change targets combined with financial consequences for the manufacture of ICEs is driving the seismic shift in production and ultimately take-up rates. Consequently, the share prices of lithium miners have surged since April, substantially outperforming the market.

In the US, President Biden’s proposed infrastructure bill has set aside US$174 billion to encourage EVs, with nearly US$18 billion for a national charging network. A recent US government technology report however has suggested nearer to US$90 billion will be required for the charging network to meet the government’s 2035 EV target.

Perhaps most importantly, it is this last development – a network of ubiquitous rapid charging stations – that will speed up EV adoption, with important demand consequences for upstream suppliers including lithium producers.

Growing EV markets

A plethora of predictions typically expect the global EV market to grow 10-fold by 2025 and forecasts of a 50-fold increase by 2030 are not uncommon. And with lithium demand for the burgeoning energy storage market demand expected to far exceed that which is required for EVs, it is reasonable to expect bright revenue prospects for lithium producers.

Demand, of course, is but one side of the equation. Currently, global lithium (carbonate production) is roughly 500,000 tonnes per annum. If current predictions for the 2025 EV market alone are correct, demand will exceed 2.7 million tonnes per year. If 2030 predictions are correct, expect demand to exceed 15 million tonnes. By way of examples, Institutional Investor has reported that EV sales have more than tripled since only 2017, Citi Bank predicts 75 per cent of all mined lithium will be consumed by EV batteries by 2025, and finally, the IEA predicts a 40-fold increase in lithium demand by 2040.

Of course, if new and recycled supply cannot meet demand, ‘Houston’ will have a problem and the EV market will simply not reach adoption forecasts.

Are lithium stocks a bubble?

Australia is uniquely positioned to supply at least some of the expected demand. If currently planned Australian lithium refining capacity is met in the next few years, however, it will still only double global supply to about a million tonnes.

That suggests to me the jump in the prices of lithium production stocks since my last article on the subject is anything but a bubble. A long runway of exploration, development and production is ahead and remember this is an investment theme that is independent of economic, COVID-19, interest rate and inflation cycles.

Lithium-ion batteries contain other metals such as cobalt, nickel, graphite and manganese. And there’s no shortage of mining projects being established to extract and produce these battery materials. New technology will also help to meet some of the projected demand with green credentials. Recently, General Motors struck a deal with Australian lithium miner Controlled Thermal Resources, to extract lithium from US geothermal deposits in the US. If successful the project could deliver another 600,000 tonnes annually.

Meanwhile, Albemarle Corp., the world’s largest lithium producer, is working on a new laboratory in North Carolina to accelerate production of ultra-thin lithium foils and anodes that could double energy density and halve costs.

For context, a battery mining project only differs from other mining methods by the technology employed to remove the last few thousand parts per million of impurities. The success of battery mining projects, therefore, hangs on the ability, which should not be underestimated, to achieve the necessary purity economically.

Nevertheless, the transition to green energy – and as automakers embrace the EV revolution – rising demand for lithium-ion batteries should push lithium prices up while ensuring the supply of battery metals remains short for years. According to Macquarie Bank, a slight supply deficit this year of 2,900 tons will rise to 20,000 tons in 2022 and triple to 61,000 tons in 2023. Meanwhile, Credit Suisse is forecasting a deficit of 248,000 tons in 2025.

Unsurprisingly, lithium and nickel prices have already risen steeply this year. Lithium carbonate is up 71 per cent year to date, lithium hydroxide has nearly doubled and the premium on nickel briquette is up 24 per cent – the highest level since late 2019. If, however, projected demand continues to outstrip supply – supply which has been depleted and constrained by supply chain inefficiencies – prices can surge further.

At Montgomery, one of our key investment themes this year, along with demand for income, a boom in mergers and acquisitions, has been decarbonisation. And it appears there’s some durability to the latter theme.

Globally, regulators and governments will prioritise clean energy, EV sales will continue to surge as choice flourishes and, so, battery metal demand will remain buoyant. If mining production fails to keep up, producers of battery metals such as nickel, copper and lithium will have a solid 2021 and 2022, while their shares will also enjoy growing demand from a happy band of fund managers who have been hitherto underweight and who are increasingly required to make ESG-friendly bets.

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