The Electric Vehicle Trend Will Be Explosive - Here’s How To Profit On It

October 5, 2017

The Electric Vehicle Trend Will Be Explosive – Here’s How To Profit On It



  • The latest news surrounding the electric vehicle market is extremely positive.
  • However, not every related investment will do well. We’ll discuss car manufacturers, graphite, cobalt, nickel, copper, and lithium.
  • There’s one way to profit from the growing trend that carries little risk, is already profitable, and definitely offers high upside in the next decade.

Introduction

We all know transportation will be electric in the future. However, this doesn’t mean that every investment in the sector is a smart investment.

A great example of how investments in hot trends can work out is Amazon (NASDAQ: AMZN), and this example is the best-case scenario out there.

Figure 1: AMZN’s stock price since IPO. Source: Yahoo Finance.

AMZN’s stock was trading at $86 in March 1999, but it took more than 10 years for the stock to reach that level again and leave it behind forever.

This just goes to show how careful an investor should be when investing in something that is supposed to be the future as even with AMZN, which has been the definitive winner in e-commerce, it took more than 10 years for many investors to break a profit.

In today’s article, we’ll discuss the current situation in the electric vehicle (EV) industry, the developing trends, and how to go about investing in the sector by discussing the risks and rewards. It isn’t easy to profit while limiting your risks, but it is possible.

The Electric Vehicle Trend Is Strengthening

The main factor behind the strengthening of the electric vehicle trend isn’t pollution, a silent drive, or some other kind of romanticism, it’s the fact that China is dependent on foreign oil.

Chinese domestic production doesn’t even cover for a third of domestic demand which puts the whole country in a vulnerable position. Therefore, last month’s news that China is planning on completely banning internal combustion engines is something to really consider.

The forecast curve for electric vehicle sales has been becoming steeper and steeper in the last few months. Bloomberg New Energy Finance estimates EV sales to increase 25-fold up to 2030.

Figure 2: Forecasted EV sales. Source: Bloomberg.

In growth numbers, UBS expects the market will grow around 31% up to 2020 and then speed up to an average of 46% growth per year.

Figure 3: UBS’s electric vehicle forecast. Source: UBS.

Every growth investor’s heart starts to beat a little faster when seeing charts like these as the numbers are staggering. But this doesn’t mean everything related to electric vehicles will be a great investment.



Electric Vehicle Investments – Lithium

As a consequence of the huge estimated growth, one of the hottest metals lately is lithium which is an essential part of the battery packs for EVs.

Figure 4: Lithium prices have spiked lately. Source: Metalary.

However, as everybody is seeing what’s going to happen, everybody is also investing in new lithium projects. There are currently 16 operating lithium mines in the world and from 2019 onwards, that number is expected to quickly double.

Figure 5: Currently operating lithium mines. Source: Bloomberg.

Even if EV sales grow 31% in the next 4 years, total demand will only triple while global lithium production might produce much more than that.

The current lithium reserves that miners have found are enough to last more than 400 years. Current lithium reserves are at 14 million metric tons while production is only at 35,000 tons. If production increases by 25 times, it will take a lot of time to mine the available lithium.

Figure 6: Lithium reserves are 400 times larger than current production. Source: USGS.

The current lithium exploration efforts have increased the resources to more than 50 million tons which makes it clear that there is and will be plenty of the metal.

With increased investments, it’s highly probable that there will be an oversupply in lithium a few years from now and therefore it’s incredibly risky to invest in the metal and related investments. Some producers will definitely be winners just as AMZN won in retail, but the likelihood of getting the right one is very small.

On top of all of this, nobody is yet discussing lithium recycling which will bring a lot of supply in the future as the average life of a battery pack is around 8 years.

To venture a bit into the realm of sci-fi, the Korean steel giant Posco has invested $26 million into researching ways to extract lithium from sea water alongside the Korean government. Something like this would be incredibly expensive, but nevertheless shows how much lithium is out there.

So then we have to look at other ways to profit from the electric vehicle trend.



Electric Vehicle Investments – Car Manufacturers

The issue with car manufacturers is that the electric vehicle revolution will simply put more pressure on their margins and intensify competition.

Tesla has already been operating for 10 years and hasn’t yet made a profit. The current Model 3 ramp up is behind schedule and as all other manufacturers enter the field, the logical result is that there will be a war for market share. A war for market share usually means that profits turn negative and investors get to hold the bag.

Figure 7: Tesla’s net losses year by year. Source: Statista.

Therefore for electric vehicle portfolio exposure, one must dig deeper than the obvious.

Electric Vehicle Investments – Other Options

What to look for is a definitive supply deficit coming from the electric vehicle revolution and a price that is still below the necessary price to cover for the deficit. If the metal’s global availability doesn’t allow for incremental supply, even better.

Figure 8: increased demand for metals coming from electric vehicles. Source: Bloomberg.

The biggest growth will come in graphite, then nickel, aluminum, and copper will also benefit.

The Graphite Market

Graphite prices are in a slump and still haven’t recovered from the 2011-2012 euphoria surrounding the metal.

Figure 9: Graphite prices. Source: Northern Graphite.

Even if a battery has almost 40 times more graphite than lithium, the issue with graphite is that it is in abundance and can also be made synthetically. Therefore, investing in graphite depends mostly on miner-specific factors rather than a possible supply gap forming.

There are plenty of new projects available and the Balama project in Mozambique is expected to cover for 30% of global graphite production. So with graphite, it all depends on individual miners and synthetic production.

Figure 10: Expected global cost curve by Syrah Resources from the Balama project. Source: Syrah Resources.

The Nickel Market

The nickel market is much more interesting, and you can read about it in detail here.



The Copper Market

Alongside nickel, copper is my favorite metal to invest in because there is a supply gap forming due to growing demand and the fact that the low hanging fruit has been mined.

The red metal is in higher demand today than at any previous point in history and demand is expected to grow as new investments in infrastructure, renewable energy, global development, and electric vehicles all push demand for copper higher.

The metal that has to connect all those solar roof tiles with the battery pack in the garage and then also the car charger, all the charging stations around the world, etc., is copper.

Copper prices have rebounded from 2016 lows but given the looming supply gap, we could see copper go beyond 2011 levels.

Figure 11: Copper prices in the last 10 years. Source: Nasdaq.

Copper production is expected to start declining in the next few years if copper prices don’t go above $4.

Figure 12: Copper supply gap opening from 2019 onwards. Source: Wood Mackenzie.

Given the higher expected copper costs and declining ore grades, I wouldn’t be surprised to see copper prices on average above $4 over the next decade with spikes above $5.

Figure 13: Copper cost curve. Source: Wood Mackenzie.

Copper and nickel miners that have low costs and little debt are the best vehicles to best take advantage of the positive trends surrounding the metals because they won’t go bankrupt in a global recession while the upside will be extremely high when copper prices spike.

The Cobalt Market

The cobalt sector is a very difficult sector to invest in. You can read more in our article about cobalt here.



Conclusion

The beauty of long term structural trends is that they allow you to position your portfolio ahead of time. This lowers your risk and increases your returns.

No one knows when copper will explode, but there are miners now that offer a stable dividend, have low costs, and a great long-term outlook. By exposing your portfolio to such investments, you get a value producing asset that has the opportunity to increase many times over in the next decade.

All other investment opportunities offer high potential increases, but also carry the risk of leaving you with nothing which isn’t a great way to watch the electric vehicle trend pass by.

I know it’s difficult, but be careful out there because there will be many small stocks, junior miners, and wannabe car producers that will make great promises and excite investors. However, when the time for delivery comes, these companies usually fail.

Companies with stable businesses and a bit of history that are also exposed to explosive trends but make money even if nothing happens are the best risk reward investment out there.