How strong is the demand for Electric Vehicles?
In this week’s video insight Roger discusses the decarbonisation investment theme and the small cap beneficiaries of the electric vehicle revolution. Some companies in this theme include Pilbara Minerals, Mineral Resources, IGO, Allkem and Aeris Resources. Is all of the good news already factored into these prices?
If you have been following the blog and our videos, you’ll know we’ve presented frequently on the anticipated shortage of lithium, the decarbonisation investment theme and the small cap beneficiaries of the Electric Vehicle revolution.
We have previously reported the tipping point has already passed. That tipping point was Volkswagen Group’s 2021 Power Day where the company outlined a massive €25 million capital expenditure drive to bring down Electric Vehicle battery production costs and accelerate the transition away from internal combustion engines. It triggered an original equipment manufacturer (OEM) race to provide a full range of Electric Vehicle models.
And there’s a network effect going on here. More models produce more choice and therefore desire, while more desire produces more models.
UBS this week published the results of a survey of more than 11,000 consumers in the largest passenger vehicle markets. The survey revealed 49 per cent of consumers globally are very likely to purchase a Battery Electric Vehicle. And importantly, none of the countries surveyed experienced rising consumer subsidies, suggesting increased popularity of Electric Vehicles is organic rather than tax-driven.
Consumer demand will be strong and upstream suppliers will struggle to keep up, sending raw material prices soaring.
Of all the investment banks UBS is probably the most optimistic about Electric Vehicle sales penetration with a forecast of 22 per cent of all passenger vehicle sales globally in just three years and 54 per cent by 2030. If they’re right, battery supply will need to increase three-fold by 2025 and 12-fold by 2030.
But as we are discovering, right now sales targets are simply deferred when core ingredients become scarce or otherwise unavailable. It doesn’t matter how badly you want that new Land Rover Defender or Toyota Landcruiser – it doesn’t even matter how much you are willing to pay – they’re simply unattainable.
Indeed, the global auto industry’s devastating dearth of computer chips, critically important electrical wiring, palladium for catalytic converters, pig iron for steel, nickel for Electric Vehicle batteries and other essential parts (not to mention fires on car-carrying container ships) has contracted production, practically immobilised deliveries and resulted in soaring prices for new and used vehicles.
Meanwhile, BMW has halted production at two German factories. Mercedes is slowing work at its assembly plants, and Volkswagen is warning of production stoppages while it establishes alternative sources for parts.
Nevertheless, when we reach the point battery production cannot keep up with demand, it will serve only to extend the period, by years, of elevated prices for the raw inputs. And if there is one clear message from the UBS survey, it is this; the tipping point for mass adoption of Electric Vehicles has passed and an unstoppable secular trend is underway. UBS also noted the trend is rapidly accelerating as evidenced by the doubling of investment by most major global OEMs.
Companies we have previously explained are exposed to this theme include Pilbara Minerals, whose share price is up 229 per cent over a year, Mineral Resources (+42 per cent), IGO Ltd (+132 per cent), Allkem (formerly Orocobre +74 per cent) and Aeris (+45 per cent).
Among my peers and colleagues there is a percolating view, based on the above share price moves, that some of the very good news might be partly factored into prices already. That is always a difficult thing to quantify.
On the one hand, it is quite possible they continue to soar from here but it is also possible great returns can be made awaiting any pullback associated with temporary disenchantment with the story. The market tends to grow weary or impatient and its habit of jumping at shadows may also deliver investors a more palatable entry point.
The Montgomery Small Companies Fund owns shares in Pilbara Minerals, IGO, Allkem and Aeris Resources. This video was prepared 06 April 2022 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade these companies you should seek financial advice.