David Whitten, Head of Janus Henderson’s Global Natural Resources Team, discusses how the transition to electric vehicles and growing demand for battery power is shaping the outlooks of key raw materials.

The electric vehicle (EV) revolution has emerged as a significant investment theme in recent years. While still in its early stages, the sector gained significant momentum particularly over the last two years, with the global auto industry accelerating EV development plans and articulating EV strategies. For this transition to take place, the auto industry will need to invest hundreds of billions of dollars.

Rapid EV growth forecast

Although only approximately one million EVs were sold in 2017, the announced development plans could see EV penetration rates increase materially by 2025, with many analysts suggesting rates of 10%-14%¹. According to UBS, a 16% penetration rate would represent production of 16.5 million EV units per annum (pa) from 2025². While there is debate about the realistic potential penetration rates, if the costs and efficiencies of EVs are validated, penetration rates will ultimately be much higher.

To achieve the required production levels, a major expansion of the EV supply chain is required in parallel with vehicle development.”

David Whitten, Head of Global Natural Resources

Growth in battery production required to meet demand

Central to the EV revolution is the lithium ion battery, which will impact global demand for lithium, cobalt, nickel and graphite. To achieve the required production levels, a major expansion of the EV supply chain is required in parallel with vehicle development. This supply chain incorporates the development of natural resources to supply battery raw materials, as well as the expansion of battery production capacity. While some of this infrastructure exists, it is insufficient to meet demand forecasts to 2025 and beyond. This is a multi-year theme, which has already commenced with the development of new lithium projects, the expansion of battery capacity by existing plants and the development of greenfield sites.

To appreciate the scale, lithium production capacity will need to increase up to six-fold from current production numbers by 2026³ (depending on EV penetration rates). Lithium development alone would require more than $10 billion in capital. Looking at battery production, current lithium battery capacity is approximately 120 GWh pa⁴. This capacity will need to increase by around 15 times by 2026 to meet projected demand⁵.

The investment cycle is in train, with numerous automakers placing orders for batteries to meet their production schedules. This has seen battery makers announce commitments to expand or develop new ‘gigafactories’ in order to meet demand. Security of supply has become a major theme, leading to numerous offtake/financing deals to secure the development of new raw material sources. Commodities significantly impacted by EV growth, such as lithium, cobalt and nickel, have increased materially in price, encouraging these developments.

Vehicles could be overshadowing the bigger opportunity

With heavy focus on the EV thematic, it is easy to overlook the potential growth in battery storage for residential, utility and industrial applications. The reality is that these applications could be more significant than EVs for raw material demand. While lithium ion batteries are incorporated into all of the above applications, other battery technologies will also have a role to play.

Non-battery EV commodities expected to benefit

While not directly impacted by battery demand, copper is expected to be a beneficiary of EV growth as it is an essential material for EV components and infrastructure. According to the Copper Development Association Inc., battery EVs contain 83kg of copper, while electric buses contain up to 370kg⁶. The forecast increase in copper demand due to EVs could be 1.7 million tonnes (Mt) by 2027⁷. While this is a large number, it is modest given the copper market is approximately 23.5 Mt pa and growing at 2%.

Even discounting demand from EVs, the outlook for copper remains attractive. Following a period of new supply, the market is forecast to deliver increasing deficits post-2019. This will be positive for copper producers and the price. Nevertheless, the copper industry will face a challenge to add the required level of capacity in the next few years. Given copper is 100% recyclable, the forecast supply gap could give rise to profitable growth outlooks for scrap metal and recycling businesses.

Aluminium is also expected to benefit from EV growth as it used in preference to steel given its light weight. As aluminium is already a sizeable market, demand growth from EVs will be modest relative to its size.

Fund positioning

The Janus Henderson Global Natural Resources Fund continues to invest in this theme. In the case of lithium, we are invested in established producers, such as Albemarle and SQM, which have a competitive cost position in Chile. We have also invested in developers such as Orocobre, Mineral Resources and Lithium Americas.

With regards to Cobalt exposure, we hold Glencore, the world’s largest producer, but this position also provides exposure to its diversified mining operations, which includes a substantial copper portfolio. We initiated a position in CleanTeQ, a developer of the most advanced nickel/cobalt project in Australia. Interestingly, via its own technological innovation, CleanTeQ plans to produce nickel/cobalt sulphate, the direct feedstock used by battery makers. We also hold Independence Group, which recently commissioned the high quality Nova nickel/copper mine and is also evaluating the viability of producing sulphate products as well.

Our copper exposure is derived through diversified miners including BHP, RIO, Anglo American, Teck, Glencore and more focused specialist copper producers such as Antofagasta and Lundin Mining.

As part of our investment process, we continually evaluate alternative opportunities arising from this and other investment themes.

<sup>Dollar figures are in US dollars unless otherwise specified.
1. Survey of broker estimates, April 2018
2. UBS Report, Electric cars: Highway to Marginal Hell, 28 Nov 2017
3. Roskill report 2018, as per Pilbara Minerals Presentation, low case (demand CAGR 23% and high case demand CAGR 33%)
4. Roskill report 2018, as per Pilbara Minerals Presentation
5. Roskill report 2018, as per Pilbara Minerals Presentation
6. Copper Development Association, Inc, Factsheet – Copper Drives Electric Vehicles
7. Copper Development Association, Inc, Factsheet – Copper Drives Electric Vehicles</sup>