JOHANNESBURG - Electric vehicles (EVs)
are an inevitable part of society’s future. The major car companies have
invested heavily in developing reliable, long-distance electric solutions.
Meanwhile, there is an
increasing political imperative to decarbonise economies, further incentivising
the adoption of electric vehicles. However, the rollout of this
technology is not smooth sailing.
One of the major reasons why
the rollout of EVs will be held back somewhat is the fact that the supply of
the major commodities used in the manufacture of EVs will, in our opinion, be
constrained. Further, the reliance on coal power for electricity generation
will impact the efficacy of EV adoption. The impact of these two factors will
only become more acute as the percentage of EVs in the overall vehicle fleet
increases from its current 0.2% share.
A material opportunity
However, these factors also
give rise to distinct investmentopportunities, notably in the areas of the
market that are addressing or will have to address these issues. Cobalt, one of
the key materials in all types of batteries - from those in your phone to those
in yourelectric vehicle - is a high-risk commodity.
Over 60% of the world’s
cobalt comes from the Democratic Republic of Congo, a notably volatile region.
As a result, manufacturers have been working to reduce the cobalt content in
their batteries.
One company helping to
facilitate this reduction is Umicore, a major manufacturer of nickel manganese
cobalt (NMC) batteries. NMC batteries use only a fifth of the cobalt found in
lithium cobalt oxide (LCO) batteries, which currently make up almost half of
the world’s batteries. There are few reasons why LCO batteries should go on
being favoured, as NMC batteries have superior energy density and a
longer lifecycle, while the price of cobalt has risen 150% in 18 months, making
LCO batteries notably more expensive.
The renewables riddle
Another major challenge
facing the electric vehicle roll out is the mismatch between the
political impetus to support electric vehiclesand the decarbonisation
of electricity production. In recent months, French president Emanuel Macron
has pledged to ban the sale of diesel and petrol cars by 2040, while British
environment secretary Michael Gove has made a similar pledge.
While these pledges are
noble, they present enormous infrastructure challenges. Macron’s timeline would
drive electricity demand up by around 40% during a period that the French have
already committed to reducing the contribution of nuclear to their overall energy supply
from 72% to 50%. Despite these commitments, renewable sources have yet to
become reliable enough to be a base source of energy.
In Germany, where
a third of the energy supply is sourced from renewables, the
government has had to turn to coal as an emergency supply at times when
renewable sources have failed. France
has already committed to not using coal, which leaves the government with only
one option: natural gas, which has the benefit of emitting 40% less CO2 than
coal. We believe that this reliability gap, coupled with rising demand for
electricity makes natural gas an excellent opportunity for an energy portfolio.
Benefitting from
bottlenecks
It appears that there is
very real political appetite to support the move towards greater usage for EVs
and the outlook for the industry, while exciting, will throw up many
challenges. Consequently, as we see with any area exposed to strong growth,
bottlenecks and increased margins will be experienced and exploited.
The two that we find most
compelling are the shortfall in commodities traditionally used in batteries and
the reliability gap in the electricity supply. However, the rollout of EVs will
provide anenergy fund with many interesting opportunities for
some years to come.