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ELECTRIC VEHICLES DRIVE COMMODITIES OF THE FUTURE

by: Alexandra Symeonidi & Luis Olguin
Category: Investment Insights
Tags
Electric Vehicles Commodities Future Alexandra Symeonidi Luis OlguinMetals
Lithium Nickel Aluminum Copper
Oct
26




Demand drivers stemming from electric vehicles (EVs) and their infrastructure
could impact the utilization of several metals and the countries from which they
are sourced—many of them emerging markets (EMs). Specifically, the push toward
EVs and their infrastructure supports the demand for a number of metals we call
commodities of the future—lithium, nickel, aluminum, and copper. 

LITHIUM: ELEMENTAL FOR EV PRODUCTION 

The rise of EVs is likely a major reason for the surge in demand for lithium, a
key component of lithium-ion batteries. Bloomberg estimates that lithium demand
from batteries will increase fivefold from 2021 to 2030.1 S&P expects lithium
demand from all uses to triple by 2025 to almost 1.5 million metric tons.2 

More than 90% of lithium supply is mined as primary product in hard ores. Total
global reserves are estimated at 21 million metric tons in 2020, 23.5% higher
than they were in 2019 due to continuing exploration of the soft metal. As is
the case with other metals, EMs play a pivotal supply role. 

Although about 50% of mined lithium currently comes from Australia, most known
reserves are in Chile. In fact, more than 40% of world reserves are found in
Chile. As the country continues to turn reserves into production, its lithium
exports should increase, affecting its trade balances. This is already beginning
to occur: Chilean lithium exports were almost four times higher in 2020 than
they were a decade ago.3 

Over the past few years, companies have invested in Chile given the country’s
vast lithium reserves. In late 2018, China-based Tianqi Lithium, one of the
largest hard rock lithium producers in the world, acquired roughly 24% of
Sociedad Química y Minera de Chile (SQM). 

Moreover, companies in the sector have set aggressive targets to increase
production to meet expected demand. Tianqi Lithium, for example, produced more
than 70,000 metric tons of lithium carbonate, comprising about 21% of total
global supply, in 2020, and its production is expected to grow 70% in 2021. SQM,
another significant player in the market, increased lithium production by 43% in
2020 to 64,600 metric tons, comprising about 20% of global supply. Production is
expected to increase by another 47% in 2021. SQM expects lithium carbonate
demand to grow from 330,000 metric tons in 2020 to 900,000 to 1,000,000 metric
tons in 2025. 

Lithium-ion battery technologies, such as the EVs themselves, are diverse.
Depending on end-use, they are produced with a number of other metals and new
technologies keep changing.  Lithium, nickel, and cobalt are the most common
elements of EV battery production, although they can also include manganese,
titanate, and iron. The chart below illustrates.

 

NICKEL: HIGH GRADE, HIGH DEMAND

Nickel is also experiencing demand from EV batteries because it helps deliver
higher energy density and greater storage capacity. The very common NCA
batteries for EVs, for example, are 80% nickel.

Indonesia is the world’s largest producer of nickel, comprising up to 30% of
global nickel supply in 2020, according to USGS estimates.4 In January 2020,
Indonesia enacted a two-year nickel export ban to help accelerate the
construction of new smelters and preserve nickel resources. The decision will
allow Indonesia to process nickel domestically and potentially benefit from an
upcoming demand surge in the metal.

The second and third largest nickel producers are the Philippines and Russia,
with approximately 13% and 11% of total global nickel supply, respectively.

As with all metals, nickel quality (grade) varies. In the construction of EV
batteries only high-grade nickel is used. But the high-grade nickel market is
very concentrated: seven companies accounted for 83% of total supply in 2020.5
The largest high-grade nickel supplier in the world is Russia’s Norilsk Nickel,
which had a 22% market share in 2020, followed by the Chinese Jinchuan Group,
with 17% market share in the same year. Brazil’s Vale accounted for 12% of total
market share in 2020.

Companies have long recognized the potential demand surge for nickel due to EVs
and related infrastructure and are committed to increasing supply to the market.
Norilsk Nickel, for example, has a strategic ambition to increase nickel
production up to 17% from 2020 to 2030. Vale, meanwhile, plans to boost nickel
production 20% from current production levels by 2025.

 

ALUMINUM: SOLVING THE WEIGHT PROBLEM

While battery technology certainly differentiates EVs from conventional
vehicles, it also makes vehicles heavier. Replacing steel parts is one way to
reduce vehicle weight and improve energy efficiency. Aluminum, a lightweight but
strong and malleable metal, is a good substitute for certain steel components
and can help reduce the vehicle’s overall weight. 

Although aluminum is more expensive than steel per metric ton, EV automakers
have been increasingly using the metal, particularly for battery, motor
housings, and body structural components, as they transition to multi-metal
vehicles. Mexico is the fifth largest producer of auto parts in the world,
primarily serving the all-important U.S. auto market. We believe its auto
components industry is well poised to benefit from the rise in lightweight auto
parts.

China dominates both the supply and demand of aluminum. In 2019, China produced
about 37 million metric tons, according to USGS estimates, which is about half
of the total global aluminum supply. China has also increased its share of
global aluminum production capacity from 11% in 2000 to almost 60% currently.
This increase has at times created oversupply and depressed prices. However,
Chinese consumption has also grown due to urbanization, economic growth,
investments in infrastructure and real estate, and, most recently, the focus on
EVs.

The largest aluminum producers in the world are based in China. Aluminum
Corporation of China Limited (Chalco) and Hongqiao Group are the largest
producers of primary aluminum globally. Chalco is 39% owned by Aluminum
Corporation of China, which is a state-owned and strategic company for China.
Russia’s United Company Rusal is the third largest primary aluminum producer
globally, accounting for 6% of global production in 2020. It believes aluminum
is the way to more sustainable industries and sees demand spiking in the coming
years.

 

NEXT UP: COPPER

Regardless of the type of EV or its components, all EVs need charging stations,
and the growth of EVs on the roads requires proportionate growth in
infrastructure. In our next post, we will look at the growth in charging
stations and the related increase in demand for copper.

Sources:1 USGS, 2021.2 Nornickel annual report, December 2020.3 BloombergNEF.4
“Lithium Supply Is Set to Triple by 2025. Will it be Enough?” S&P Global Platts,
October 2019.5 Banco Central de Chile.  About the Authors:Alexandra Symeonidi,
CFA, is a corporate credit analyst on William Blair’s emerging markets debt
(EMD) team. In this role, she covers the Europe, Middle East and Africa
(EMEA)oil and gas, metals and mining, industrials, and utilities sectors. Before
joining William Blair, she was a credit analyst on NN Investment Partners’ EMD
team. Before joining NN Investment Partners’ EMD team in 2018, she worked on the
firm’s multi-asset and performance measurement teams. Alexandra received a B.S.
in economics from Athens University of Economics and Business and an M.Sc. (cum
laude) in finance and investments from Erasmus University’s Rotterdam School of
Management. Luis Olguin, CFA, is an emerging markets corporate portfolio manager
on William Blair’s emerging markets debt (EMD) team. Before joining William
Blair, he was a senior portfolio manager on NN Investment Partners’ EMD team. In
that role, he had global portfolio management responsibilities for emerging
markets corporate credit as well as analyst duties across the Latin American oil
and gas, metals and mining, and industrials sectors. Previously, he was head of
equities for AFP Habitat, a pension fund in Peru. During this time, he was also
a professor at the University of Lima, where he taught several courses on
investment management. Before that, he was a director with financial and
managerial responsibilities for a family-owned conglomerate in Peru. He also
spent eight years in fixed-income research and portfolio management roles at ING
Investment Management (NN Investment Partners’ predecessor). Luis received a
B.B.A. from Emory University’s Goizueta Business School.  WilliamBlair is an
Associate Advisor Member of TEXPERS. The views and opinions contained herein are
those of the authors, and do not necessarily represent the views of WilliamBlair
nor TEXPERS. These views are subject to change. This information is intended to
be for information purposes only and it is not intended as promotional material
in any respect.   Follow TEXPERS on Facebook, Twitter and LinkedIn as well as
visit our website for the latest news about Texas' public pension industry.

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