The EV Industry Faces Trouble with Sourcing Commodities

Editor’s Note: Welcome back to Jeff Brown’s prediction series. Over the next several days, Jeff will share his biggest predictions for the new year.

Today, we talk about the electric vehicle (EV) revolution. As Jeff says, EVs have a major hurdle ahead of them. And hardly anybody is discussing it. Read on…

Van Bryan (VB): Jeff, I’d like to ask you about what the electric vehicle industry looks like next year. I understand you have a big prediction along these lines.

Jeff Brown (JB): I do. But it’s worth taking a high-level look at where the industry is first.

There’s this misconception that electric vehicles are already widely adopted. Depending on where we live, it’s likely we’re seeing electric vehicles on the road every day.

But the reality is that we’re still in the early innings of what will be a multi-decade adoption cycle. It was really only in the last few years that we’ve started to see increased adoption.

In 2020, there were about 3 million EV sales worldwide. By 2021, there were close to 7 million. And 2022 is likely to be even higher.

So, this is incredible growth. But it’s still a relatively small part of the overall automotive market. This trend will play out over years and decades.

VB: And you believe this adoption cycle won’t be as easy as many believe. Is that right?

JB: That’s right. Governments – including the United States – have set very aggressive targets for EV adoption. But what most seem to be ignoring are the commodity constraints.

The cars themselves aren’t really the problem (i.e. the steel, materials, and electronic components). The constraints are going to come with the batteries, specifically with the commodities needed to make these batteries. They’re really the long pole for the industry.

Lithium is a perfect example. It’s a major input for lithium-ion (Li-ion) batteries used in most EVs. And there just aren’t enough lithium mines in the world to produce enough of the commodity to meet the aggressive targets set for EV adoption.

I gave a presentation on this topic back in March. And I shared a chart that showed the cost to produce an EV battery had been declining for years.

But in 2022, something unexpected happened. The cost to produce an EV battery increased. And this has everything to do with rising commodity costs.

VB: Why do you think the cost of EV battery metals are on the rise?

JB: Part of it has to do with all the supply chain disruptions we’ve had over the past few years. And in the wake of the lockdowns, we had plenty of miners simply shut down. But we’ve also had a tidal wave of new demand in recent years.

We should remember that for years, there was only one automotive company generating significant demand for these metals. That was Tesla.

But in the last few years, virtually every major automaker has launched – or has plans to launch – an electric vehicle. They’re all desperately trying to catch up with Tesla.

Toyota, GM, Ford – they’re all in. And that’s before we consider the new upstarts like Rivian, Lucid, and several others.

It’s a straightforward equation. More demand battling for less supply means prices go up. It means that these electric vehicles are more expensive to produce. And it’s created something of a landgrab for these metals.

And since the cost of the batteries make up the largest percentage of the cost of an EV, this will impact the rate of adoption, as most EVs will remain more expensive than their internal combustion engine (ICE) equivalents.

VB: You also pointed out that the need for more battery metals could have a connection to the war in Ukraine. What was your conclusion there?

JB: What most don’t know is that there’s about 500,000 tons of lithium oxide under the Ukraine. It’s probably the largest untapped lithium oxide reserve in the world.

My suspicion is that one of the motivations for the U.S.’s proxy war there is to ensure that the supply of lithium stays accessible for future exploration to the West.

Is that the only motivation? No. But I certainly think it’s a big incentive.

VB: That turned out to be a controversial conclusion for some.

JB: It was. And I was a little surprised. After all, nations have been waging wars for access to strategic commodities for literally centuries. In the past, that might have been access to agricultural land or oil.

Is it so controversial to suggest that access to lithium and other metals is one motivation for some of these geopolitical conflicts? And if this is a zero-sum game, what wouldn’t nations do to maintain access?

And we won’t hear this from the mainstream media, but there are numerous biological laboratories throughout the Ukraine that are funded by the United States Defense Threat Reduction Agency (DTRA). 

I’ve even reviewed documents myself posted on the website of the U.S. Embassy in the Ukraine that outlines the support for these laboratories. The documents even name a U.S.- based contractor from Kansas City – Black & Veatch – as the integrating contractor.

I only mention this to demonstrate that what’s happening in the Ukraine isn’t “clean.” The conflict isn’t about some virtuous stand against Russia. 

Earlier this year, CBS reported that only 30% to 40% of the aid being sent by the U.S. actually gets to where it needs to go. The rest is siphoned off for other purposes – none of which would make U.S. taxpayers happy.

Maybe some subscribers think I went out on a limb.

But it’s very naive to think that the U.S. is spending $100 billion supporting the Ukraine – more than the U.S. spends on its own U.S. infrastructure (roads, bridges, etc.) – just to take a philosophical stand against Russia, and that 100% of the aid is getting to where it needs to go with no accounting in place.

Just look at the pandemic policy program – the Paycheck Protection Program (PPP). Even NBC News calls it the “Biggest Fraud in a Generation,” claiming that more than $400 billion was stolen. 

If the current government can’t properly manage and account for a domestic aid and stimulus program, is it that hard to believe that there’s corruption associated with the $100 billion and growing being sent to the Ukraine?

I know that topics like this are uncomfortable to think about. None of us want them to be true. After all, these are U.S. taxpayer dollars, and there are clearly domestic needs. But as an analyst, these are the facts – whether I like them or not. 

And the Ukraine’s lithium oxide reserves are critical for the U.S. EV battery production goals. It won’t solve the shortage in metals for battery production, but it’s a critical resource for future production.

We’ll of course be tracking this closely, and I’m confident that we’ll see this play out over the next couple of years. 

As the conflict eventually gets resolved, let’s watch and see which Western miners announce major deals for new lithium mines in the Ukraine. By then, the whole picture will unfold. And I think it will be obvious to all. 

VB: Let’s pivot back to what these shortages mean for the automotive industry. Why is it a problem?

JB: The industry has always had a target in mind for the cost of electric vehicle production. The idea is that once battery production costs reach around $100 per kilowatt-hour (kWh) , then the cars will be comparable to an internal combustion-engine vehicle.

In other words, the cost to the consumer would be roughly the same as a traditional car.

I actually think the number needs to be a bit lower, but that $100 per kWh target has been long-held by the industry, including Tesla.

And for years, it looked like that target was inevitable. Battery production costs have been declining year after year. And the idea was that it was only a matter of time before we got to that $100 per kWh mark.

But it hasn’t happened. Many of these automotive executives either misunderstood or simply ignored these market dynamics.

And this is going to be a major problem for automakers, especially those that have gone “all in” on EVs in the past two years. Ford is a perfect example.

Ford recently unveiled its Ford Lighting. It’s basically an electric version of the F-150. Pre-orders were sold out almost immediately. But then something happened. Ford raised the prices on the trucks.

When the truck was first announced, the base model was $40,000. But the economics didn’t make sense for all the reasons we just discussed. Ford had to raise the prices to $53,769. That’s a big increase.

Meanwhile, the very basic model of the F-150 – with the internal combustion engine – can usually be purchased between $35,000 and $40,000. And of course, this truck has a longer range and can easily be refueled at any gas station.

So, what’s a consumer going to do? They’re going to buy the F-150.

And I know some will say that there are still plenty of tax incentives for electric vehicles. And that’s true. But is that really our long-term plan? That governments will subsidize electric vehicles forever?

Subsidies have been in place for more than a decade, and they continue. And the reality of rising commodities prices has thrown a wrench into the timeline when many EVs can reach price parity with ICE equivalents.

As I look into 2023, I predict that we’ll see one or two EV manufacturers lower their production forecasts because they simply don’t have the batteries to “fuel” their EVs.

The industry, and the U.S. government, is going to learn a major lesson over the next couple of years.

VB: Would any company be immune?

JB: Maybe unsurprisingly, Tesla is in the best position right now. The company has been ahead of the curve for years.

The reality is that Tesla is the only EV company that’s been aggressively and proactively putting in place supply agreements with mining companies years in advance of current production. All other automakers are scrambling to catch up. 

In 2020, Tesla announced it had purchased the rights to a 10,000-acre lithium deposit in the Nevada desert. And earlier this year, Tesla signed a deal with a nickel mine in Minnesota to buy 75,000 tons over the next six years.

And as usual, there were plenty in the mainstream press who didn’t understand this. Why is Musk getting into the mining business? But it was precisely for this reason. It was a brilliant chess move. And it’s paid off.

This year, Tesla said it was able to directly source 95% of its lithium hydroxide. About half of its cobalt was directly sourced. And it was about one-third for nickel.

This is a remarkable competitive advantage. And I don’t think people realize the long-term benefits this will give Tesla. 

Even Tesla’s EV battery technology is a competitive advantage, minimizing the amount of cobalt needed for production – an expensive metal that comes from volatile markets with poor labor practices.

So, we could be looking at a scenario where other automakers either stall or stop production of new EVs next year while Tesla carries on.

VB: And probably the most important question: What should investors do with all of this information?

JB: The obvious answer is also the best one: Go straight to the source. Invest in the companies that mine and refine these metals like lithium. It was actually Elon Musk who said lithium refiners have a “license to print money.”

And that’s what we’ve done. Just last month, we added my favorite lithium miner and refiner to our Near Future Report portfolio. 

Select commodities have been one of the only areas in the markets that have delivered positive returns this year.

While historically The Near Future Report has focused on technology and biotechnology companies, I call it the “Near Future” for a reason. I’m focused on what’s growing right around the corner – it doesn’t matter what the industry is….

So I’m excited to see how that investment develops next year.

[Editor’s Note: Subscribers to The Near Future Report can catch up here. And if you’d like to join Jeff’s flagship letter for the new year, we’d love to welcome you. Learn more right here.]

And longer term, there will be some very interesting investment opportunities around new battery technologies like solid-state batteries.

And I would like readers to know that just because I’m pointing out these headwinds doesn’t mean I’m not excited for the future of electric vehicles. And by understanding the nuances of this industry, we’ll be able to find some truly incredible investments.

VB: Thanks, Jeff.

JB: Anytime.

Editor’s Note: We’ll be back tomorrow with a new prediction from Jeff Brown. We’ll discuss the future of 5G and a looming consumer electronics “craze” that could replace all smartphones. You won’t want to miss it.