Tesla’s success drives the battery metals race

Tesla’s remarkable 290 per cent share price rise over the past four months has been dismissed as speculative overkill, but even if that’s true it is hard to ignore the pace at which its electric-powered cars are selling - and the amount of battery metals they’re consuming.

 Most recent comments about Tesla, a pioneer of the electric vehicle (EV) revolution, have been about its share price and $US260 billion stock-market value, with little attention paid to the 90,650 cars the company delivered in the June quarter.

The rise in the price of US-based Tesla from a low in mid-March of $US361 a share to last sales at $US1417 means it is worth more than all other US car makers, combined.

Ford, for example, at a stock-market value of $US27 billion, is worth roughly 10 per cent of Tesla even though it is beefing up its EV offering, including a range of electric Mustangs. BMW, Mercedes, Toyota, General Motors and even Ferrari are following Tesla into the EV business and, while consumers and car writers can debate the merits of what’s being offered, the value for Australian investors is what’s consumed in making an EV, especially what goes into its batteries.

Lithium, nickel, copper and cobalt are four of the metals hooking a ride on the shift to electric-powered vehicles and away from petrol and diesel, which are increasingly being squeezed off the road by government regulation.

There is, of course, nothing new in this shift towards EVs. It has been underway for the best part of a decade and, while it has been a slow burn in the early years, there are clear signs of the industry accelerating.

Some investors suffered losses in the initial burst of enthusiasm for battery metals, which petered out when demand projections proved excessively optimistic and prices crashed, especially for lithium.

But Tesla’s success is a reminder that the underlying thesis for investing in battery metals has not changed and, while growth in the EV industry will not be a straight line up (nothing ever is), the trend is unmistakable.

Citi, an investment bank, summed up the redeveloping case for investing in battery metals in a recent comment about lithium:

“Recession might be coming but climate change isn’t going away, and EV related metals demand isn’t either,” the bank said.

The challenge for investors interested in EV metals is to recognise that shifting a century-old industry based on burning oil to one based on storing electricity will not happen overnight, and nor will there be a quick conversion of consumers to battery power.

Range anxiety (can I get home?) and charging stations (where are they?) are questions that must be answered before there is a wholesale shift to EVs.

But as more consumers recognise the inevitability of the change, and EV demand rises, there could be a stampede to secure supplies of battery metals – with early signs of a rush developing.

BMW has made a number of moves over the past month to shore up its supply of batteries and battery metals, agreeing to buy cobalt worth $US150 million from a Moroccan miner, Managem, while sourcing the rest of its cobalt requirement from Australian producers, including Glencore’s Murrin Murrin mine in WA.

Those deals contain a positive message for local investors. Firstly, that Australia has most of the raw material that goes into the long-life, rechargeable batteries used in an EV, and secondly that Australia is an environmentally responsible provider.

BMW could have sourced its cobalt from the world’s biggest producer of the metal, the Democratic Republic of Congo, but deliberately by-passed that troubled country because of the potential for a backlash in Germany where ESG (environment, social and governance) issues are closely policed.

Tesla, too, is on the hunt for “responsible” battery metals, with its outspoken founder and chief executive, Elon Musk, last week calling for nickel miners to lift production to avoid a future shortfall.

Musk said, when releasing Tesla’s second quarter earnings report, that he was prepared to offer a “giant nickel supply contract for a long period of time” to a miner that was extracting metal in “an efficient and environmentally sustainable manner”.

Nickel responded with an immediate rise of 4.2 per cent, taking the recovery since mid-March to 21 per cent as the metal has risen from $US5 a pound to $US6.07/lb.

Battery supply and the cost of batteries (sometimes referred to as cells) are a dominant consideration for all EV makers, making up an estimated 45 per cent of an EV’s cost.

“The real limitation on Tesla growth is cell production at an affordable price,” Musk said.

Having achieved a lead of several years over his rivals, Musk is determined to remain at the head of the pack, which will not be easy given consumer attachment to better-known car brands.

A Toyota or Mercedes driver, for instance, may well choose to stick with a known product than shift to a relatively new startup.

Accelerated production is a key to Tesla staying ahead and, to achieve that, Musk has just ordered the construction of a fourth vehicle assembly plant, the second in the US, to match two already operating in China. The pace at which Tesla is increasing its sales has left rivals standing.

From 100,000 a year in 2017, the target this year, even with the COVID-19 pandemic, is 500,000. By 2025,Tesla expects to be producing two million EVs a year.  

For Australian investors, the best exposure to the growth of the EV industry is through locally-listed battery-metal producers though, as with the first flush of the sector, it will be important to select carefully and to be patient because metal demand and EV sales will not be coordinated.

Right now, there is a residual overhang of surplus lithium and no obvious shortage of nickel or copper, the three metals which are naturals for Australia. Morgan Stanley, an investment bank, last week held a conference call with analysts from the leading commodity forecasting consultancy, Benchmark Mineral Intelligence.

Their view is that the price of lithium will remain under pressure for another year as a surplus of 50,000 tonnes of lithium is absorbed by EV makers, and the owners of mothballed mines wait for an opportunity to restart.

Lithium market balance should be achieved in 2022, Morgan Stanley said, adding that demand had been delayed “but not derailed”.

Another feature of the next phase of the battery metals industry will be a push by original equipment makers (OEMs) to take greater control of the supply chain.

“As batteries represent 45 per cent of the cost of an EV, OEMs want to make sure there are no bottlenecks in the supply chain,” Morgan Stanley said.

Conservative investors can get exposure to battery metals through the big miners, especially BHP with its extensive copper interest and reborn love of nickel.

Rio Tinto also has copper but no nickel and only hints of lithium exposure.

It’s down among the pure lithium producers that the biggest bang for bucks might be found, even among companies which scorched their followers in the price crash of three years ago when lithium carbonate (one of the ways the metal is sold) plunged from $US20,000 a tonne to $US7000/t.

All the pure-play lithium stocks have started to react positively to Tesla’s EV success. Orocobre, which has its best lithium interests in South America, has followed in Tesla’s tyre tracks, rising by 54 per cent since mid-March to last sales at $3.17, roughly half-way back to its early-2018 high of $7.24.

Pilbara Minerals, another high-flyer of a few years ago, is up an eye-catching 150 per cent since mid-March, though that only means it has grown from a depressed 14c to 35c, which is well short of its early-2018 high of $1.20.

Lithium stocks have a long way to go before reclaiming their past peaks, and that might not happen for another year, or two, but the news from the EV market and industry leaders like Musk is promising.

As Morgan Stanley said, demand for batteries has been delayed, not derailed.