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The Resource Bull Market You Didn’t See Coming – EVs and Battery Storage to drive commodity demand for the next decade

Anthony Milewski, Chairman of Cobalt 27

  
As the Chinese driven commodities “super cycle” wound down and miners’ balance sheets came under pressure globally, management teams, investors, bankers and observers alike were left to wonder when, where, and how the next commodities bull market would manifest itself. Commentators speculated that the next commodities super cycle was a decade off and would be driven by growth in India or possibly by the urbanization of Indonesia. While GDP growth and urbanization of emerging and frontier markets certainly helps commodities demand, almost universally investors, miners, and commentators failed to predict the bull market which is now upon us. Namely new demand for copper, nickel, lithium and cobalt, as well as a host of other commodities in the coming years, due to the electrification of automobiles and the knock on effect it has on power grids globally as well as battery storage technology which is revolutionizing the uses of renewable energy, solar farms, and making power cheaper and more accessible globally.

New technology does not always replace old technology. Most people don’t know that many of the first automobiles made were electric or that even in the 70s and 80s automobile makers were working on electric vehicles. It has taken a variety of factors, both economic and political, to get us to the point we are at now with the EV and battery storage – which is the verge of mass adoption. When I think about disruptive technology there are two principles I see repeated time and time again for technology displacement to occur – 1) cost; and 2) utility. In the case of the EV we are nearly at cost parity between EVs and gas powered automobiles. We are only a few years off from EVs potentially costing less than gas powered automobiles. Utility in the case of the EV has two components – battery rechargeability and battery range. The current EV range is already further then over 98% of Americans travel in a single day and the current charging infrastructure allows one to drive across the Continental US. In other words, almost without notice, the major barriers to the adoption of the EV have fallen.

Two years ago the penetration rate of EVs was almost zero today we are at approximately 1.8%. Wall Street analysts differ on their penetration rate views in the coming decade, ranging from 8% to 35% in 2025, with the average around 15%. If you extrapolate the forward growth curve, you are closer to 30% of new car sales in 2025 being EVs. Growth in the battery storage area is harder to predict, but antidotally we see companies like Tesla rolling out battery farms and technology investors such as Softbank investing in mines to get lithium off take to power the batteries associated with their technology investments.

What does this all mean for commodities? Simply put, a wave of demand for copper, nickel, lithium, and cobalt is coming that almost no one - miner, investor, or banker alike, anticipated or planned for. Exploration budgets have been slashed for almost a decade now, with a dwindling project pipeline. The large copper mines of the world are growing old and the new potential copper mines are located in challenging jurisdictions. Nearly 65% of the world’s cobalt supply is produced in the DRC. Water use issues associated with evaporate lithium production are calling in to question social licenses to mine in North and South America. And yet with all these challenges, demand for the underlying commodities only grows.

Consider this, as much as 15% of global copper consumption may come from EV and grid applications in seven short years (in fact, it may be much higher). The copper market is in relative equilibrium, what does a 15% increase in demand mean for copper? The cobalt market is 100,000 mt today. To meet EV and grid storage demand we may need as much as 350,000 mt of cobalt annually in 2025. The lithium market may need to double and a material short fall in class one nickel is developing. CRU estimates the average metals use per vehicle to be 84 kg of copper, 30 kg of nickel and 8 kg of cobalt.

To be sure, the story is far more nuanced. In grid storage applications batteries such as the vanadium redox battery are likely competitors to the lithium ion battery. The common battery chemistry in the NMC battery that powers the EV is likely to move from a 5-3-2 formulation to a 6-2-2- formulation and then eventually on to an 8-1-1. Money is also being spent on advancing recycling technology, which today is toxic, expensive and not practical. However, on average it takes over a decade from discovery to commissioning a new mine. Recycling technology and advances in processing technology are measured in years and not days.

We are now entering one of the most exciting commodities markets we have seen in decades. The way to play the adoption of the EV and grid storage is not betting on Tesla or Umicore. I have no insight in to which automaker is going to win the race in autonomous driving, mobility as a service off of their EV platforms. I have no view on which utilities are going to best utilize grid storage to displace current infrastructure. BUT, what I do know for sure that is so long as you believe the events discussed are going to happen, the basic materials that support the roll out are going to be huge winners.


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