The electric vehicle (EV) revolution is gaining momentum. And there is one country that is leading the charge in this revolution.
China wants to see nearly 5 million new EVs on the road by 2020. Starting this year, EVs must account for 10% of sales from automakers in China.
The ambitious goal for electric cars will require a massive production of EV batteries. Automakers are turning to mega factories.
In 2014, Tesla broke ground on its Gigafactory 1 in the Nevada desert. But China is now home to six out of seven of the largest mega factories.
Now other Asian, European and American automakers are in a rush to catch up. Urged on by the success of Tesla and government mandates, many are transforming into EV makers.
General Motors, for example, is planning to offer 20 new EV models within the next decade. And Volkswagen plans to offer 27 electric cars by 2022.
With demand no longer in question, automakers are rushing to build mega factories of their own. Toyota recently partnered with Panasonic to advance its battery technology and build a mega factory as well.
Even with billions of dollars flowing into battery factories, the price of battery metals is collapsing.
A 2017 estimate of supply shortages spurred rallies in metals including lithium, cobalt, nickel and even copper.
Two popular battery metals, lithium and cobalt, are down 60% from their highs last year. Nickel saw a softer fall of about 7%.
The reason for the collapse is an agreement between five Chinese metal companies. With the support of President Xi Jingping, this consortium is carving a new path to supplying its nation with EVs.
But there is a crucial issue that complicates the goals of automakers: a shortage of refined metals for the EV batteries.
A Solution to Unrefined Metals
EV batteries call for a higher grade of metals.
Only refined forms of nickel and cobalt are adequate to make batteries capable of storing enough energy without exploding.
Nickel pig iron, as it’s known, is an unrefined form of nickel. It’s made from nickel laterite, the most abundant form. It’s used to make stainless steel. While cheap and abundant, it doesn’t work in batteries.
Nickel sulphide is the rarer form of nickel. It’s usually found deeper underground and in smaller quantities.
Cobalt shares a similar story. Cobalt sulphide is the form required to make the cathode in EV batteries.
Lower-grade forms of both metals can be refined into the sulphide forms, but it’s not an easy process. High-pressure acid leaching (HPAL) is used to turn raw forms into battery-grade metal.
But HPAL is challenging and often runs over budget and time.
Major iron miner Vale is still struggling to bring its HPAL system up to full operation. It is six years behind schedule and will require an additional $500 million for improvements.
The Chinese consortium is proposing a solution to the expensive process by looking to build an HPAL system in record time.
Five Chinese companies partnered late last year to accomplish the task. They are promising to deliver a fully operational system in under a year and at a cost of just $700 million.
If successful, the consortium’s nickel mine in Indonesia will flood the market with refined nickel sulfide. Partners will supply cobalt from other mines for refining at the plant.
Any sign that the Chinese consortium lags on its HPAL system could spur higher prices in nickel and cobalt.
A total failure of the project would likely send prices of these metals to all-time-highs. But there is a metal that will withstand the uncertainty ahead.
Copper Shortage by 2022
The HPAL project is filled with uncertainty. Wood Mackenzie, a global commodities intelligence firm, stated that the project is “not realistic.”
Many within the industry are skeptical of the timeline and budget of the project. But if the Chinese want to dominate in the EV arena, they will need to find a solution for sourcing high grades of nickel and cobalt soon.
Unlike nickel or cobalt — which may never see higher prices again — the shortage in copper is coming. Estimates indicate a 193,000 metric ton copper deficit by 2022.
Copper is a basic ingredient for batteries. It is also heavily used in charging stations. Copper’s rally isn’t dependent on a technological breakthrough. Prices will rise as the EV revolution pushes forward.
Consider Global X Copper Miners ETF (NYSE: COPX) to gain exposure to the upward trend in copper. The exchange-traded fund (ETF) holds a basket of the world’s largest copper miners.
Matt Badiali and I recently sent readers of Real Wealth Strategist our best copper mine pick. It’s a project being developed just outside of China’s walls.
This company is set to reach peak production just as the deficit peaks to 2.4 million metric tons by 2025.
Good investing,
Anthony Planas
Internal Analyst, Banyan Hill Publishing