Why the EV is not dead – just tamed by the market

The last weeks haven't been kind to you if you were a strict believer in the so-called 'transport transformation', with news of severly scaled-back plans in terms of the transition by car manufactures to fully electrify their fleets. The Mercedes example below illustrates what is being thought in many CEO floors:

The Electric Vehicle (EV) reality revisited: Technology aspects

As I posted on Facebook a while ago, Mercedes-Benz was one of the more prominent producers of EVs to basically say ‘EVs are great – but maybe not that great’. The wider buyer sentiment in the European and North American markets underlined that statement. EVs are being sold, and every year more of them. As I wrote in my lithium blog, the story of EVs is not as bad for a new, disruptive technology. Because developing such technology is one thing, enabling it to penetrate markets another.

But there are two downsides to the EV story: One is that electric propulsion requires a whole new web of supporting infrastructure in the form of decentralized charging stations. And here, not only are costs a problem, but also regulatory aspects, often boiling down to the question of who is responsible (cities, or car manufacturers)? More, the raising demand for electricity is pulling heavily on the capacity of power suppliers and power grids to produce and distribute this increased demand. At least, due to the increasing demand for electricity, prices for it are likely to go up, changing the economics of buying an EV in the first place. On the other hand, diminishing demand for petrol may lead to lower prices that has to be paid for crude.

Old and new problems: Range and value preservation

Other technical issues are at the level of an individual car, with still more than mediocre range, which is further diluted when the car has to carry heavy loads, has to go uphill or operates in the cold. If all three factors come together, your daily range is almost down to the level of a donkey cart. Given that many EVs are still in the luxury range in terms of prices, an increasing number of buyers gets frustrated when their neighbour in his 20k petrol car tells them that they had managed the 750 kilometer/500 miles holiday trip in 8 hours, instead of 11 – whereas the time difference was accrued thanks to multiple charging stops.

Last but not least, a new problem recently emerged, which wasn’t that much visible in previous year. And that has to do with introducing EVs into the used-car markets. Now that EVs are slowly on the road in serious numbers, it becomes also much clearer how they will behave as a second-life product. The short answer is…well, not too good here either. Anyone owning a laptop or mobile (so almost everyone) has made the experience that after 3-5 years, depending on usage, the power of the battery gets less and less. Meaning you have to recharge more often, whereas durability is decreasing. Since most EVs are leased cars, they enter the used car market after 3-4 years. Hence, this weakness might not have become obvious in their first ‘used-car life year’, but after the second or so.

Their already questionable range gets further reduced. Few people would be willing to buy a car for still 40k (dollars or euro), that barely does the 150 miles / 200 kilometer distance – under optimal conditions that is. This will further push prices down, making it more and more risky for leasing companies who are responsible for a lion share of the EV fleet to acquire these cars. This is because the used car price has to be factored in in order to calculate the monthly leasing rate. The other alternative is to substantially increase the monthly leasing rate for EVs – but that will further reduce attractiveness to buyers.

So, like with the introduction of any new technology, hick-ups are normal, but they can be come by with improving supporting technology along the road. If you just compare the many of perils with flying in the 60s and even the 70s, where large-scale accidents with hundreds of passengers dead were not that uncommon with flying after the 2000s, you know what I mean. Using planes as a means of mass transport was still quite a new technology in the 60s, and many areas where not well known or understood. It took humanity a while to work that through before arriving at the safest mode of travel that commercial flying actually constitutes today. no

Luckily, ridiculous ranges and low used-car prices won’t result in equal numbers of deaths. It is just a severe problem for the car manufacturers, but as I wrote, commercial pressure will push the range of new developments.

The Electric Vehicle (EV) reality revisited: Political aspects

The biggest problem though for car manufacturers however is another one: While there was SOME demand by customers for EVs, the issue with giving birth to this segment was its political roots: Politicians in North America and Europe pushed for ‘transformation’ of, according to whom you would like to listen to, the transport sector, the transport & energy sector, the whole economy, our whole ways of life and so on.

I will spare you discussing the usefulness of transforming ‘everything’, especially coming from people who could hardly transform a non-working lawn mower into an operating one. Transforming even a whole sector is all but easy, and history provides few examples where state-guided transformation was anything but a disaster. Ok, early communism in Russia was actually not without success in transforming a backward, illiterate agrarian society into a largely industrialized one – if you don’t bother about a few million victims along the road.

Simply put, politicians neither understand much of technology and engineering, nor about market mechanisms, and how innovation, market mechanisms and demand/supply systems and signals are interconnected. Fuzzing around in such complex systems is a receipt for disaster. But back to the EV market: Unfortunately for the car industry (or maybe they don’t deserve our pity since they naively left all principles that made them successful corporations in the first place behind them), they followed political scene-setting without much interference. A few years back, you could see all the billboards by various carmakers reading along the lines of ‘all future is electric’. Maybe they forgot to add ‘and we don’t care about customers tastes’.  A number of CEOs stated at what time they would carry their highly successful and popular diesel and petrol engine to their graves. Some at 2030, as the EU wanted them to do, but some even envisioned earlier dates. Complying with politics seemed more important than with customer tastes.

Based on that, the demand scenarios for battery metals such as lithium, cobalt and others were projected. And that was not wrong, because politics commanded this tough form of ‘transport transition’, simply because it felt powerful enough to do so, and, as outlined above, industry followed like a flock of sheep. For that reason, we had seen this enormous hype in key battery metals, first and foremost in lithium. Questions around ‘will we have enough metals in the ground to feed this market?’ were replied even before the 2020s with ‘no – we don’t’. We would have seen most likely a much stronger and longer run for lithium were if not for the corona policies which made a rough cut. But the run re-ignited again after 2021, as the political commands came back, as did negative supply projections for lithium.

Re-shaking the cocktail: Will car manufacturer CEOs let markets and customers rule again?

So, now the big, multi-billion question is this: Does the recent pull-back (note: it is not a pull-out) by Mercedes, Ford and others ring the bell for lithium and battery metal markets, and for profitable investments in these sectors? Should investors stay away from this market?

Here comes the multi-billion answer: Hmmmmmm!

Ok, now seriously. As I explained above, I don’t see the death of the EV industry, but rather a realignment with reality, and…surprise, with market forces. This sad chapter of industry leadership, where highly educated engineers simply follow the orders of a bunch of politicians without giving a thought to customers, infrastructure requirements, availability of raw materials, and, last but not least, their own tradition, success stories and cultures is hopefully over, or at least it will be readjusted

As such, most car manufactures will continue to build, and to develop so-called internal combustion engines (ICE) models, but also continue to develop their EV range, in which the hybrid-lines (i.e plug-ins that combine an ICE with an electric engine – requiring considerably less metals than a 100% electric model) will become more prominent again. That will lead to better batteries, and more competitive prices, as we will see more models by more suppliers. For the next 10 years or so, EVs will not become a mass-product, but their share in the total automobile sector will increase. And since this sector is huge, and growing, EV production will continue to grow substantially over the next 10 years as well. This is what I have been writing about the penetration of EVs into global automotive marktes before, based on claims by the International Energy Association, the Global Battery Alliance and McKinsey:

50% is not 100%, and indeed, increasing the share from 50% onwards will get slower the closer we get to the 70% to 75% range. In my sense, this assumption is pretty much in line with the Mercedes' CEO assessment we talked about in the beginning.

The unavoidable growth of the EV market under market conditions

Hence, ICEs won’t be replaced by 2030, nor by 2035. EVs will not be available in sufficient quantities to allow that, and not all of the issues I have outlined initially will be made away with. But independent of that, EVs might well cover 50% or more of total annual sales between 2030 and 2035. Industry will push for this, supported by subsidies and similar measures, but all of that will proceed at a lower pace, and less aggressively than originally anticipated by some.

Profiting from battery metals under 'realistic scenarios'

Coming back to investment options:  Even this slower, or lets say, market-oriented growth will require significant increases in the production of key battery metals like lithium, copper, nickel and graphite. Because meeting even the 50% market share, a rougjly 25% - 30% annual growth in lithium production will be required. This is again from my previous article on lithium:

As such, there is profit to be made when investing in these metals, either directly, or by buying shares of miners, or my favourite option, by getting involved in their exploration process.

But when the EV industry gets more market oriented, mining or metal investors need to do the same: While between 2016 and 2018 almost any lithium exploration project could manage share price increases at least for some time (and again so in 2022-2023), investors in the Junior Mining market now need to look a bit closer at the quality of their projects: Not just any project is good enough, and markets (i.e. lenders) will be much more selective. But what is clear is this: A lets say lithium project that actually will provide battery-grade lithium (as far from every lithium deposit has this distinct quality), has an above-average resource or reserve, is low-cost and located in a safe jurisdiction, the chances for making sound profit are still high. Again, one need to be more careful what is being selected.

And there is one other, very important aspect that investors need to be aware of in the battery market: Technological change and the drive for substitution. This is a key issue in this industry. It is not requited to be a technical battery specialist, metallurgist or anything. But one should read regularly (at least monthly) in a respected news provider on this topic about upcoming essential trends. This is what pushed cobalt out of the record price level a while ago: The metal got so expensive, and given its supply delicacies (the bulk came from the DR Congo, which has a notoriously bad reputation for mining standards), innovators pushed hard for reducing the role of this metal in EV batteries. Lithium for instance will not be pushed out tomorrow, but it MIGHT have a reduced role in batteries that are being developed in a few years, and that would come onto the market another few years later. So, follow these developments regularly and you will still find plentiful opportunities to strike it big in the Junior Mining sector for battery metals.