Warp Speed Sulu
Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.
In Star Trek ‘dilithium’ crystals were rare. They were used to generate warp speed to travel the galaxy.
Although dilithium is an invented material, it is weird that 50 years on lithium, third in the periodic table and a real element, is centre stage when talking about future transport needs. Its main, and growing use today is for batteries powering electric vehicles.
Without doubt large strides in battery technology have brought electric vehicles (EV) to the forefront of engineers and creators minds when producing the next generation of cars. EV’s are increasingly becoming a realistic alternative to internal combustion engines powered by fossil fuels.
Demand for EV’s has also increased because of shifting attitudes towards climate change and a realignment in government focus. Government policies to promote the use of electric vehicles are underway globally.
In Germany, all autos are required to meet a 35% reduction in carbon dioxide emissions by 2030, whilst in the US, citizens are offered a tax cut between $2,500-$7,500 for choosing electric. Closer to home, the UK government has set goals of between 50%-70% for all new car sales to be ‘ultra-low’ emissions by 2030.
Consumers who are becoming increasingly environmentally conscious are targeting businesses and products that cause little environmental damage. Naturally, investors have also latched onto this trend with the development of Environmental, Social, and Governance (ESG) and Socially Responsible Investment (SRI) investment products. The knock-on effect is increased pressure on companies to adopt more environmentally friendly policies.
Global sales of EV’s are expected to grow exponentially, as illustrated in the chart below. For context worldwide sales of all vehicles amount to an estimated $39.8bn.
Title: Current and projected global new EV sales
Source: Bloomberg, data as of September 2019
One implication of EV’s becoming more popular is the need to continue to produce more batteries; and to keep improving battery technology. This produces increased demand for lithium the core element in most batteries. Lithium has certain properties, such as being lighter than other metals. This makes its use effective for batteries in EV’s because a lighter weight improves mileage capacity.
Despite favourable conditions encouraging EV production in the long term, some unhelpful trends are dampening near term demand. This is occurring mainly in China.
For example, Chinese consumers buy more electric cars than any other with new car sales in China being over 1m, this compares to over 300,000 in the US and over 50,000 in the UK. Favourable subsidies from the government, of around 50k Yuan (£5680), are paid to buyers of EV’s; provided they have a driving range of 250 miles. But this subsidy was cut in June by half to 25k Yuan (£2840). To put this into context, here in the UK the maximum grant available for an electric vehicle is £3,500. It doesn’t take rocket science to work out why demand has started to falter in China.
Weakening demand for EV’s feeds through to lithium suppliers and the price paid. In the chart below we show the impact on producers as depicted by the Solactive Global Lithium index; members being active in the exploration and or mining of Lithium or produce Lithium batteries. The blue (dotted) line is the price of lithium. In both cases prices have fallen after having risen dramatically from 2015 to 2018.
Graph : Lithium Commodity Firms Index vs Lithium Spot Price
Source: Bloomberg, Data as of September 2019
Over the long term the evidence to hand points to growing demand. Short term there are obstacles. The trade spat between the US and China’s is unhelpful, especially if it hinders governments ability to apply supportive financial subsidies. Battery technology also needs to evolve. Warp speed may still be fictional whereas extending mileage capacity and reducing cost are realistic goals. Batteries that last for over 300 miles, with a replacement cost much lower than the current price of £6,000, are needed. It would be fantastic if ‘Moore’s Law’ (the number of transistors on a microchip doubles about every two years while the price of a computer halves) can be applied to batteries. If applicable there are some interesting changes yet to come.
ESG refers to environmental, social, and governance practices of an investment which can have a material impact on the performance of the asset. SRI takes ESG one step further by selecting and or eliminating investments dependant upon specific ethical guidelines.