Electric Rain: Macro Opportunities from the EV Revolution
- Ten months into the year, the macroeconomic landscape remains broadly the same: Developed Market Equities continue to grind upwards despite valuations remaining high. Traders and investors continue to crowd into momentum-based trades. Volatility remains at historically-low levels and longer dated yields are stuck in a tight trading range. In an investment landscape like this, it helps to sometimes consider macro theses that exist outside the range of traditional asset classes. Thus, for this issue of the Global Macro Outlook, we will look into some of the trends in Electric Vehicles and how they relate to some of the biggest automobile markets in Asia.
- In September 2017, China (the largest market for automobiles) announced that it was in fact developing a timetable for the complete implementation of electric vehicles to replace traditional internal combustion engines within the next 25 years. This was on the back of similar declarations made by India (deadline 2020), Britain and France (both in 2040) to completely eliminate the sale and production of gasoline and diesel engines in the medium-term.
- While the secular shift in demand from ICE to EV technology has been discussed for some time now, a domain that appears to be more opaque are the opportunities for positioning in the raw materials for EV technology: namely, the cobalt, lithium, and nickel that goes into producing lithium-ion batteries. To demonstrate this, simply observe the historical chart below outlining the prices moves for these commodities in 2017.
- The historical data shows that strength in these commodity markets have been nothing short of parabolic. And certainly there a basic supply-demand factors that are driving these moves. Take lithium, for example. In order to build the 2.5 million electric vehicles expected for the year 2020, at least 90,000 metric tonnes of lithium is needed. The world annual production of lithium however, is at a mere 35,000 per year. Giving this massive imbalance in demand-supply dynamics, necessarily one factor has to give and that factor appears to be the meteoric rise in the Lithium ETF (NYSE: LIT).
- However, basic trading principles dictate that when prices are as high as these, it is rarely a good idea to enter at the market. In response to this, we can instead consider an alternative mode of exposure to the EV revolution: by considering a long position in Nickel. Like Lithium, Nickel is a key component in the production of the lithium-ion batteries that power electric cars. And also like lithium, Nickel benefits from the extreme imbalance in demand and supply dynamics: the world needs 2.4Mt of it by 2040, but annual production is at 2.2Mt.
- The key difference is that, unlike cobalt and lithium, nickel has failed to rally parabolically, instead behaving like a host of other industrial metals, as opposed to an ‘EV metal’. For commodity investors willing to play the long-game, this could offer a more attractive risk-return profile in the years moving forward. With China (the biggest importer of commodities) necessarily deleveraging in the next few years, one can be on the lookout for potential entry points into this exciting space.
By Nicholas Tan Wei Hong