We expect major upheavals in the financial markets over the next few years. In this article we explain our cyclical framework for these challenging times and why you should invest in commodities now.
Published: 16th of June, 2021
t o r c k c a p i t a l m a n a g e m e n t
Energy Revolution – Part 4
Mineral Demand Driven by Electrification of Transport
30th of September, 2021 - torck capital management AG
In the last blog article on “The ‘Energy Revolution’ as a Demand Driver for Minerals”, we demonstrated how the acceleration of a transition from fuel-intensive energy systems to more material-intensive energy systems may translate into a new “super cycle” of rising commodity prices. There is a large scope for junior mining companies to play a critical role in orderly clean energy transitions by ensuring an adequate supply of minerals, which creates an interesting investment opportunity that has a leverage effect on rising underlying commodity prices.
The “Exponential Opportunities Energy Revolution Fund” concentrates on investments in junior mining companies that mainly explore and develop copper, lithium, nickel and uranium resources. To better understand the implications of the Energy Revolution on the demand for each mineral, the upcoming blog articles will discuss in more detail the transformational change taking place in the energy sector – which includes the generation, storage and distribution of electricity – and the electrification of fossil fuel dependent technologies.
Our first topic of interest is the adoption of electric vehicles (EVs) – a critical factor in all IEA scenarios aiming to achieve the decarbonisation of the energy system, where increasing transport electrification goes hand-in-hand with decarbonising the electricity sector. In fact, the transportation sector is responsible for approximately one quarter of global CO2 emissions, which are growing at a rate that is faster than in any other sector. It is also the only sector in Europe that recorded an increase in emissions since 1990. Within the transport sector, road transportation is responsible for over 70% of all greenhouse gas (GHG) emissions. And within road transport, passenger cars account for more than two-thirds of GHG emissions.
Therefore, passenger cars have become one of the most important targets for decarbonisation, whereby EVs have emerged as the most viable option to reduce GHG in the transport sector and become a critical factor to overcome climate change. In general, EVs provide overall climate benefits compared to other types of vehicles, if the electricity used to charge EVs has a carbon footprint similar to – or better than – a modern natural gas-fired combined-cycle powerplant. In the event that the world transitions to a net zero energy system by 2050, which is projected in the IEA’s Sustainable Development Scenario, a global EV fleet could reduce lifecycle GHG emissions by up to two-thirds compared to an equivalent internal combustion engine vehicle (ICEV) fleet (see Figure 1). Today, EVs already provide GHG emissions reductions of around 20-30% relative to ICEVs on a global average. The impact of a widespread EV adoption will further depend on battery efficiency and advancements in sustainable battery manufacturing and recycling.
At the end of 2020, the total number of EVs on the world’s roads reached the 10M mark – 1% of the total passenger car stock. This represents an increase of 43% from 2019. While the US is the second largest GHG emitter worldwide, it has lagged behind China and Europe in the EV take-up. In the US EVs comprise about 2% of the market, against about 6% in China, 10% in Europe and 11% in the UK. China is still the largest EV market, but for the first time its sales were overtaken by Europe. In a trajectory consistent with the 2015 Paris Agreement, the IEA estimates that the global EV fleet would need to grow to 70M vehicles by 2025 and 230M by 2030 (see Figure 2). As a result, annual battery demand could increase 20-fold to 3.2 TWh (see Figure 3), since EV batteries in the SDS account for about 85% of total battery demand. Currently, announced planned production capacity for EV batteries equates to a corresponding 3.2 TWh by 2030, which would be sufficient to cover the projected demand. Efforts must be made to ensure that all the announced production capacity is built on time and that factories rapidly increase their capacity factors, which are currently at 50%.
Policy support continues to play a key role in driving EV penetration and battery storage capacity additions, alongside a wider range of model offerings from automakers. In 2020, around 370 EV models were available in the market, a 40% increase from 2019. Throughout the 2020s, automakers are expected to embrace electric mobility more widely after several major automakers have already announced plans to invest aggressively in EVs and to rapidly scale up model availability. This year General Motors committed to phase out gas-powered cars by 2035, followed by Mercedes-Benz, Volvo, Jaguar and Daimler.
To address the issue that EVs currently remain more expensive than comparable ICEVs at the point of purchase, governments across the world provide purchase incentives to support EV sales. Although a recent MIT study has shown the full lifetime cost – including the purchase price, maintenance and fuel – for most new EVs on the market to be lower, the purchase price remains a critical purchase decision criterion. Total worldwide purchase incentives, which primarily came in the form of subsidies and/or vehicle purchase and registration tax rebates, reached USD 14B in 2020 – 12% of total consumer expenditure on EVs. Incentives were up 25% from 2019, mostly as a result of economic stimulus measures in Europe. Nonetheless, the share of government incentives in total spending on EVs has decreased over the past five years, suggesting that EVs are becoming increasingly attractive to consumers.
As EVs scale up, facilitated by technological improvements and purchase incentives, dealing with “range anxiety” associated with EVs becomes increasingly important. Range anxiety results from the need for recharging, potentially in areas and at times where public charging is not available or takes too much time. To further encourage EV uptake, it is vital to ensure a convenient and affordable publicly accessible charging infrastructure. Therefore, governments provide support for EV charging infrastructure through measures such as direct investment to install publicly accessible chargers that facilitate longer journeys or incentives for EV owners to install charging points at home.
In a collective attempt to stimulate the take-up of EVs, more than 20 countries have now introduced electrification targets or ICEV bans and 8 countries in addition to the EU have announced net-zero pledges. The carbon emission standards for new passenger vehicles proposed by the EU, set a de facto date to ban the sale of new ICEVs in Europe from 2035. China has set a target of 20% of vehicle sales to be emission free by 2025 and announced plans to phase out ICEVs by 2035. To put the US on a path to net-zero emissions by 2050, it is estimated that all new cars in the US also would have to be electric by 2035. This is because of the time ICEVs will stay on the road for.
The rising deployment of EVs in consequence of a phasing out of conventional vehicles is set to supercharge demand for critical minerals. A typical battery EV requires six times the mineral inputs of an ICEV (see Figure 4), which include copper, lithium, nickel, manganese, cobalt, graphite and REEs. In general, copper is the cornerstone for every electricity-related technologies. In EVs lithium, nickel, cobalt, manganese and graphite are in particular crucial to battery performance, longevity and energy density, while REEs are used for strong permanent magnets in electric motors.
According to the IEA, EVs and battery storage together could account for about half of the mineral demand growth from clean energy technologies over the next two decades. In the SDS mineral demand for use in EVs and battery storage grows around 30 times over the period to 2040 (see Figure 5). By weight, mineral demand in 2040 is dominated by copper, graphite and nickel. Lithium sees the fastest growth rate, with demand growing by over 40 times in the SDS. The shift towards lower cobalt chemistries for batteries helps to limit growth in cobalt, displaced by growth in nickel.
As governments are expanding their support for the widespread adoption of EVs and automakers seek to electrify their vehicle portfolio, bottlenecks in critical minerals for EVs and batteries are set to lead to new market disruptions. A shortage of semiconductors this year demonstrated the vulnerability of the “just-in-time” automotive supply chain, with global losses estimated at more than $110B. The issue that we now see lies within the cyclicality of commodity markets. When demand rises, supply takes time to respond because new mining projects have long lead times. The time lag, in turn, causes prices to spike, before overinvestments lead to a price collapse and the start of a new cycle. We are currently at the point where a new cycle is about to start and supply deficits are emerging. For this reason, we see a high potential for current exploration and development mining projects in top jurisdictions that focus on minerals critical for the electrification of the transport sector.
Continue reading with part 5 here.
About torck capital management
torck capital management is an asset management boutique based in Zurich. Well-established in the Swiss financial industry, our goal is for torck to become the leading boutique of choice for exponential opportunity investments. We aspire to both drive meaningful change with our investments and seize exponential return opportunities in times of market disruption. Our new “Energy Revolution Fund” – set to launch at the end of September – builds on the thesis that a worldwide clean energy transition will kick-start another “super cycle” of rising commodity prices, which was last seen in the early 2000s when China’s economic growth took off. With investments in hand-picked junior mining companies that ensure an adequate supply of minerals for the clean energy transition, we see the potential for our next exponential opportunity.
Follow our upcoming blog articles to learn more about how the clean energy transition will impact the demand for critical minerals and create a strong investment case for junior mining companies.