Battery metals: Where is the electric journey taking us?

The age of electric-powered transport is upon us. And this is driving demand for batteries – as well as for their constituent metals. This article explores how commodity investors can benefit from this trend.

By Thomas Benedix, commodities expert at Union Investment

En route to the mass market: Worldwide, there were some five million electric-powered vehicles on the road in 2018, and by the end of 2019 that number is expected to reach more than eight million. A clear shift towards electromobility is also discernible in Europe’s automotive powerhouse. In 2018, Germany recorded a 44 per cent year-on-year increase in electric car registrations – and the trend shows no signs of reversing. Moreover, the increase in electric car sales comes at a time when car sales in general are in decline. This is partly due to political incentives – in Europe, China and the US, the purchase of an electric vehicle is subsidised.

Environmental concerns are also helping to push up demand. According to current estimates, electric vehicles are expected to have a market share of around 10 per cent by 2025, whereas only 2 per cent of today’s vehicles are electric-powered. Various factors will determine whether electric cars will ever truly enter the mass market. Price is obviously a key consideration, as is the range of the vehicle and the time it takes for it to charge. The car’s battery plays a crucial role here, particularly in terms of expense. The battery accounts for the bulk of the manufacturing costs for a mid-range car. So it’s no surprise that VW has announced its intention to enter the battery-making business in partnership with Swedish start-up Northvolt.

The heart of the electric car – the battery and its metals

The battery and its constituent metals form the heart of the electric car. But which type of battery technology – and therefore which metals – will prevail? This is also a question investors might want to ask themselves, so that they can tailor their portfolio to benefit from the battery trend.

Lithium-ion batteries provide the power for almost all of today’s electric vehicles. And there’s a good reason why: They are small, compact and powerful. But we need to look closer here. There are various kinds of lithium-ion battery on the market and they all use different types and amounts of metal. The cathode is the lithium-ion battery’s key component when it comes to cost, lifecycle and performance.

NMC cathodes are the most common variant at present. As per the abbreviation, they contain a mix of nickel, manganese and cobalt. This type of cathode offers a good compromise between performance, energy density and cost. But it’s important to distinguish between the different combinations of the metals. Whereas last year, most NMC cathodes were made up of five parts nickel, three parts manganese and two parts cobalt (NMC 532), cathodes with higher nickel content are likely to become more prevalent in the years ahead. This type of cathode is known as NMC 811, indicating that it contains eight parts nickel. NMC 811s are hardly used at all today, but Bloomberg predicts that by 2030, 61 per cent of all electric cars will contain a lithium-ion battery featuring this cathode.

There are several reasons for the shift from cobalt to nickel: Cobalt is currently twice as expensive as nickel. Also, the higher the nickel proportion, the higher the energy density, which means a more powerful battery. Many companies are also looking to reduce their dependency on cobalt, the mining of which is mired in controversy. The more nickel-rich variant is therefore likely to be very popular. NCA cathodes, which comprise nickel, cobalt and aluminium, will also become more prevalent in the years ahead. By contrast, the use of lithium-iron-phosphate cathodes will die away because of the relatively low power that they offer in lithium-ion batteries.

The big winner will be nickel

Nickel will therefore become more and more important, with demand likely to surge in the coming years. Currently, the metal’s primary application is in steel refinement. Only 3 per cent of globally mined nickel was used for electric car batteries in 2018, but that figure is set to rise to nearly 60 per cent by 2030. The metal is scarcer today than it has been for ten years. Stocks of nickel held by the exchanges have fallen significantly in recent months. It appears that industry is already beginning to build up reserves. But this scarcity is yet to be substantially reflected in the nickel price. One tonne of nickel is currently trading at US$ 11,800 – not all that far from its high of over US$ 15,000 recorded in May 2018. There is clearly still upside potential here. The more demand increases for the nickel sulphate used in batteries, the more significantly the price will move upwards.

Nickel is in itself not a rare metal. The deposits are there, they just need to be mined. Of course, that’s a question of price. More nickel mines will open only when there is sufficient profit to be had. The current prices are not yet at a level that will drive up supply. But we believe that if this situation is not addressed within the next five to six years, demand for nickel will exceed supply to such an extent that the market will experience an acute shortage. We therefore expect the nickel price to rise to US$ 15,000 per tonne over the next twelve to 18 months. This is assuming that the economy grows at a stable rate, otherwise demand for high-grade steel is likely to decline. From today’s perspective, we believe that nickel has the most to gain from the trend towards electric cars and battery power.

Potential for copper too

Copper is also likely to benefit. The metal is used not only in electric motors but also in power generation and in transport infrastructure. Supply is scarce for structural reasons, as in the past five to six years the development of new deposits has been neglected. A mid-range electric vehicle needs 80 per cent more copper than a comparable petrol-powered model. There is clearly a lot of potential for the metal here.

In the coming years, the demand for batteries is likely to favour copper and nickel. Many companies have already geared their production to NMC cathodes, and that’s not something that can be changed overnight. It’s clear, however, that huge strides are being made on the research front. In ten years’ time, new and more powerful battery variants could be mixing it up in the market and opening up new opportunities for your portfolio.

Unless otherwise noted, all Information and illustrations are as at 18 June 2019