Scratch below the surface of one of the world's most promising investment themes for the next two decades – electric vehicles - and you will not be surprised to find China is the single most important driver of growth and profitability.
China is at the forefront of the adoption of technologies to slash greenhouse gases. Its socialist market economy, which includes centralised control over industrial production, has led to the fastest uptake of electric vehicles of any country in the world.
China's shipments of electric vehicles in January were 38,470, up about 480 per cent from a year earlier, according to figures published last month by Japanese broker Nomura. In 2017 global shipments of electric vehicles hit 1.4 million, up 50 per cent on a year earlier.
China accounted for 76 per cent of global shipments of electric vehicles in December 2017, according to Nomura. These figures include plug in hybrid electric vehicles.
Over the past five years the most profitable way to ride the electric vehicle boom was to invest in mining companies that either produced minerals used in battery manufacture or were exploring for minerals that could be used in battery production.
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But the explosion of speculative interest in battery-related mining stocks, particularly those mining lithium, peaked in the last six months. This caused people to question where the industry was headed.
Pertinent questions were being asked such as: Is the lithium market as cyclical as every other commodity? Will new entrants be attracted by the excessive profit margins? Will there be an over-supply of lithium?
Fund managers who attended a seminar in Sydney this week hosted by Goldman Sachs were given an unvarnished view of the prospects for lithium and other minerals used in the manufacture of batteries.
Following a presentation by Bob Koort, who heads the Goldman Sachs research effort focused on the chemical industry and is based in Houston, 15 companies made presentations to fund managers.
The following companies (ranked by market cap) presented their wares: Independence Group, Orocobre, Pilbara Minerals, Galaxy Resources, Syrah Resources, Western Areas, Clean TeQ Holdings, Altura Mining, Global Geoscience, Neometals, Talga Resources, First Cobalt, Lithium Power International, Lithium Australia and Blackstone Minerals.
The share prices of some of these companies have been highly volatile with several doubling in value over the past year despite falling more than 20 per cent this year.
Koort gave a balanced view of the market for lithium stocks and other battery-minerals-related miners trying to crowd into the battery market.
He says he has been dealing with three groups of investors in North America: the thematic investors who think an electronic vehicle revolution is inevitable, the cyclical investors who treat lithium like any other commodity and the chemical investors who knew about lithium before it was the hottest game in town.
Koort says the thematic investors think the cyclical demand for lithium will overwhelm any fears of oversupply.
"They want to own the arms merchants to that EV revolution," he says.
"I will tell you they are shaken. But the true believers, the true zealots in the EV adoption curve will still continue to buy these lithium companies."
Koort says the cyclical investors are mainly mining analysts and mining investors.
"Frankly some of the hedge funds are gleeful that we have seen this sell-off, that it was inevitable, that companies were making too much, that it was going too far too fast," he says.
"The fact that you still have companies earning 60 to 70 per cent cash margins just suggests there is going to be an overflow of new entrants to take advantage of that. Even today, although we have seen reversals in these stocks, you have SQM, Albermarle, FMC, all in that 11 or 12 times EBITDA range which, if it is a cyclical industry, is too high."
Koort says the traditional chemical investors got a little concerned when the market got over heated.
"Now that we have seen a big pull-back, they are attempting to get involved again," he says.
"I think the challenge for that group of investors is that they need to see some catalyst on the horizon that can make them feel like the worst is over and maybe we have flushed out the negative sentiment and we can start re-establishing some enthusiasm for the space."
Investors pondering a punt on the minerals used in batteries that help power electric vehicles need to keep a watchful eye on China, which could make the EV revolution happen faster than lithium producers think.
