The first question you have to ask about electric vehicles (EV) is simple.
Is it for real or just hype?
I have been an EV skeptic for a long time but a deep dive throughout the last year has convinced me that the industry is on a growth path that is very likely to accelerate.
Why?
The most important reason is China.
Electric vehicles are a winning proposition for China because they help solve two big problems. China’s air pollution problem in its severely congested cities is one. The other is a platform to generate significant jobs and help the country capture the commanding heights of the global economy – the key goal of itsChina 2025strategic plan.
EVs represent a huge market to take advantage of economies of scale for 1.4 billion consumers, and will create a blend of employment and technology that will drive economic growth for decades to come.
Daimler will begin making electric cars in China in 2019.
There is a reason beyond China’s market potential for automakers like Daimler to come to China – it is the source for many of the materials that go into EV batteries and motors such as rare earths and rare metals.
More on this issue in a moment but first let’s look at the rapidly advancing landscape of electric vehicles and the breakthroughs making EVs more efficient, inexpensive and practical.
EV Market Approaching Takeoff Point
While almost every expert predicts China will be the dominant market for electric vehicles, the momentum is building across the world.
- Global electric car sales were up 68% for 2018 reaching a global market share of 2%.
- U.S. electric car sales were up 138% year over year hitting a 2.5% market share thanks to Tesla, which has recently hit 50% of domestic new electric car sales.
- Bloomberg states that “Even the world’s biggest miners are switching to electric vehicles.”
- Israel aims for zero new gasoline, diesel-powered vehicles by 2030.
- Starting in January 2020, all major manufacturers operating in China, have to meet minimum requirements there for producing new-energy vehicles.
- UBS, a leader in research in EVs predicts that the global market for electric vehicle batteries in 2025 could be 10 times bigger than in 2018.
- Volkswagen is spending $50 billion by 2023 to develop electric cars and self-driving vehicles.
- Porsche has developed technology that adds 62 miles (100 kms) to the Porsche Taycan’s range in just 4 minutes.
- Irvine, California based Rivian has launched an all-electric pickup truck with unbelievable specs. This revolutionary company is electrifying trucks and SUVs, because they are often the most-polluting vehicles on the road.
The (above) Rivian electric drive platform delivers remarkable power and torque through four independent motors – with 200 horsepower available at each wheel.
- And Waymo has finally taken the driver out of its self-driving cars launching a service in Phoenix, Arizona.
What all this evidence points to is that we are approaching a takeoff point for sharp growth for EV markets.
The stakes are high – the current global auto business generates $2.5 trillion of sales each year.
The world’s automakers are in the beginning stages of a massive transition to electric vehicles and, while the build up often takes more time than expected, the takeoff is oftentimes explosive.
Things take longer to happen than you think they will, and then they happen faster than you thought they could.
— Economist Rudi Dornbusch
You have probably read and heard a lot about lithium and cobalt over the past year. They do play a key role in the production of electric vehicle batteries. Investors jumped on this story in 2018 sending cobalt and lithium stocks soaring.
But in the last quarter of 2018, cobalt stocks came back to earth as cobalt prices fell from $40 a pound to $25 a pound.
But stay tuned for new EV battery investment ideas as ongoing and intensive research is searching for the next generation of electric car batteries.
All across the globe from America to Japan to China to Germany the race is on.
GM, Ford, Toyota, and BMW all know that the key to the electric vehicle (EV) story really taking off is a battery with much shorter recharging times and much longer range from one charge.
The Rare Earths Factor
A key ingredient in EV technology overlooked in the mainstream financial media is rare earths.
Since the 1990’s, China has become the Saudi Arabia of rare earths as the country’s favorable geology, low cost labor and lax environmental standards allowed it to produce about 85% the world’s production.
China will no doubt use this leverage to keep more of these rare earths at home and may cut back production or limit these exports to gain a strategic edge.
China may also soon become a net importer of these materials. All this will put upward pressure on rare earth prices.
After a long period of weak pricing and being off the front page, rare earths are now back in the news with prices and headlines on an upward trajectory.
Why Rare Earths are Moving Center Stage
What has changed? In short, the momentum behind clean energy, wind power, robotics and, in particular, electric vehicles (EV) and the entire infrastructure that supports these trends.
Backing these developments is a confluence of trends and events. There has been significant progress in materials science regarding batteries and motors.
The numbers show that we are very close in reaching a point of critical mass – an inflection point when all the benefit of scale start kicking in.
In addition, government emission targets and consumer subsidies for hybrid and electric vehicles are driving markets forward. Finally, China, and to a lesser degree India, have significant producer incentives to scale up EV production.
The electrification of the automotive industry is being driven by ambitious national targets to meet environmental targets. Roskill forecasts that by 2027, close to 70% of new passenger vehicle sales will be hybrids or full battery EVs.
Despite growing demand, the accelerated price bump in 2017 was primarily driven by environmental reforms and closures in China causing a tightening supply from producers, followed by a recovery in prices as producers came back online.
There are two trends in China regarding rare earths that seem clear.
First, China has consolidated production in six state owned companies and closed down smaller independent operators.
Second, it is keeping more of these precious resources at home for better control and to attract foreign manufacturers to produce products in China.
Time to Look Beyond the EV Battery to EV Motor
While EV batteries, cobalt and lithium have garnered most investor and media attention, I believe that EV motors have been overlooked and offer significant upside potential.
The reason permanent magnets are important is that they allow the motor to be smaller, lighter and more efficient. This is why the Chevy Bolt as well as other leading EV makers use these materials and why Tesla, after experimenting with other options, went with permanent magnets for its Tesla Model 3.
EV motors are, in turn, dependent on rare earth permanent magnets, which are 5-10 times stronger than regular magnets.
This leads to lighter and more powerful, efficient motors. For example, the Chevy Bolt motor weighs only 38 kg.
The average electric car uses ten times more permanent magnets – ones that never lose their magnetism – than a traditional car.
The key ingredients to plug-in hybrid and EV motors are two “hidden” permanent magnet rare earths – Neodymium and Praseodymium – also referred to as NdPr.
A UBS study shows that neodymium represents 9% of production costs and a surprising 56% of raw material costs of its motor.
Importantly, manufacturers need NdPr to make these motors – there are no substitutes. And in addition to the EV motor – there are an additional much smaller 25 motors spread throughout the entire electric vehicle that requires NdPr.
While traditional petrol or diesel combustion engine motor vehicles each use approximately 0.7 kg of NdPr oxide, electric or hybrid vehicles require at least 2 kg.
Prices for Neodymium have fluctuated between $40 and $85 a kilogram over the past year and annual production is estimated to be only 30,000 tons a year.
This is why one company that produces both of these rare earth materials has a stock that has more than tripled over the past 24 months.
Summing Up…
Before getting to specific recommendations, let me summarize my breaking research:
- After period of stagnation, rare earths prices and stocks are on upward trend
- Consensus has formed that the EV market has passed an inflection point
- EV battery metals cobalt/lithium have garnered most of the media attention – magnet rare earths are next
- Neodymium and praseodymium are key ingredients for permanent magnets
- China is holding more rare earths at home for its own needs
- China could become a net importer over the next decade
- China-US economic rivalry and conflict could lead to interruption of supply of rare earths
