Article in the SMH this weekend, and mention of graphite for EVs. It appears this whole sector is starting to run hot :
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September 10, 2022 — 5.00am
How investors are trying to ride the electric car waveElectric cars make up a fraction of the vehicles on Australian roads, but many in the financial markets are already eyeing off the potential spoils from motorists moving away from traditional petrol engines.
Macquarie Group, known for sniffing out opportunities from deep-seated changes in the economy and technology, is a case in point. It’s been gearing up to lend more money for electric vehicle (EV) sales, as cheaper models hit the market. In the year to March, the bank’s direct business financed more EVs than it did petrol cars.
“We can certainly see that the demand is strong, and the opportunity to continue that trend is very real, and we’re very excited about that opportunity,” an executive director in Macquarie’s personal bank, Peter van der Westhuyzen, says.
Tesla is the most popular overseas stock held by Australians on Nabtrade. But there are other ways to get EV exposure.CREDIT:BLOOMBERGMacquarie is just one of the many financiers keen to grab a slice of the EV pie. Non-bank lender Pepper is also vying for a piece of the action, Westpac launched an EV and hybrid loan this year, and fintech Plenti is targeting the market. Bank Australia last month vowed to stop funding loans for new petrol, diesel and hybrid cars from 2025.
Yet this jostling between banks is only a fairly small part of the financial implications of the shift to EVs. On global equity markets, investors are trying to pick the winners and losers from the long-term decarbonisation trend, including the shift away from traditional cars, which is set to shake up entire industries.
So, how are investors seeking to profit from this monumental change, aside from buying Tesla shares? And what sectors of Australia’s economy could be the most exposed to the eventual rise of EVs?
Battery minerals: The ‘buy now, pay later of 2022’
On the mining-heavy ASX, the main way to get exposure to the EV trend is through the commodity sector, most obviously producers of metals used to make something all EVs must have: batteries.
Retail investor trading in shares has died down in the past year, but Nabtrade director of investor behaviour, Gemma Dale, says there is heavy interest in battery minerals stocks, especially the lithium sector.
“It’s the buy now, pay later of 2022 - the one that everyone wants a piece of when the market is not that exciting,” Dale says.
The sluggish uptake of EVs in Australia is irrelevant for these investors, who are instead betting on a surge in global demand for metals used to create batteries, such as lithium, cobalt and nickel, alongside copper, which is widely used in electronic products.
‘It’s the buy now, pay later of 2022 - the one that everyone wants a piece of when the market is not that exciting.’
Gemma Dale, NabtradeAmong the key lithium stocks are Pilbara Minerals, which is up more than 90 per cent in the past year, Mineral Resources (up 21 per cent in the last year), Liontown Resources (up 60 per cent), Allkem (up 57 per cent) and Core Lithium (up 359 per cent).
David Franklyn, head of funds management at Argonaut, is one investor who is upbeat about the strong demand for battery minerals at a time of tight supply. He says global EV sales were about 6.6 million in 2020, and by 2030 he expects this will surge to about 40 million, if not more, requiring huge amounts of materials such as lithium, cobalt, copper and nickel.
Australian lithium and rare earths miners
Share and commodity price overview 2021-2022 YTD
The fund has backed several key lithium players alongside copper miner Oz Minerals as a way to get exposure to the surging prices.
“Whoever wins in selling the most EVs doesn’t really matter. They are all going to need copper,” he says.
Portfolio manager for global resources at Ausbil, James Stewart, also highlights booming demand for “electrification and decarbonisation metals”, and says the minerals most leveraged to the EV boom are lithium and graphite, and to a lesser extent nickel and copper.
“EVs underpin long-term growth for nickel and copper, but here and now, we see very tight markets in graphite and lithium, as mine development has not kept pace with surging demand with this one-time fundamental switch from fossil fuels to renewables,” he says.
“Lithium and graphite pricing is expected to remain elevated for some time, and we believe we will benefit from owing the lithium and graphite producers and developers.”
Against this bullish case, however, mining is a notoriously cyclical industry. Some investors worry too much optimism is being priced into these stocks, and point out commodity price booms often stimulate huge waves of investment in new supply, which can cause mineral prices to tumble.
Some businesspeople, such as Mineral Resources chief executive Chris Ellison, also argue Australia should be trying to extract
more value from the lithium by processing it here, and ultimately manufacturing batteries. At its results last month, Ellison said he had spoken to government and some car manufacturers about the idea.
“All I have to do is go and get a battery manufacturer to come over here with their technology and a big bag of cash, and we can add surety of supply, and our vision is to see if we can make that work over the next couple of years,” Ellison said.
‘Long-term megatrend’
Separate from the electrification metals craze, some local investors are taking their money overseas to get direct exposure to the car makers themselves.
Nabtrade’s Dale says Tesla is the most held overseas stock among its clients - it outranks ASX-listed mining giant Rio Tinto - though this may also be driven by the high profile of Tesla founder Elon Musk.
Tesla is also the key pick of some global fund managers seeking an innovation bent, such as Hyperion Asset Management, or Holon Global Investments.
Managing director of Holon Heath Behncke says the transformation caused by electric vehicles will be massive for the entire car industry, and it’s backing Tesla to remain ahead of rival car makers. “When you start to look at how large the transformation is, it’s like what Apple did with the iPhone on steroids.”
Chief executive Alex Vynokur cites a survey showing more than half its ETF investors were interested in renewable energy themed ETFs, and it expects this will translate into demand for getting exposure to electric vehicles. He argues an ETF such as this can provide a more diversified portfolio with a wave of accessing “long-term megatrend opportunities”.BetaShares in December launched an exchange-traded fund (EFT) focused on “electric vehicles and future mobility” on the ASX, which provides exposure to overseas stocks including Uber, Tesla, and Chinese car maker BYD and NIO. The ETF has so far attracted about $12 million, and it’s down about 25 per cent so far this year, amid a wider rout in “growth stocks”.
But such is the magnitude of the shift to EVs that it is not just car makers and providers of raw materials that will be affected.
Bill Pridham, portfolio manager at Ellerston Capital, is betting on overseas businesses that will provide services or components that will be needed, rather than trying to pick the winning car makers themselves. These include Flex, a US manufacturer that is making electric car components, sensor business Sensata, and data infrastructure business Digital Bridge.
“This is going to be a decade-long shift, but we do know that it’s getting government support around the world,” Pridham says. “It’s going to be a very long cycle of investment coming through.”
A slow EV transition for Australia
In a sign of the growing government support for EVs - which are seen as necessary to hitting carbon reduction targets - US President Joe Biden has set the goal of having half of all new vehicles sold in 2030 to have zero emissions, including battery electric and hybrid electric cars.
Australia has been one of the slowest in the developed world to move towards electric cars, but there are signs of momentum picking up.
Climate Change Minister Chris Bowen has flagged changes to efficiency standards and electric cars accounted for 4.4 per cent of new car sales in August, a record high. That’s well below adoption rates of 10 to 20 per cent in some European countries. Norway is the world leader, with EVs making up nearly two-thirds of new car sales in 2021.
Pepper Money chief executive Mario Rehayem says customers taking out EV loans typically make more than $150,000 a year, but the average loan size has been falling. The group of people buying EVs is also wider than a few years ago, when it was largely early adopters, tech professionals and green advocates.“The cohort of borrowers that’s acquiring an EV is very different to the cohort who was buying in the last two years,” Rehayem says.Until now, the move away from traditional cars has been delayed by the limited supply of EVs, their high cost, and the fear of running out of power without easy access to a charging station (known as “range anxiety”).
But even if the recent momentum in domestic EV sales continue, most agree Australia’s transition to EVs will be drawn-out, due to the limited range of EVs on the local market and the extensive changes to infrastructure needed.
Ampol, a fuel retailing giant, is a case in point. When the company notched up a record profit last month after this year’s surge in oil prices, it predicted traditional fuels would remain in demand for at least the rest of this decade because EVs are still so much more costly than traditional cars.
And while growth in EVs clearly matters for the business in the long term - it is rolling out a network of charging stations - investors put far more weight on factors such as refining profit margins. Despite the decarbonisation trend, Ampol shares are up 17 per cent in the past year.
Hugh Dive, chief investment officer at Atlas Funds Management and an Ampol shareholder, says the EV issue is one of the first questions he asks the company, but the issue is outside the typical time horizon as an investor.
“Generally the view is it will be quite slow. EVs will come to the fore, but it’s not Norway.”
All IMHO, DYOR
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