The electric vehicle (EV) revolution is underway. One financial asset is already priced for it: The market thinks Tesla, with a market cap of roughly $60 billion, will produce more than a million cars in the coming years.¹ In 2016, Tesla produced only about 75K EVs. And it's not just Tesla; the traditional automakers are finally taking seriously the shift in consumers' tastes towards EVs. Volvo has announced that after 2019 all new cars produced will be either electric or hybrid; Volkswagen, the largest automobile company in the world, has declared publicly that Tesla is its biggest competitor. Governments are also driving the EV revolution. Britain and France have announced increasingly restrictive bans on petrol cars; in China, the government has declared EV subsidization a matter of energy security, given China's high reliance on petrol imports. Last year nearly half a million EVs were sold internally in China by domestic producers. It is not clear whether the traditional automakers can benefit in a race that was forced upon them. At best, and with aggressive capital spending, the industry can preserve the same equity value it has today.
But what the market hasn't yet fully priced is the lithium battery market and the impending lithium commodity supercycle that the EV revolution is likely to command. Based on current lithium carbonate prices, each EV demands about $1,000 worth of lithium carbonate.² Today, the world produces about a million EVs, implying that the global lithium carbonate export market for EVs is still very small—about $1 billion a year. What could the world look like by 2030? The consensus assumes 25 million EVs by then (about a quarter of global car production), which, based on current lithium prices, implies a $25 billion global lithium EV export market. We would argue that this figure is too low. In our view, not only EV car production will likely accelerate faster, lithium prices could be poised for another big spike. This view could translate to at least a $50 billion lithium EV market by 2030—on par with the size of the copper market today.
The consensus is underestimating the pace of EV adoption. We believe that many of the drawbacks that plagued mass adoption are being tackled more quickly than expected: i) battery life has been the most important consumer worry, but now the new Tesla Model 3 is able to achieve 310 miles per charge for $44,000 compared to the 2011 Tesla Roadster with 245 miles per charge and a price tag of $110,000; ii) consumers were worried about the limited amount of charging stations. In 2011 there were 28,236 public EV charging stations around the world; in 2016, the number had skyrocketed to 363,337. When it comes to actual machinery, EVs are superior to petrol vehicles across many dimensions, including having fewer parts (meaning lower maintenance costs), having longer life cycles (on average, an EV lasts 500K miles versus 140K for petrol), and emitting zero pollutants.³ It's true that currently the all-in cost of an EV is higher than that of a petrol car (the average all-in cost of an EV is about $35K versus $22K for petrol).4 But analysts predict EV-petrol cost parity by 2025. Their forecasts are likely to be conservative; yet even taking them at face value suggests an explosion of EV production by 2030. The history of technological disruption suggests a classic "s-curve" adoption whenever exponential cost deflation crosses crucial competitive thresholds.
Lithium supply will likely lag until lithium prices spike high enough to justify huge mining investments. Given the intense scramble for the mineral that battery producers have been forced into, and the limited medium-term supply backdrop, we think lithium prices could double or triple from here. Mining is highly capital-intensive, and history has shown that mining companies are reluctant to pour in capital just on the basis of expectations. In many ways, the super spike in commodity prices is part of the mechanism by which secular commodity demand shifts get accommodated. Only when the economics of mining shifts towards a lucrative high-margin business does more mining investment come in. But until that happens, mining in a tightly supplied market becomes very profitable. Back in 2002, when China joined the WTO, "the consensus" underestimated how far China's commodity demand could surge. Importantly, copper prices had to super spike first (along with margins on copper min ing) before the economics of mining investments finally changed. Granted, there are enough lithium resources for hundreds of years, but lithium mining capacity won't scale up meaningfully until the price makes it attractive enough.
Bottom line: Commodity supercycles almost always occur when: i) the consensus underappreciates the full extent of secular demand, and ii) a price super spike is induced by delayed mining capacity expansion. We think that is likely the case today with lithium. The sharp acceleration in EV demand should command significant growth in lithium mining and battery manufacturing, far beyond what the consensus is estimating. In fact, we think there is a high chance that the annual value of lithium mining will eventually surpass that of copper. In the medium term, the efficiency gains in lithium batteries greatly improve the economic case for solar, and to a lesser extent wind, at the expense of fossil fuels.
¹ We assume a long-run multiple of 20x earnings, a 7.5% profit margin, and an average vehicle price of $40,000.
² Assumes 75kg of lithium carbonate equivalent (LCE) needed for a 75kWh battery (Tesla Model 3). We acknowledge that this is on the higher end of the consumer EV range. We also assume that the price of lithium carbonate is roughly $14,000/metric ton.
³ Tony Seba: Clean Disruption-Energy & Transportation. Published June 9th, 2017
4 UBS Evidence Lab Electric Car Teardown—Disruption Ahead? Published May 18th, 2017
Read the original article on J.P. Morgan Private Bank. J.P. Morgan is a global leader in financial services to corporations, governments, for-profit and not-for-profit institutions and wealthy individuals. Through the Private Bank at J.P. Morgan, the firm delivers customized wealth management advice and solutions to wealthy individuals and their families, leveraging its broad capabilities in investing, family office management, philanthropy, credit, fiduciary services and special advisory services to help its clients advance toward their own particular goals. For more than 150 years, the Private Bank's comprehensive and integrated product offering, commitment to innovation and integrity, and focus on placing the interests of its clients first and foremost have made J.P. Morgan an advisor of choice to people of significant wealth around the world. Copyright 2017. Follow J.P. Morgan Private Bank on Twitter.
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