Forget Tesla. There Might Be An Even Better EV Play Right Now.

Forget Tesla. There Might Be An Even Better EV Play Right Now.
Reda Farran, CFA

over 2 years ago4 mins

  • EV sales are set to surge as their costs fall and governments promote them through tax benefits, grants, and outright bans on fossil fuel-powered vehicles.

  • Lithium and nickel are key components of EV batteries, aluminum and copper are heavily used in the rest of the vehicle, and the latter’s a key component in charging stations.

  • Surging EV sales will lead to a surge in demand for these four key metals, and you can profit by investing in shares of companies that mine them or in ETFs that track the metals’ prices.

EV sales are set to surge as their costs fall and governments promote them through tax benefits, grants, and outright bans on fossil fuel-powered vehicles.

Lithium and nickel are key components of EV batteries, aluminum and copper are heavily used in the rest of the vehicle, and the latter’s a key component in charging stations.

Surging EV sales will lead to a surge in demand for these four key metals, and you can profit by investing in shares of companies that mine them or in ETFs that track the metals’ prices.

Mentioned in story

Electric vehicle (EV) sales are booming: they’re expected to rise from 3 million in 2020 to 14 million in 2025, according to Bloomberg New Energy Finance (BNEF). That’s hardly surprising, considering the world’s governments are going out of their way to make the switch from traditional vehicles. But rather than invest in the many car companies out there, there could be a better way to profit from this electric surge: by investing in the four key metals EVs rely on.

Lithium

The most important part of an EV is its engine-equivalent: the battery. Since virtually all EVs run on lithium batteries, the rise of EVs will lead to a big surge in demand for the metal. BNEF estimates that lithium demand from EV batteries will increase fivefold from 2021 to 2030. S&P Global, meanwhile, expects lithium demand for all uses to triple by as soon as 2025. Lithium batteries, after all, are also found in a whole range of consumer electronics, including smartphones, laptops, and cameras.

Around 75% of global lithium production is controlled by just five firms, each with publicly traded stocks you can buy: Albemarle, SQM, Ganfeng Lithium, Tianqi, and Livent. Alternatively, virtually all of these stocks are held by the Global X Lithium & Battery Tech ETF, which invests in a diversified basket of lithium- and battery-focused stocks.

Nickel

Lithium battery technologies are diverse, and – as you can see in the graph below – they’re produced in conjunction with a number of other metals, depending on the end use.

Lithium battery technology uses and advantages. Source: William Blair
Lithium battery technology uses and advantages. Source: William Blair

While NMC batteries are most commonly used among EVs today, NCA batteries are increasingly taking over. That’s because their higher energy densities – the amount of energy stored per unit of weight – provide EVs with more range. That’s why Tesla uses the battery technology in its cars, and why other firms are following suit.

But here’s the thing: NCA batteries are 80% nickel. So it follows that rising demand for EVs – and by extension EV batteries – will lead to rising demand for nickel. More specifically, high-grade nickel. And like lithium, the supply of this high-grade nickel is concentrated, with seven firms accounting for more than 80% of supply.

High-grade nickel production is concentrated. Source: William Blair
High-grade nickel production is concentrated. Source: William Blair

All of these seven firms are publicly traded, and it’s worth noting that the biggest of them – Russia’s Nornickel – has an ambitious strategy of increasing production by 17% by the end of the decade. But there’s a catch: none of the companies solely produce nickel, meaning you’re investing in the potential – and potential risks – of a variety of other metals when you invest in them. Take Nornickel, which – despite its name – only actually made 20% of its revenue last year from its nickel operations. You also have an ETF tracking the price of nickel, but it’s rather small in size, meaning it can be more difficult to trade if you’re investing large amounts. The ETF is up by around 15% this year.

Aluminum

The batteries that power EVs, regardless of their technology, all share one major disadvantage compared to conventional internal combustion engines: they’re heavy, reducing vehicles’ ranges. One way to fix this problem is to replace steel parts in the vehicle with aluminum, a lightweight but strong metal that can substitute for certain steel components and reduce the vehicle’s overall weight. EV makers have increasingly been using the metal, driving up its demand.

The largest aluminum producers in the world are based in China, with Chalco and Hongqiao the top two. Russia’s Rusal takes the third spot. Other big producers are American firms Alcoa, Kaiser Aluminum, and Century Aluminum, as well as France-headquartered Constellium, which already counts several big automakers as its customers. You also have an ETF tracking the price of aluminum that’s up by around 40% this year. But similar to the one tracking nickel, it’s also rather small in size, so it’s more difficult to trade if you’re investing large amounts.

Copper

Copper has all sorts of industrial uses, meaning global economic growth is driving appetite for the metal right now. It’s also a big beneficiary of the EV boom, with the International Copper Association predicting that EV-related copper demand will more than triple by 2030. For starters, an EV contains three to five times more copper than a conventional vehicle. And because of its excellent electrical conductivity and durability, copper is the metal of choice in EV charging stations which are growing proportionately with the number of EVs on the road.

You can gain exposure to copper by investing in shares of copper-mining companies like Freeport-McMoRan (the world’s largest independent producer), Southern Copper Corporation, or First Quantum Minerals. A more diversified way to do this would involve investing in the Global X Copper Miners ETF, which tracks 30 such firms. Bear in mind, though, that you’ll be exposed to more than just the copper price: these companies also mine other metals, and you could lose out on the back of poor profits. So a more direct way to gain exposure to the red metal is through ETFs that track its price, with WisdomTree Copper and the United States Copper Index Fund the two of the biggest out there.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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