We believe a 15-year average timeframe for complete disruption of the ICE market (so that EVs make up 100 per cent of the global car pool by 2030) is probably a fair estimate, and that the key driver, currently overlooked, is the rapid and continuing decline of rechargeable lithium-ion battery costs.
While battery manufacturers should see strong production growth ahead, we remain sceptical of their ability to generate attractive returns in a market in which, ultimately, falling prices are not only necessary to grow volumes, but are already embedded in contract structures. As an industry, we believe that it is ripe for commoditisation in a manner similar to that witnessed by solar over the past decade.
In our opinion, the best investment opportunities are to be found in companies that offer genuine competitive advantages in niche areas further along the supply chain. In particular, our analysis shows that lithium miners, cathode and separator manufacturers will be the key beneficiaries.
Lithium producers: Until recently, lithium demand has been dominated by industrial applications and has historically grown at a factor of 1.1 times gross domestic product growth. While lithium accounts for just 3 per cent of battery production costs, we foresee demand and price rises ahead as it is the ever-present raw material in lithium-ion batteries.
Cathode manufacturers: Cathode manufacturers produce the chemistry, which largely determines the performance of the battery, and they own or licence the intellectual property surrounding it. Unlike battery manufacturing, it is a complicated process for the newer technologies and a more oligopolistic market overall.
Separator manufacturers: Separators provide a crucial safety function, and as such form an integral part of a battery-incorporating cathode technology. Together with high barriers to entry in this area, this should sustain demand, pricing rigidity and economic profits for producers. We see minimal scope for disruptive technologies to threaten this area over the coming five years.
The mass commercialisation of EVs is at an inflection point that is being underpinned by the increased cost-competitiveness of rechargeable lithium-ion batteries with traditional internal combustion engines. That presents a tremendous investment opportunity in particular, as analysis indicates that future demand for lithium-ion batteries and the falling production costs are materially underestimated by the market.
Duncan Goodwin, head of global resources at Baring Asset Management
| Key points |
A number of structural growth opportunities are starting to emerge in the resources space. The notion that EVs could fully replace the ICE in the not too distant future is not as farfetched as it sounds. The best investment opportunities are to be found in companies that offer genuine competitive advantages in niche areas further along the supply chain. |
