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Investment Case
Bloomberg New Energy Finance just published its annual Electric Vehicle Outlook, a long-term forecast of how the electrification of transportation will proceed over the next few decades. BNEF predicts that:
By 2040, 57% of all passenger vehicle sales and over 30% of the global passenger vehicle fleet will be electric.
There are three main catalysts expected to support a rapid increase in global EV demand:
1. Global Environmental Regulations
Government regulatory support in key markets such as Europe, China, and the US is expected to accelerate the adoption of electric vehicles around the globe. Increasingly, more countries are committing to banning, or at least limiting, the sale of internal combustion engine (ICE) vehicles over the next decades as part of efforts to reduce air pollution.
China will account for 48% of the passenger EV sales by 2025, 34% in 2030, and 26% in 2040. Europe will pull ahead of the US as the number two EV market in the 2020s, driven by environmental emission regulations. While India and other emerging economies are progressing at a slower pace, Japan, South Korea, and Australia should see EV adoptions by 2040 of 63%, 52%, and 61% of sales, respectively.
2. Lower Battery Prices, Leading to a Price Parity Vehicle Inflection Point
Another factor supporting greater adoption of EVs is that battery prices continue to get cheaper. This, coupled with government subsidies, leads to a price parity inflection point for consumers. BNEF predicts price parity between EVs and internal combustion engine vehicles to occur by 2024 across most geographies, causing EV sales to surpass those of ICE vehicles.
In 2015, the battery made up for than 57% of the total cost of the car. That percentage has now shrunk to 33% and is expected to reach 20% by 2025.
3. New EV Models Coming to Market
From a consumer perspective, more innovative, powerful, longer-range, and price comparable vehicles are coming to market manufactured by leading automakers such as Volkswagen (OTCPK:VWAGY)/Audi (OTCPK:AUDVF), Kia, Porsche, Mercedes, Volvo (OTCPK:VLVLY), BMW (OTCPK:BMWYY), Ford (NYSE:F), Nissan (OTCPK:NSANY), Honda (NYSE:HMC), Jaguar, and Aston Martin (OTCPK:ARGGY). The auto industry’s heavy-hitters have been transforming their businesses and plunging millions into R&D to produce electric cars. Over the next 12 to 18 months, consumers will begin to see the fruits of that huge investment. One new name, American start-up Rivian, plans to become the Tesla of pick-up trucks.
How to Play This Trend in an ETF
So who stands to benefit from the electrification of energy beyond the positive environment implications and the consumer?
The prime beneficiaries of this trend will be those in the lithium-ion battery supply chain: producers of lithium, cobalt, nickel, graphite, and manganese.
Source: EQM Indexes LLC
The battery makers and auto makers will see their margins squeezed, but the supply chain will see its prices increase as supply tries to keep up with demand.
This is the thesis behind Amplify Advanced Battery Metals and Materials ETF (BATT). It is a different approach than being taken by other ETF competitors focused on just lithium and/or the battery manufactures like the Global X Lithium ETF (LIT) or Electric Vehicle technology such as KraneShares Electric Vehicles & Future Mobility ETF (KARS) or the Global X Autonomous & Electric Vehicles ETF (DRIV).
Again, the battery manufacturers and auto makers will see their margins squeezed as competition rises.
BATT is the only pure-play ETF focused solely on the lithium-ion battery supply chain providing direct exposure to lithium, cobalt, nickel, manganese, graphite, and other battery metals via publicly-traded companies. Stocks in the portfolio are principally engaged in the business of mining, exploration, production, development, processing or recycling of advanced battery metals and materials.
Source: Amplify ETFs
Year-to-date, BATT’s approach has slightly outperformed that of LIT’s, down 6.4% versus 7.7% due to macro headwinds such as the US-China trade war and bearish sell-side demand sentiment for lithium.
DRIV and KARS are up 6.1% and 5.5%, respectively, given they do not provide explicit exposure to the lithium-ion battery supply chain and include technology such as semis, software, sensors, and other derivative plays related to electric and autonomous vehicles.
Battery Metal Supply and Demand Considerations
Recent industry data suggests that conditions for Lithium-Ion batteries, the batteries used in Electric Vehicles, remain robust. Trying to play catch-up with China, according to Roskill, the US and Europe are expected to invest $21 billion by 2028 in new Lithium-Ion battery plants. But China alone is expected to invest $51 billion over that time frame.
Competition is expected to be fierce with battery manufacturing margins becoming compressed and weaker battery manufacturers will be acquired or go out of business.
Sustainability of the EV battery supply chain is a primary concern for most automakers. As a result, many of the major automakers like BMW (OTCPK:BMWYY), Volkswagen, Volvo and Tesla (TSLA) are entering into long-term supply agreements to hedge any increase in prices on the metals side and to ensure they will have access to these metals as they scale up their EV production.
On the metals demand side there is constrained capacity which will make it difficult for supply to keep up with demand. US lithium producer Albemarle (ALB) expects lithium demand to explode to 21% per year through 2025.
As EQM Indexes Battery Metals & Mining Index Committee member and industry expert Duncan Blount explains:
While lithium is not as scarce as other battery metals like cobalt, projects take time to develop and are often in new jurisdictions for mining.
Daniela Desormeaux, a natural resource expert with research firm signumBOX, expounds,
Brine projects can take more than 7 years to develop and while spodumene projects are easier (traditional mining), even once the company’s project is producing, it is very difficult to reach the quality specifications required for battery production. This can add another 1 to 2 years. New lithium supply is expected to primarily from Argentina and Australia.
Critics of some of the bearish lithium sentiment on Wall Street argue that even though additional capacity for lithium has come online in anticipation of a global ramp-up in demand, mining projects are always subject to delays and considerable output constraints.
The president of North Carolina-based Global Lithium LLC, Joe Lowry, speaking at a recent industry conference, says the possibility of oversupply in lithium is a myth. He predicts the industry will need to inject $12 billion over the next five years to have a chance at meeting demand. Similar to Blount and Desormeaux, he highlights that despite the “myth” perpetuated by “big bank analysts” and misunderstandings surrounding the Chilean regulator CORFO’s reporting, “increasing production quickly is not so easy.”
The mining companies also appear bullish and continue to invest heavily themselves. While Chile’s lithium giant SQM (SQM) did indeed experience pricing pressure in the first quarter as new supply came online, the company still expects lithium demand to grow at double-digit rates in the future. As further testimony to the confidence of companies in the space, SQM is investing in a project with Kidman Resources (OTCPK:KDDRF) which just received a takeover offer from diversified company Wesfarmers (OTCPK:WFAFF) earlier in the month. And China’s Gangfeng Lithium just acquired a 30% stake in London-based Bacanora Lithium (OTC:BCLMF).
Conclusion
With the acceleration of electric vehicle demand almost a certainty, this creates an important inflection point for investment into the metal inputs into the lithium-ion battery supply chain. BATT provides a diversified investment vehicle to gain access to this global trend. Only 3 companies in the ETF are based in the U.S., with the greatest exposure in Emerging Markets, Australia, and Canada. The ETF gives access to international players in the space that is not easily accessible to US investors.
The current top 10 holdings are as follows:
Source: Amplify ETFs
The US-China trade war remains an overhang on all commodities, but especially battery metals. While this had created negative sentiment and performance YTD, it also creates a lower entry point for ETF investors with a long-term perspective.
Disclosure: I am/we are long BATT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: EQM Indexes is the creator of the EQM Battery Metals and Mining Index. It is not possible to invest directly in an index. Exposure to an asset class represented by an index is available through investable instruments based on that index. EQM Indexes does not sponsor, endorse, sell, promote or manage any investment fund or other investment vehicle that is offered by third parties and that seeks to provide an investment return based on the performance of any index. EQM Indexes makes no assurance that investment products based on the Index will accurately track index performance or provide positive investment returns. EQM Indexes is not an investment advisor, and makes no representation regarding the advisability of investing in any such investment fund or other investment vehicle. A decision to invest in any such investment fund or other investment vehicle should not be made in reliance on any of the statements set forth on this website. Prospective investors are advised to make an investment in any such fund or other vehicle only after carefully considering the risks associated with investing in such funds, as detailed in an offering memorandum or similar document that is prepared by or on behalf of the issuer of the investment fund or other vehicle. Inclusion of a security within an index is not a recommendation by EQM Indexes to buy, sell, or hold such security, nor is it considered to be investment advice.
Business relationship disclosure: EQM Indexes created the EQM Battery Metals and Mining Index (BATTIDX) and receives compensation from Amplify ETFs related to BATT for research input and marketing support.
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