Investors in Technology Metals for EVs, Be Very Careful What You Wish For in 2022

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The one-dimensional talking heads (aka, the elected officials, lifetime appointed bureaucrats, and academic “advisors” who make their decisions based upon the requirements of lobbyists) of Washington, D.C., have started off 2022 by choosing winners and losers for the parts of their home markets served by the domestic American OEM automotive industry.  This is being done by fiat, not directly from the executive or legislative branch, but from the bureaucracy in the form of the Environmental Protection Agency, which last week decreed that all motor vehicles must have an average fuel use by 2026 of the equivalents of 55 miles per gallon of fossil fuel.

The consequences of this action, if it is not halted or overturned by the courts or a future election, will be catastrophic for the economy, because the only way such an edict could be fulfilled would be by the legerdemain practiced by the EPA when it measures the “range” of an electric vehicle without regard to its actual range in use real-time and under real conditions. In the world of EPA, an EV’s loss of 40% of range in cold weather and its loss of 30% in hot weather seem simply not to be taken into account. Nor is the shortened working life of a lithium-ion battery due to the degradation caused by “fast charging” taken into account.

The printing of money by the Federal Reserve and its spending by the economic-logic-free Congress has had a very foreseeable effect on the prices of critical metals required for the transformation of the fossil fuel powered vehicle industry to battery electric power. As investors watched the Chinese government’s fiats to its OEM automotive industry and anticipated the EPA’s actions, as a feature of the current administration’s commitment to the “greening” of the OEM automotive industry, they bid up the prices of the necessary critical materials for batteries and for electric traction motors for such vehicles to today’s very high levels. This has ensured that the non-Chinese automotive industry’s plans to produce and reduce the costs of batteries through economies of scale have been damaged fatally. The battery has been and remains the biggest cost of the parts needed to make EVs. The average EV sold in America in 2021 was $55,000 because of that. While an average ICE was $42,000. The national average income in the USA for a family of four is $64,000. Unless EVs for sale in America meet at least the average price for an ICE the price differential wipes out any possible fuel savings over the life of the vehicle.

The Washington one-dimensionals sort of figured this out, so they proposed, in the traditional way of politics, not economics, to give a “tax credit” of up to $12,500 to subsidize the price of EVs for American made vehicles made by “union” workers. Congressional phones rang and rang as those outside of the DC bubble told their elected officials that this “tax credit” was in fact a gift to the wealthiest Americas who needed it least. The subsidy for the moment has disappeared from the conversation in Washington, much to the dismay of the American OEM automotive industry.

Meanwhile, back in the former Motor City the remaining two American legacy car makers, neither of which is in the top five OEM auto producers in the world, announced that they would, between them, build 5 “Gigafactories” to make lithium-ion batteries. Recently one of them, General Motors, announced that it had made critical raw material and finished goods “arrangements” for the supply of its factories with American companies that have either not produced any such materials or are only in the early stages of doing so. The procurement officers of the two relatively small American OEMs do not seem to understand the time frames required to not just bring a mine into production but also to achieve the multiple downstream processing steps required to turn a mineral into a battery, a magnet, or a motor in large volumes with on-time delivery, to specification, and at an agreed price! While all of this detail is not being addressed, the commodity metals continue to increase in price putting the OEM automotive purchasing paradigm of long term (at least three years) pricing in the toilet. The price of batteries alone has increased 20% just in 2021. The OEM auto and truck markets in the USA are now in turmoil due to technology parts supply limitations. What will it look like when the supply of EV battery and motor metals is recognized as permanently in deficit? Costs to make EVs will continue to increase and make them increasingly unaffordable to all but the top earners.

If there is a stock market correction (aka, a crash) in metals in 2022, the far-sighted (aka Asian) battery makers who have done their part for pushing up raw material pricing by stockpiling lithium, cobalt, and the rare earths, thus, driving up the prices, could find their balance sheets corrected and be facing margin calls on their loans using lithium, et al., as collateral. The US OEM automotive industry will be facing a customer base that is reluctant to buy big ticket items if and when liquidity is under siege and government spending on necessary infrastructure for EVs in the US is reduced. Of course, non-producing auto factories will not need workers or parts either. Deflation could come and be worse than inflation.

I will end this essay on a positive note. There isn’t enough lithium produced today to satisfy even the most conservative estimate of EV demand in 2025 and there may never be enough produced to satisfy the most conservative demand for the 2030 model year. Even if lithium prices dip during a correction, I think they will bounce back enough to support good mining and refining projects. If there is such a dip, buy into the EV material’s supply chain markets then. If there is no dip, then hold on.

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7 responses

  1. tracy weslosky Avatar
    tracy weslosky

    …whew….

  2. Alex Avatar
    Alex

    On a related note, the CEO of Blackstone private equity group yesterday published his list of anticipated surprises for 2022. One of the surprises is very much in line with what Jack Lifton has been predicting throughout 2021:
    “#10 In a setback to its green energy program, the United States finds it cannot buy enough lithium batteries to power the electric vehicles planned for production. China controls the lithium market, as well as the markets for the cobalt and nickel used in making the transmission rods, and it opts to reserve most of the supply of these commodities for domestic use.”
    I wonder if we will finally see the investment community and the OEMs waking up to this possibility.
    https://www.blackstone.com/news/press/byron-wien-and-joe-zidle-announce-the-ten-surprises-of-2022/

  3. Jack Lifton Avatar
    Jack Lifton

    Alex, It is glaringly obvious to those of us who follow mining and mineral economics that rare metals are “rare,” because either accessible deposits from which they can be produced are limited, or commercial hydrometallurgical technology to recover them economically is not available. The neocons insist that the supply of anything can be increased by simply spending more money on them. The Chinese take the approach that you must gather ye rosebuds while you can, and so rather than chase profitability they chase security. They have now achieved sufficient ownership/control of global technology metal sources and have sufficient domestic refining and fabricating facilities for their long-term plans for vehicle electrification and alternate energy production where feasible. They are set to go into their planned future. They are not capitalists; they are realists.

  4. Bruce Smith Avatar
    Bruce Smith

    Jack, there is a compounding issue that has probably not been acknowledged. I have a Tesla S 85, now 7 years old with 221K km on the clock. As of now I can still re-charge my battery back up to 365km (was 401km when new). Have only ever used a Supercharger 3 or 4 times now its trickle feed of of Solar panels.
    As more and more EV’s (with a preponderance using Superchargers) “age, there will likely be a growing demand for battery replacements hitting the supply chain concurrent with the EV sales graph becoming exponential.
    It would be interesting to do two grapohs and overlay them: new EV battery demand curve and used EV battery replacement curve. Added together you have the total demand )plus home storage etc). It wont be a pretty picture. Then we have to offset recycling of Li (how can that be accurately forecast?). If the past is anything to go by China will become the Li recycling capital ofthe worl so jurisdictions other than China should ban the export of used batteries to China for “re=processing” or else there will be a further supply chain disruption. The lid is already cracked open and the Li Genie is already in flight.

  5. Jack Lifton Avatar
    Jack Lifton

    Bruce,
    You’re certainly correct. The bad actors in this scenario are the American academics who devised the metric, “earth abundant.” In the earth’s crust neodymium is more abundant than lead. Therefore, the academics conclude, there is sufficient neodymium for all time. The same with lithium. According to the academics it’s abundant. The need for accessible deposits of a high enough concentration to be worked economically by current technology is of no interest to the earth abundant crowd who advise politicians and business planners. This is the problem here in the West.
    Jack

  6. tracy weslosky Avatar
    tracy weslosky

    Alex and Bruce – come back, your comments and feedback are outstanding. And Jack, more people need to hear what your saying….and read your columns. I do because I have been in this industry sector since 2008 and visited countries around the world watching the ‘birth of the EV movement’ and what you say – sticks. In my experience, the truth always makes sense and it always, sticks to the wall.

  7. Dariusz Avatar
    Dariusz

    I think North American REE miners are looking at a huge opportunity – with conditions. Different set of conditions than back in 2010/11. China does control the REE sector but I feel their strategy is very different than what it was in 2010/11. Back then they dropped the prices of REEs so that mining projects in North America and Australia would become non profitable & not economical – to kill the competition at that level. They were in a position to do that because back then supply still outweighed the demand. We are in a very different situation now. The entire planet is pushing for ‘green economy’ for climate reasons. That push is real this time. To achieve all the goals set by public and private sector the supply of REE’s has to grow by x10? x20??. Demand outweighs supply right now and will do so for the next decade or two. Chinese recognize that and their strategy is different this time. It is to make the REEs as expensive as possible and make the entrance to the REE end product sector as difficult as possible. That buys China a lot of time. Time that they know how to effectively use. Hence the rising REE prices and the new legislation banning cooperation with foreign entities. They know it will take years for the ‘West’ to be able to mine, process, refine and produce REE end products. That is when the Chinese can mine (or buy feed-stock from places like Myanmar), process, refine and produce REE end products – right now. China will push to dominate all sectors at the top of the supply chain in rare earths in the next few years knowing that the West will be busy during that time dealing with creating the base of the whole supply chain starting with mining. By the time the West is capable to mine REEs and refine them into pure REE oxides China will dominate all sectors using those end products. Electric Vehicles, electric motors, wind turbines and all other high tech items that need components made of REEs. China will kill the development of those end products in the West by raising REE prices to levels which will make let’s say manufacturing an American electric vehicle affordably (price) impossible to compete in the global marketplace. To summarize; right now China dominates the mining and refining of REEs. Their goal is to dominate the end product(s) that require REEs. Which North American REE miner will make it? Deposit quality, cost of mining and ability to refine are the key issues.

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