The Biden administration has not been shy about its goal to deliver a greener future to Americans. Relative to Europe and China, the US has been lagging, but Biden is expected to push for more electric vehicle (EV) friendly policies as part of his climate change plan. On March 29, a group including United Auto Workers (UAW) members, parts companies, and major automakers, published a letter addressed to Biden requesting support of a “comprehensive plan” on EVs. The proposed plan would include hefty government tax credits, among other incentives. It seems these groups expect some big government support of their industry. 

It also seems they’ll be getting it – 500,000 new EV charging outlets are part of the new administration’s commitment. This is part of the $400B public investment in clean energy, including battery technologies and EVs. This spending commitment would provide Americans with a strong infrastructure to support newly purchased EVs. One of the big existing challenges to EV owners is access to more charging stations.     

Global EV sales growth has been strong, growing from just over 1M units in 2015 to an estimate of just over 3M units during 2020. The room to grow from this low base is substantial too. In the US alone, 99% of registered passenger vehicles are non-EVs. We could see 100% sales growth every year for six years straight before EVs account for half of the current number of passenger vehicles. 

So EV sales are clearly growing fast and most consumers are looking for public ways to show a reduced carbon footprint. All the time at home is strengthening our resolve in terms of addressing climate change. Pew research from June 2020 shows that two thirds of Americans think the government should be doing more to tackle climate change. Also, 71% of Americans think the government should impose tougher fuel efficiency standards for cars. Most interesting to me is that this has broad support from both Republicans and Democrats, making it a much easier policy decision. It makes sense that a daily task like driving is where people want to feel a reduction in their footprint, and it supports the thesis for higher EV sales in the coming years. 

ESG As a Key Investment Area

The ESG trend is alive and well in the capital markets during 2021. That’s after sustainable funds saw $51B in new investments during 2020. As always, it’s good to get exposure in ways that others may not have considered yet. After all, prices quickly adjust to large sources of exposure, like shares of Tesla. That means it’s tough to get them at a price anyone would consider cheap. One way to get early exposure to this EV trend without overpaying is to look at the inputs to every EV that gets manufactured.  I mean, maybe Tesla doesn’t maintain their dominant market share for 20 years and the upside that’s been priced in doesn’t materialize. As the old saying goes: in a gold rush, sell shovels.  

So what goes into every EV? A battery. EV batteries use a lot of cobalt and nickel. In 2018, each EV battery made used 10kg of cobalt. Cobalt use falls into two categories: chemical applications (largely rechargeable batteries) and metallurgical uses (high temperature alloys, superalloys for aerospace, defense, power generation). 

The Cobalt Market

More than half of cobalt demand is for use in lithium-ion batteries such as those in EVs. More than half of known cobalt reserves are in the Democratic Republic of the Congo (DRC). The DRC notably has the 165th freest economy in the world. China refines a majority (~80%) of the cobalt sulphates and oxides used to make the cathodes for lithium-ion batteries. China and the DRC are two countries that are well known for instability. 

Due in part to this instability, supply disruptions have occurred over the years. When that instability prevents sufficient supply from hitting the market, the remaining cobalt producers benefit from a potentially substantial price surge. 

If a company is well run then these price fluctuations present an opportunity. On top of selling into a large and growing market for EV batteries, the cobalt can potentially be sold at a higher price. 

EVs will continue to benefit from the ESG trend to give consumers what they want. Right now, that’s products with lower carbon footprints. Tesla was clearly early to this party and their share price reflects the growth the market expects in the years to come. Now we’re seeing new EV companies receiving large funding rounds. Rivian raised $8.2B, Nio raised $3.5B, and Nikola raised $2.5B. If they continue to grow, so will the need for batteries and in turn, the need for cobalt.    

Thank You for your loyal readership

The Financial Star Team.