Famous for its cereal crops and cattle-rearing, the northern Mexican state of Sonora abuts the US border that President Trump was so keen on tightly patrolling. Yet this region of deserts and mountain ranges – where drugs-related violence has spiralled in recent years – has another asset that Americans are eagerly keen to import for one of their cornerstone industries.
Once used as a medicinal cure for depression, lithium has become a key raw material in the manufacture of new-wave car batteries that it is hoped will eventually drive the gas-guzzling internal combustion engine off the road. The metal’s use – which extends to mobile phone and laptop batteries – explains the sustained interest of international investors in the hitherto unexciting Sonora.
In February 2021, Bacanora Lithium, a London-listed developer in which the specialist Chinese miner Ganfeng Lithium is a major shareholder, announced it had begun initial site works at its La Ventana concession, which in time will become a 35,000 tonne per year open pit operation – the largest of its kind in the world.
Ganfeng, a supplier to Tesla whose ebullient leader Elon Musk has done much to popularise electric cars, is not the only resources group trying to position itself for a new metals boom. China might dominate the electric vehicle supply chain, producing about two-thirds of the world’s lithium-ion batteries, but many more investors are weighing up how to put themselves on the road to new-found riches.
As an example, Robert Friedland, the North American mining tycoon, is developing a copper mine in the Democratic Republic of Congo (DRC), while Sir Mick Davis, the former
chief executive of coal extractor Xstrata, has put $30m into a project in Madagascar to produce graphite that provides the negative electrode for batteries in which lithium is the positive charge.
A small market, but growing fast
The truth is that the journey for electric cars has a long way to go. Which power system prevails is still to be decided – and the mix of metals under the bonnet is still being experimented with too. Despite a lot of noise, last year only 2% of global car sales were battery electric. By 2050, data provider IHS Markit predicts that 60-80% will be electric – including battery, plug-in and fuel cell varieties – but vehicles on the road that rely on the internal combustion engine will still number 1.9bn because of their longevity.
However, the tipping point could be approaching fast. Driving uptake of these new vehicles are the environmental concerns of the consumer, necessary infrastructure such as nationwide charging points and the heavy hand of regulation. Last year, the prime minister Boris Johnson announced that new cars and vans powered wholly by petrol and diesel will not be sold in the UK from 2030, although some hybrids would still be allowed.
But the number one determinant is cost. Countries that were early to offer subsidy such as China have roared ahead. A more sustainable approach is to drive down the cost of the electric battery pack which contributes some 30% of the overall cost of the car for consumers. A recent price survey carried out by BloombergNEF found that the average price per kilowatt-hour for a lithium-ion battery pack has fallen to $137, down from more than $1,100 a decade ago and closing in on parity with combustion engines at around $100.
Pressure on raw materials
Closing the gap for good depends on the price and supply of the right raw materials, and that has fluctuated wildly. All-important lithium peaked at close to $25,000 per tonne in early 2018 but then slid as supply got far ahead of demand for electric cars. This year it has bounced back, but only to half its peak.
Meanwhile analysts predict a long-term supply gap for copper, whose price has touched 10-year highs this year. The metal is highly conductive and essential for electric cars, with each vehicle containing more than a mile of copper wiring. It is no surprise that mining majors Anglo American and Rio Tinto are soon bringing on stream new copper plants, in Peru and Mongolia respectively. Nickel is also in greater demand. It is viewed as a good alternative to cobalt, which is mainly sourced from the DRC where child labour in small-scale mining is still in evidence.
Manufacturers are focused on pushing beyond the hybrid models that run on both fuel and electricity, such as the Toyota Prius. Given the market capitalisation of Tesla is getting on for 15 times that of Ford, the grandaddy of the sector, it is clear who investors think the winner will be, but other incumbents such as Volkswagen – owner of the Audi and Porsche brands – are already outselling the young upstart in some markets.
These firms are reliant to some extent on the companies who have profited from the greening of the last generation of automotives. Johnson Matthey, the FTSE100 company and platinum metals specialist, is a major supplier of catalytic convertors. In the hope that it can surf the next wave, it is ploughing millions into eLNO – enhanced lithium nickel oxide – a material designed for low-cost, high density batteries that is going into mass production in 2022. Buyers of the shares must hope that Matthey’s two-century history means it can once again keep up with technological advancements. In the meantime, tighter regulations are driving up income per vehicle it supplies catalytic convertors to, and huge markets such as China and India remain behind the clean-air curve.
Another operator in this space is Umicore, the Belgian materials company, which favours NMC (nickel, manganese, cobalt) cathode materials. It reported a doubling of battery demand for electric vehicles in Europe last year compared with 2019. Even the Covid-19 pandemic could not stop the growth, which was led by new car models launched to comply with a more stringent carbon dioxide directive, and a raft of local incentives for buyers.
But the race for reliability and cost effectiveness should not distract from any environmental concerns about how these vital materials are sourced. Lithium mines such as those in Sonora require huge quantities of water and there are fears that extraction will take its toll on the surrounding environment.
Investors must do more than simply note the irony that a green revolution on our roads threatens natural damage before many millions of new cars have even left the factory.