A shortage of battery metals slows down EV growth … EVs remain “the future,” but the present is oil and gas … why aren’t there new refineries coming online today?
Global growth of electric vehicles is hitting a snag.
Legendary investor Louis Navellier just experienced this when he tried to purchase a new Audi electric vehicle, yet was told by his local dealer that they’re not taking new orders for the e-tron GT.
And why not?
It has to do with something we’ve highlighted before here in the Digest: the shortage of key battery metals.
Let’s jump to Louis’ recent issue of Market 360 for more:
The lithium-ion battery shortage is now becoming increasingly obvious as companies struggle to cope with high lithium, nickel and cobalt prices, which threatens to postpone the electric vehicle revolution.
According to Benchmark, raw materials now account for 80% of the cost of a lithium-ion battery, up from 40% in 2015.
Specifically, Benchmark noted that materials for the battery cathode, such as lithium, cobalt and nickel, have collectively gained about 150% in the past year, including 25% to 30% in the past month!
The demand for lithium has well surpassed the supply, despite supply having grown 22% from 2020 to 2021.
We can see the effect of these higher costs by looking at the electric-car manufacturers.
Last week, The Wall Street Journal highlighted Rivian Automotive CEO RJ Scaringe’s warning that the shortage of battery supplies for EVs could be worse than the semiconductor shortage.
From Scaringe:
Put very simply, all the world’s [battery] cell production combined represents well under 10% of what we will need in 10 years.
He added that this means “90% to 95% of the supply chain does not exist.”
***This doesn’t mean that the electric-vehicle revolution is in danger
Louis makes this point, highlighting how Tesla just posted record profits in Q1.
Looking forward, Tesla CEO Elon Musk has acknowledged that high lithium prices are a “limiting factor” for EV growth, but he anticipates Tesla’s new Austin and Berlin manufacturing plants will help to overcome some of the bottlenecks.
The battery-metal shortage is a solvable issue. Yes, it will take time to overcome the lack of supply, and that could delay some EV returns for investors. But the fundamental growth story hasn’t changed. A speedbump is not a brick wall.
On this note, back to Louis:
Here’s the reality: Despite the shortages, there is still significant long-term growth ahead for the electric vehicle industry.
For example, BloombergNEF released its Long-Term Electric Vehicle Outlook on Wednesday, writing that EV sales are likely to more than triple by 2025.
And the International Energy Agency expects the EV market to grow 3x to 4x in the next decade, according to its EV Market Outlook report.
In its Long-Term Electric Vehicle Outlook, BloombergNEF writes:
The rising cost of batteries does not derail near-term EV adoption. Some of the factors that are driving high battery raw material costs – war, inflation, trade friction – are also pushing the price of gasoline and diesel to record highs, which is driving more consumer interest in EVs.
From an investment perspective, Louis highlights Panasonic, Toyota, and Ford as companies that he sees benefitting from this EV megatrend.
As to the shortage in lithium, in past Digests, we’ve put a few options on your radar: the Lithium & Battery Tech ETF from Global X (LIT), Albemarle (ALB), and Livent Corp (LTHM).
***Though EVs will power long-term returns, Louis sees plenty of nearer-term profits from the oil patch
Back to his update:
I see a huge opportunity in energy stocks. The reality is that oil and natural-gas stocks are set to lead the overall stock market.
It’s for these reasons that I’ve continued to add more energy stocks to my Growth Investor Buy Lists.
Now, as objective investors, let’s pause…
The energy trade has been soaring for months. In fact, as I write Tuesday morning, the price of West Texas Intermediate Crude has just topped $120 intraday, which is only a few dollars shy of its March closing-high of $123.70.
Given this, we need to be cautious and ask ourselves: Is energy still a good investment today for investors who aren’t already sitting on a healthy cushion of gains?
Well, last Friday, Louis added five new energy plays to his Growth Investor portfolio, so he’s putting his money where his mouth is. And for added assurance, we can turn to our macro expert Eric Fry.
From Eric’s latest issue of Smart Money:
While the S&P 500 teeters on the brink of a bear market, big energy companies like Exxon Mobil Corp. and Chevron Corp. made new highs last week.
It must be too late to get in now, right?
I sure don’t think so. This is no accident. Nor is at a fluky result of crazy trading.
Eric writes that he expects oil stocks to continue outperforming thanks to the two most basic forces moving any market – supply and demand.
Specifically, years of prolonged underinvestment have reduced global crude production capacity, which is a big part of the reason why oil and gas prices have been hitting multi-year highs.
And what’s fascinating is we shouldn’t expect this to improve…which is partially why the oil trade still has life in it.
***The politics and pressures keeping oil companies from building out capacity
Simplistically, oil prices will fall if: a) demand drops, or b) supply increases.
Demand doesn’t appear likely to drop anytime soon. In the immediate time-frame, summer is peak season for gasoline consumption as people drive to vacation spots.
And if we look over the next couple years, the battery-metals shortage we covered earlier is increasing the cost for new EVs. This will steer certain buyers away from EVs, back to gasoline-powered vehicles.
What about supply? Surely record-high gasoline prices will lead to more refining and production as oil and gas executives look to cash in, right?
It’s not that simple.
Yesterday, we learned that Mike Wirth, the CEO of Chevron, said he doubts we’ll ever see a new oil refinery in the United States, despite record-high gasoline prices today.
Why?
From Wirth:
You’re looking at committing capital 10 years out, that will need decades to offer a return for shareholders, in a policy environment where governments around the world are saying: We don’t want these products. We’re receiving mixed signals in these policy discussions.
Today, the Biden Administration is pushing green-energy efforts while actively attempting to steer the U.S. economy away from fossil fuels.
Add to that, oil and gas investors, burned in the past, who are finally seeing big profit windfalls, want those profits returned to them instead of used to build out future production.
This preference is logical. Why would you want to throw enormous investment dollars at a new refinery with government policy actively seeking to undercut your business?
As Wirth just noted, a new refinery would tie up capital for a decade. Given the energy-policy trajectory of today, is it more or less likely we’ll see oil-friendly policies 10 years from now?
Given this, we shouldn’t expect a surge of new supply to ease oil and gas pressures.
When you combine elevated demand with limited supply, sustained higher prices are the result.
***While this leaves consumers in a bad spot, it’s a tailwind for investors
Gas prices have never been higher. But switching to an EV to avoid gas prices comes with its own sticker shock. On this note, here’s CNBC:
Most Teslas are now significantly more expensive than they were at the beginning of 2021.
The cheapest “Standard Range” version of the Model 3, Tesla’s most affordable vehicle, now starts at $46,990 in the U.S., up 23% from $38,190 in February 2021.
This leaves consumers in a bad spot. But for investors, these challenges are tailwinds.
To pad your portfolio, look to top-tier electric-vehicle manufacturers, well-run battery-metals miners, and leading oil and gas companies. That’s what Louis and Eric are doing.
Have a good evening,
Jeff Remsburg
