Carmakers around the globe are rushing to introduce electric vehicles, hoping to take advantage of strong demand for what is considered a more climate-friendly alternative to the internal combustion engine.
Tesla, the market leader, sold over 300,000 electric vehicles globally in the first quarter. Volkswagen hopes to overtake Tesla on sales of electric vehicles by 2025. General Motors has announced that it will be all electric by 2035. And Ford has seen strong early demand for its Lightning, an electric version of its popular F-150 pickup truck.
So how can investors get in on what is already a strong and established global trend? One way is through investing in companies that make electric vehicle batteries and those that mine and process the minerals those batteries use. Batteries can represent 35 to nearly 50 percent of the production cost of an electric vehicle, and a number of exchange-traded funds invest in battery makers, miners and mineral processors.
The Global X Lithium and Battery Technology ETF has over $4.6 billion in assets under management. The fund has a major holding in Albemarle, a lithium miner based in North Carolina, as well as in battery makers like Panasonic and the Chinese company Ganfeng Lithium.
Lithium, the lightest metal on earth, is at the heart of most electric car batteries, often in combination with nickel, cobalt and manganese. Spurred by demand from electric vehicles as well as mobile phones, lithium prices have skyrocketed and are 10 times what they were just a few years ago. Lithium has been mined mainly in Australia, China and South America. The United States produces a tiny proportion of the world’s supply, though there are proposals to expand production.
Numerous research efforts are underway to improve battery performance, to lower batteries’ weight and size and to minimize the amount of time needed to recharge them.
Most promising, many say, is the effort to create a battery that uses solid-state lithium. “Solid-state batteries will be a game changer,” said Jay Hwang, a senior research analyst with S&P Global. Despite efforts to find alternatives, Mr. Hwang said, he foresees a continuing central role for lithium. “In 10 years, it’s highly likely we will still be using lithium, either in liquid or solid-state form,” he said. QuantumScape and Solid Power are two of the firms doing solid-state lithium research.
The Amplify Lithium and Battery Technology ETF has roughly $200 million in assets under management and tracks the EQM Lithium and Battery Technology Index. Christian Magoon, chief executive of Amplify ETFs, said he looks for markets where governments, corporations and consumers are all spending money. Such is the case, he said, for electric vehicles. High oil prices are adding to the attractiveness of electric vehicles, he said. “If oil prices stay well above $100, that will accelerate the adoption of electric vehicles in the US”
While electric vehicles may be good for the environment, mining the minerals for their batteries has environmental and social issues. “This is not a free and clear path as far as environmental concerns,” Mr. Magoon said. Lithium mining, for example, requires huge amounts of water. Cobalt mining in the Democratic Republic of Congo often uses child labor. For now, though, these problems have largely taken a back seat to the effort to find an alternative to gasoline engines.
Like the Global X ETF, the Amplify ETF is heavily invested in Chinese companies. Among its top holdings are the Contemporary Amperex Technology Company, the BYD Company and the Yunnan Energy New Materials Company. In all, the fund has 23 percent invested in China. (It holds a similar amount in US-based companies.) China is not only a leading adopter of electric vehicles, it is a major mineral owner and the leader in processing lithium, with a market share of more than 60 percent in processing, according to to Pedro Palandrani, vice president and director of research for Global X ETFs
Still, the investments pose a risk. “Should China end up being a bad actor, it’s very likely that some indexes would be forced to eliminate Chinese companies,” Mr. Magoon said.
Jane Edmondson, the chief executive of EQM Indexes, said she was worried enough about the risks of investing in China to create an index with far fewer Chinese companies. EQM created the Rare Earths and Critical Materials Index, which is tracked by the recently introduced Optica Rare Earths and Critical Materials ETF, which trades under the ticker CRIT. “Investors who want to minimize Chinese exposure can turn to the CRIT ETF,” Ms. Edmondson said. The index does include four companies that are based in China and traded in Hong Kong, but it has less Chinese exposure than the Amplify Lithium and Battery Technology ETF “Given the fact that the Chinese own most of the critical materials or processes, then all we can do is minimize the exposure,” she added.
The New York Times reported in June that there was evidence that forced labor in China’s western Xinjiang region was used in China’s car battery supply chain. A new US law bars products that are made in Xinjiang or that have ties to the work programs there from entering the country.
Another ETF that has gained traction is the VanEck Rare Earth/Strategic Metals ETF, with over $800 million in assets. About 40 to 50 percent of its portfolio is involved in lithium in some way, according to Van Eck, though much of its investment is in rare earth minerals not used in electric vehicles.
Those vehicles, their batteries and the minerals that power them continue to gain attention. Depending on the model, electric vehicles are still more expensive to buy than gasoline-powered vehicles. But in terms of total cost of ownership, electric vehicles could already be cheaper in the United States by 10 to 20 percent because they are generally less expensive to maintain and fuel, Veronica Zhang, a VanEck analyst, said.
Mutual funds of various types hold scattered investments in electric vehicle materials and battery companies. The Franklin Rising Dividends Fund holds over five million shares in Albemarle, a major producer of lithium and other minerals. “Albemarle benefits from its low-cost position. It’s a high quality, low-cost resource,” said Nick Getaz, portfolio manager.
Lithium prices soared 437 percent last year as the industry struggled to meet surging demand. And prices rose sharply in the first half of 2022, EQM Indexes reported. “Demand is growing far faster than supply can keep up with,” said Seth Goldstein, an equity strategist in energy and resources at Morningstar. The problem, say many analysts, is that lithium mining received little investment before prices began to rise, and new lithium projects take years to begin producing. “Time is the biggest factor. These projects take time,” he said.
Albemarle has not fully benefited yet from rising lithium prices, according to Mr. Goldstein and other analysts, since many of its customers are on long-term deals at fixed prices below the current spot price of lithium. As these deals expire, the company will be able to negotiate new ones at higher rates.
Along with shares of other companies that contribute to electric vehicles, Albemarle stock has fallen sharply in recent weeks. At a recent price of $203, it was about 80 points below its November 2021 high.
Mr. Getaz offers a nuanced evaluation. In terms of price to earnings, he said, Albemarle is “fairly valued.” But because the company is investing in capital projects “to bring resources in,” he said, free cash flow will show a loss of $550 million or more for 2022. That will deter many potential investors. But by next year, Mr. Getaz said, it should be over $500 million positive.
Albemarle and other contributors to electric vehicle batteries generally do appear to have time on their side.