Automakers around the world are racing to introduce electric vehicles, hoping to tap into strong demand for what is seen as a greener alternative to the internal combustion engine.
Tesla, the market leader, sold more than 300,000 electric vehicles worldwide in the first quarter. Volkswagen hopes to overtake Tesla in electric vehicle sales by 2025. General Motors has announced 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.
So how can investors participate in what is already a strong and established global trend? One way is to invest in companies that make batteries for electric vehicles and those that mine and process the minerals those batteries use. Batteries can account for 35 to nearly 50 percent of the production cost of an electric vehicle, and several exchange-traded funds invest in battery manufacturers, miners and mineral processors.
The Global X Lithium and Battery Technology ETF has more than $4.6 billion in assets under management. The fund has significant holdings in Albemarle, a North Carolina-based lithium miner, as well as battery makers such as Panasonic and China’s Ganfeng Lithium.
Lithium, the world’s lightest metal, is at the heart of most electric car batteries, often in combination with nickel, cobalt and manganese. Driven by demand for electric vehicles and mobile phones, lithium prices have skyrocketed and are 10 times higher than they were a few years ago. Lithium has been mainly mined in Australia, China and South America. The United States produces a small proportion of the world’s supply, although there are proposals to expand production.
Numerous research efforts are underway to improve battery performance, reduce the weight and size of batteries, and minimize the amount of time required to recharge them.
Many say that the most promising is the effort to create a battery that uses solid-state lithium. “Solid-state batteries will be a game changer,” said Jay Hwang, senior research analyst at S&P Global. Despite efforts to find alternatives, Hwang said, he envisions a continued central role for lithium. “In 10 years, it is very likely that we will still be using lithium, either in liquid or solid form,” he said. QuantumScape and Solid Power are two of the companies doing research on lithium in solid state.
The Amplify Lithium Battery Technology ETF It has approximately $200 million in assets under management and tracks the EQM Lithium and Battery Technology Index. Christian Magoon, chief executive of the Amplify ETF, said he looks for markets where governments, corporations and consumers are spending money. Such is the case, he said, with electric vehicles. High oil prices increase the appeal 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, extracting the minerals for their batteries has environmental and social problems. “This is not a free and clear road when it comes to environmental concerns,” said Mr. Magoon. Lithium mining, for example, requires large amounts of water. Cobalt mining in the Democratic Republic of the Congo often uses child labor. For now, though, these issues have largely taken a backseat in the effort to find an alternative to gasoline engines.
Like the Global X ETF, the Amplify ETF is heavily invested in Chinese companies. Its major holdings include Contemporary Amperex Technology Company, BYD Company, and Yunnan Energy New Materials Company. In total, the fund has 23 percent invested in China. (You have a similar amount at US-based companies.) China is not only a leader in the adoption of electric vehicles, it is a major owner of minerals and a leader in lithium processing, with a market share of more than 60 percent in processing, according to Pedro Palandrani, vice president and director research of Global X ETFs
Still, investments represent risk. “If China ends up being a bad actor, it’s very likely that some indices will be forced to weed out Chinese companies,” Magoon said.
Jane Edmondson, CEO of EQM Indexes, said she was concerned 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 exposure to China can turn to the CRIT ETF,” said Ms Edmondson. The index includes four companies that are headquartered in China and listed in Hong Kong, but 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 What we can do is minimize exposure,” he 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 auto battery supply chain. A new US law bans products that are made in Xinjiang or have ties to work programs there from entering the country.
Another ETF that has gained traction is the VanEck Rare Earth/Strategic Metals ETF, with more than $800 million in assets. About 40 to 50 percent of his portfolio is involved in lithium in some way, according to Van Eck, though much of his investment is in rare-earth minerals not used in electric vehicles.
Those vehicles, their batteries, and the minerals that power them continue to attract attention. Depending on the model, electric vehicles are still more expensive than gasoline vehicles. But in terms of total cost of ownership, electric vehicles could already be 10 to 20 percent cheaper in the United States because they are generally less expensive to maintain and fuel, said Veronica Zhang, an analyst at VanEck.
Mutual funds of various types have scattered investments in materials for electric vehicles and battery companies. The Franklin Rising Dividends Fund owns more than five million shares in Albemarle, a major producer of lithium and other minerals. “Albemarle benefits from its low-cost position. It is 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 much faster than supply can keep up,” said Seth Goldstein, energy and resources stock strategist at Morningstar. The problem, many analysts say, is that lithium mining received little investment before prices began to rise, and new lithium projects take years to start producing. “Time is the most important factor. These projects take time,” he said.
Albemarle has yet to fully benefit from rising lithium prices, according to Goldstein and other analysts, as many of his clients have long-term deals at fixed prices below the current spot price for lithium. As these agreements 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’s shares have 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 assessment. In terms of price to earnings, he said, Albemarle is “fairly valued.” But because the company is investing in capital projects “to attract resources,” he said, free cash flow will show a loss of $550 million or more by 2022. That will deter many potential investors. But by next year, Getaz said, there should be more than $500 million positive.
Albemarle and other contributors to electric vehicle batteries generally seem to have time on their side.