The Shrewd Way to Play EVs

If you believe all you read, you may assume it won’t be long before electric vehicles (EVs) take over the world’s roads and help save the planet from the ravages of global warming.

After all, many countries have set ambitious goals for EVs. Both China and India have announced that between 2030 and 2040, EVs will account for all new car sales.

The U.S. (for good reason) has set no such goals. Still, in addition to Tesla (NSDQ: TSLA), every major U.S. automaker is hard at work developing its own EV models. Just last week, General Motors (NYSE: GE) announced plans for an autonomous (driverless) EV by the end of the decade.

All these rosy projections are wildly unrealistic.

Strain on Resources

Don’t get me wrong. It’s not that I don’t think EVs have a future. In fact I don’t doubt we will be seeing more and more EVs on the road. But the projections are too optimistic.

EVs are highly unlikely to account for even close to 100% of new car sales in any major country by 2040. A more realistic target date might be 2050 or even 2060. As for self-driving EVs, or any self-driving car, that’s an even taller order. For now I’ll just caution you not to believe all you read on this score, either.

Again, there is a future for EVs and there are investment opportunities. But the path to that future will have plenty of speed bumps along the way.

The major problem will be chronic, possibly acute, shortages of critical materials EVs require. There’s no guarantee these shortages ever will be remedied, which could limit the eventual size of the EV population. Put another way, for EVs to become as big a part of the world as many people expect, we will need to have enough supply of many critical resources.

Reliant on Other Countries

The U.S. is particularly low in these resources. This leaves us dependent on other countries, particularly China, our main rival on the world stage.

China has a monopoly on critical ores. Equally important, it’s dominant in supply chains. Obtaining the raw ores is just the first step in a complicated multi-step process. The ore has to be refined and then turned into finished products EVs require. China has the greatest expertise and capability here, too.

The critical materials needed for EVs include the following:

  • lithium
  • cobalt
  • graphite
  • assorted rare earth elements

And they also will require a lot of other resources such as iron ore, nickel, and copper, just to name a few.

While China produces the bulk of these materials, there are a few non-Chinese companies that produce them, and they are open to investors. This is the sweet spot for U.S. investors looking to benefit from the push for EVs. The interest, both in the private sector and by many governments, in promoting EVs will ensure a frantic effort to obtain the resources needed to build the cars. The shortages in materials and competition to obtain them will ensure rising prices.

Resource Suppliers Positioned to Win

If EVs do not catch on, it will likely be because there is a shortage of materials needed to build a fleet big enough for the world or the prices are too expensive for the masses. These two possibilities are inter-related.

Think about it. If there is a shortage of resources that go into the EV, the prices for those resources will rise. That increases the cost of building EVs. History tells us that usually it is customers who foot the bill, so the price of EVs will rise, possibly making EVs unaffordable to most families.

But for the materials required for EVs, the story is different. Whether we end up with hundreds of millions of EVs on the road or not, the demand for the materials will almost certainly rise significantly in the years ahead. Investors should seek out producers with low costs and high-quality assets, preferably in geopolitically stable jurisdictions.

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