Friday 29 Mar 2024
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SINGAPORE (Aug 17): With all the global hype surrounding American electric car maker Tesla this year, it’s no wonder industrial and automotive players are beginning to foresee a long-term race to build vehicles of the future.

Schroders anticipates the growing prominence of electric vehicles in the auto production mix, as demand increases and electric car prices decline in the years to come.

To Daniel McFetrich, Global Sector Specialist — Industrials, addressing power-related concerns is necessary in boosting customer willingness to purchase and use such vehicles. The main worry for drivers of electric vehicle is “range anxiety”, a term used to describe fear that the vehicle will prematurely run out of power.

McFetrich has also singled out a number of beneficiaries along the auto battery supply chain, which should stand to gain as electric vehicles become more popular:

Cathodes: According to McFetrich, cathodes represent an area with the “most compelling investment opportunities” as an important component of a battery cell. As a principal determinant of a battery’s power and energy, the cathode is also currently the main area of intellectual property for lithium-ion batteries. He believes cathode manufacturers, especially producers of NMC/NCA cathodes, are the best-placed among battery component makers given slightly higher barriers to entry.

Cell packagers: Schroders sees the most value emerging in packaging after cathodes. As battery technology matures and safety issues bed down, packaging companies are expected to retain some mark-up as auto customers increasingly outsource the packaging capability. However, McFetrich says there is still “little visibility on how this shakes out” depending on reputation and supply chain expertise.

Cell-makers: Further down the supply chain, cell-makers can grow their advantages from enhancing their technology capability and in particular, scaling up. However, McFetritch thinks the latter will not be easy as carmakers are aiming to use multiple providers for different cell specifications and even different models.
“Reputation, price, and access to high nickel cathode materials are key differentiators as we see these types of stocks as opportunistic, rather than core holdings,” he remarks.  

Equities exposed to lithium and cobalt: McFetrich is confident in lithium becoming the “market leader for battery applications” in the next five-to-ten years, boosting lithium-exposed equities in turn. “Up to now, no other material has the flexibility, durability, charge capacity, or density as lithium,” he enthuses.

The specialist expects long supply lead times and other supply issues to remain supportive of higher lithium prices for the foreseeable future.  

There are also positive implications for cobalt-exposed equities with the rising dominance of NMC/NCA cathodes in battery cell manufacturing, although cobalt faces potential supply issues. Although there are few direct cobalt beneficiaries, firms that are able to recycle the material will benefit, as they reduce dependence on sources such as the Congo, where child labour issues are prevalent.

Recycling firms: Since the performance of lithium ion batteries gradually decline instead of dying out completely, McFetrich reckons the recoverability incentive for battery materials should increase over time, driven by regulations and material scarcity. Some batteries would also be recycled for alternative use, such as storage. Either way, should auto companies have to pay to recycle, the specialist expects value to transfer from auto companies to recycling firms.

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