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In charge with Electric Vehicles

Electric Vehicles (EVs) tap into key megatrends

The world is changing at a rapid pace. Over the next decade, we expect five key megatrends to shape the framework in which we live. The marriage of two of these key megatrends – (1) technological innovation and (2) climate change builds the case for EV adoption. The reason for this is, the rise of EVs plugs the problem of rising global carbon emissions along with reaping the benefits of the rapid technological advancement.

Sources: Mc Kinsey July 2016, United Nations (UN) June 2017, Intergovernmental Panel on Climate Change (IPCC) May 2018, US Department of Health and Human Services (HHS) May 2014 and WisdomTree

Impact of Policy Change

Political will has been the cornerstone of the shift to electrification. More than nine countries and a dozen cities or states have announced bans on the internal combustion engine within the next decade or so. Governments across the globe are supporting the shift to electrification in the auto industry by providing the necessary infrastructure and tax incentives. In doing so, they are signalling the urgency to move to zero emission vehicles to meet their climate and air quality goals. Recent investment announcements for EV infrastructure development in selected countries (Billions USD) are highlighted below:

Source: International Energy Agency, WisdomTree, data available as of close 28 June 2018

China is going green

China is spearheading its way in the EV market and accounted for nearly three quarters of global EV sales in 2017. China is yet to set a deadline for automakers to end sales of gas and diesel engines. However, the government has set very specific and trackable targets on environmental development in its 13th five-year plan. China is positioning itself to be a leader of New Energy Vehicles (NEVs) in terms of both shipment volume and technology.

After four decades of growth China’s environmental quality is now significantly poor. The government is intent on raising environmental standards. In 2015, a central government led crackdown on pollution was first introduced in the 13th five-year plan. Thousands of industrial plant owners were fined and charged for misconduct. Despite the marginal improvement in air quality it is still far from reaching the healthy standards set by international organisations. Most of China’s pollution is a result of heavy coal use which accounted for 60.4% of its total energy consumption in 2017. We are now likely to see an increase in consumption of natural gas and non-fossil fuel sources owing to the governments binding targets on energy and carbon intensity.

China has become the world’s largest auto market since 2009. Road networks contribute to 76.8% of its freight traffic and is the largest source of air pollution, underpinning the significance of the shift to New Energy Vehicles (NEVs) in China. Both the consumer and manufacturers are benefiting from government subsidies on New Energy Vehicles. In August 2017 the government issued its “Beijing -Tianjin-Hebei Autumn and Winter Air pollution control plan 2017-18”. The state council further announced a 3-year action plan for Winning the Blue Sky Defence War, with detailed targets and measures in June 2018. The Chinese government aims to sell 2mn NEV in 2020 & 7mn NEVs by 2025.

Hurdles in the EV industry

The cumulative number of plug-in electric vehicles sold worldwide, for the first nine months of this year, stands at 1,279,000 (up 68% year-over-year) marking 1.8% market share. Pure Battery Electric Vehicles (BEV) led the pack up 61% and Hybrid Electric Vehicles (HEV) rose 36% over the prior year. Projections on the EV market remain optimistic. The International Energy Agency (IEA) expects EVs to become mass market in the next 10- 15 years. The following three hurdles appear to be holding back mass EV adoption.

Source: WisdomTree

Higher battery costs are one of the main obstacles holding back consumers from buying EVs. Innovation in battery technology have enabled battery costs to decline from US$1000 per kWh (Kilo watt hour) in 2010 to below US$250 per kWh, according to S&P Global Platts. Battery prices are expected to decline further by US$100 by 2030, at which point EVs are likely to be competitive with Internal Combustion Engine (ICE) vehicles.

Advancement in battery technology

Lithium-ion batteries (LiBs) are the most widely used batteries in EVs owing to their high energy density. Metals account for 40% of the costs of LiBs according to consultant firm Roskill. These batteries require more than just lithium, with other metals used in the electrodes (anode and cathode) including graphite, cobalt, nickel and manganese. LiBs adopt a range of battery chemistries that employ various combinations of anode and cathode materials. The five most advanced technologies used in LiB are: Lithium Manganese Oxide (LMO), Lithium Cobalt Oxide (LCO), Nickel Cobalt Aluminium (NCA), Nickel Manganese Cobalt (NMC) and Lithium Iron Phosphate (LFP).

Source: Boston Consulting Group (BCG), January 2010

Each of the above Lithium ion technologies can be compared along six dimensions: safety, lifespan (measured in terms of both number of charge and discharge cycles and overall battery age); performance; specific energy (how much energy a battery can store per kilogram of weight); specific power (how much power the battery can store per kilogram of mass) and finally cost. Safety is by far the most important criterion for LiB. Meanwhile battery producers face a constant tug of war between cost and safety as no single technology delivers on all six dimensions.

Source: WisdomTree

While the NCA boasts of high performance it poses safety challenges, the LFP ranks high on safety it has lower specific energy. While battery technology has taken great strides, there is no single technology that ranks highly on all six dimensions. Battery technology remains in a constant struggle to find the right chemistry to achieve the optimum performance across all six dimensions.d acceptance among manufactures. Battery manufacturers are experimenting with the composition ratios of these metals and are favouring a higher proportion of nickel. Implementing a higher proportion of nickel provides the benefit of higher energy in the batteries over long distances and also make the batteries lighter. However, the lifetime of these batteries is short. Added to that, higher nickel ratios reduce battery manufacturers dependence on cobalt. Most of the world’s supply of cobalt arises from the Democratic Republic of Congo. Owing to the country’s political instability combined with human rights spotlight on child labour, a large portion of the world’s supply of cobalt remains at risk. According to Roskill and Benchmark Mineral Intelligence (BMI), NMC batteries featuring higher nickel proportions of 5:2:3 and 6:2:2 are already in use and manufactures are pushing to commercialise the NMC 8:1:1. However the NMC’s 8:1:1 highly stringent requirement in terms of dust, moisture and contamination control are holding back efforts to make the battery commercial. NMC 8:1:1 is expected to gain significant market share in the EV market by 2020.

We expect the rapid pace of innovation in battery technology to speed up mass adoption of EVs. As adoption of EVs garner momentum they will have far reaching implications for commodities. We expect metals such as – nickel, copper, silver and smaller elements such as – cobalt and lithium to benefit from the uptake of EVs, which we will discuss in detail in the second part of our blog.

This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.

Sydkoreanska Mirae Asset köper Global X

I den senaste omgången av konsolideringen på marknaden för börsnoterade fonder så fick vi förra veckan ta del av nästa förvärv. Denna gång är det att Mirae Asset köper Global X. Sydkoreanska Mirae Asset köper Global X som är den 17:e största ETF-utgivaren i USA. Bolaget är emellertid mycket känt för sina nischade ETFer, till sin börshandlade fond med exponering mot Litium, Global X Lithium & Battery Tech ETF (NYSEArca: LIT). Global X har också börshandlade fonder som erbjuder exponering mot länder som Argentina, Nigeria och Pakistan vilket företaget är ensamt om.

Villkoren för affären är i dagsläget inte kommunicerade, men affären är en i raden av fler som sydkoreanska Mirae Asset gjort under de senaste åren. Genom köpet av Global X får Mirae ett fotfäste i USA, och det kan dessutom knytas samman med övriga marknader som Mirae har dotterbolag i. I dag har Mirae bolag i Kanada (Horizons), Australien (BetaShares) och Asien (Tiger ETF). Totalt sett hade dessa företag mer än 30 miljarder dollar i förvaltat kapital den 31 januari 2018.

Mer än 50 börshandlade fonder

Global X, som erbjuder mer än 50 ETFer i USA och på utländska börser, hade 9 333 miljarder dollar i förvaltat kapital per den 12 februari 2018. Det New York-baserade företaget är känt för sin unika uppdelning av inkomster, internationella och tematiska fonder. Global Thematic ETF (NasdaqGM: BOTZ) och Global X Lithium & Battery Tech ETF (NYSEArca: LIT) är Global Xs två största ETFer, som tillsammans svarar för nästan en tredjedel av företagets förvaltade tillgångar.

Partnerskapet med Mirae Asset kommer att ge Global X tillgång till resurserna hos ett stort globalt finansiellt institut. Detta gör att Global X kan fortsätta att expandera sina tematiska, inkomster och internationella ETF-lösningar och att bredda sina distributionsmöjligheter. Den dagliga verksamheten i Global X-verksamheten förändras inte och den fortsätter att drivas under varumärket Global X.

Har även smart beta produkter

Global X har också en grupp smart-beta-erbjudanden, inklusive Global X SuperDividend ETF (NYSEArca: SDIV), som också har blivit populär bland inkomstsökande investerare.

För nästan två år sedan tog JP Morgan Asset Management en passiv minoritetsandel i Global X. Investeringen gjorde inte att Global X blev anknuten ill JP Morgan, och det fanns ingen samordnad marknadsföring, investeringshantering, distributionsavtal eller delad styrning mellan de två fondleverantörerna.

Transaktionen väntas stängas under tredje kvartalet 2018, i väntan på nödvändiga godkännanden från tredje part, inklusive vissa regleringsfrågor och erforderliga ETF-styrelser och ETF-aktieägarnas godkännanden. Global X VD och medgrundare Bruno del Ama kommer att kliva av när affären är klar. Han ersätts då av Luis Berruga som blir VD när affären är klar.

Battery Technology – don’t bet on lithium alone..

Lithium is currently the material of choice to produce batteries in a whole range of devices where mobile energy is required, the most prolific of which being energy storage, mobile phones and battery-powered electric vehicles. But what is the risk of lithium being usurped by an alternative material? Battery Technology – don’t bet on lithium alone..

The realities of lithium as an investment

There is huge investor interest in lithium and more broadly in battery/mobile energy technology at the moment, the question is raised in almost all meetings I have with clients who are looking for ways to invest in the industry. Investors are looking to future-proof their portfolios. Lithium is a growing technology with great potential future prospects while theoretically providing a form of hedge against the expected secular decline in the oil industry, which is facing the risk of cannibalisation from the rise of electric vehicles.

The caveat to this success of lithium

The caveat to this success of lithium is that it won’t be a direct path to success for varied reasons:

Electrical grid infrastructure – Currently the electricity grid does not have the required capacity to accommodate this change. According to the Green Alliance most residential streets do not have capacity for more than 6 cars to be charged at any time and as such would require significant infrastructure upgrades.
Affordability – The average cost of a car is US$24,000, with the cheapest electric car being $33,000, therefore despite the falling costs it still has a long way to go before it can properly compete with internal combustion cars.
The internal combustion engine –Electric vehicles are not only being challenged on price, significant improvements are being made with the internal combustion engine. The “thermal efficiency” of most petrol engines currently peaks at 25%, with a theoretical maximum of 50%, giving significant scope for efficiency gains. The latest battery packs are priced at US$350/kWh, while internal combustions engines are priced at around US$100/kWh. Costs have been falling rapidly for batteries but there is still a fair way for them to go for them to compete.

Despite all the news of battery supply problems at Tesla, lithium prices are 10% above the 90th percentile of the cost curve suggesting in the short term there is potential for a price correction.
Rare earth metals are commonly used in lithium battery production, and supply squeezes are common due to supply being highly concentrated in politically volatile countries. Additionally, child labour has been used in the past and raises questions about their suitability in today’s more ethical portfolios.
There is no futures market and no exchange for lithium; most deals are done between producers and manufacturers directly.
Lithium equities also do not have a particularly good correlation to the lithium carbonate price, and in fact have a much closer correlation to the oil price.

There are other competing battery technologies that could quickly unseat lithium as the material of choice. We have summarised the key battery technologies currently being researched or developed that pose a potential threat to lithium.

Hydrogen fuel cells

Hydrogen fuel cells have been in use for some time in varied forms, led by Japan where their use in vehicles has been met with mixed success. It is a very common element and on a per joule of energy basis, a hydrogen car will go further than a lithium car.

The biggest challenge so far has been capturing and storing hydrogen. In the US there are currently only 35 commercial hydrogen refuelling stations.

Due to these infrastructure constraints they are typically confined to public vehicle use, rolling out infrastructure for personal vehicles would be time consuming and expensive. Hydrogen powered vehicles are in development by some of the leading car manufacturers but there are unlikely to be popular until the infrastructure is in place.

Magnesium solid-state

Magnesium batteries have been commercialised as primary batteries, and are an active topic of research for secondary (rechargeable) batteries. Magnesium batteries offer inflammable batteries with a higher energy density than lithium ideal for cars where safety and mileage are paramount. Magnesium is also a widely traded, abundant material but so far it hasn’t found success as a rechargeable battery. The biggest challenge for magnesium has been making a solid-state rechargeable battery, but the Berkeley Lab Joint Centre for Energy Storage Research has recently discovered the fastest magnesium-ion solid-state conductor – a major step towards making rechargeable batteries a reality. However, it has a long way to go before a battery is likely to be produced.

Lithium Sulphur

Lithium Sulphur batteries could have 40% higher energy density than the lithium-manganese and the lithium-cobalt batteries we use today. Their wider use would also help the problem of producers having to source rare earth metals such as cobalt and manganese from politically unstable countries and likely reduce costs for consumers. The key issue for lithium-sulphide batteries is the extra mass required for a conducting agent and the risk of an irregular discharge leading to safety concerns.

Battery technology opportunities come in various forms

While lithium the metal is difficult to invest in and lithium equities do not accurately track the lithium price, there may be some indirect opportunities. Currently normal internal combustion engine cars use 20kg of copper, hybrids use 40kg and electric vehicles use 80kg, primarily in the wiring harnesses that transmit power to the drivetrains, the drivetrain themselves and the battery.

We believe that lithium technology, despite its potential for success is risky due to the potential for it being usurped by one of the aforementioned battery technologies. We remain convinced that mobile energy storage is likely to be a booming industry in the coming decades but the best approach may be to consider a wide range of technologies that can deliver mobile energy storage.

If the electric vehicle market rises to 140m cars by 2035, then this equates to around one third of total copper demand According to BHP Billiton (www.bhp.com 31st October 2017). The upgrading of the electricity grid infrastructure will require much more infrastructure spend, likely to further increase copper demand.

James Butterfill, Head of Research & Investment Strategy at ETF Securities

James Butterfill joined ETF Securities as Head of Research & Investment Strategy in 2015. James is responsible for leading the strategic direction of the global research team, ensuring that clients receive up-to-date, expert insight into global macroeconomic and asset class specific developments.

James has a wealth of experience in strategy, economics and asset allocation gained at HSBC and most recently in his role as Multi- Asset Fund Manager and Global Equity Strategist at Coutts. James holds a Bachelor of Engineering from the University of Exeter and an MSc in Geophysics from Keele University.

Macro outlook supports the mining sector but further upside remains muted

ETF Securities Equity Research: Macro outlook supports the mining sector but further upside remains muted

Highlights

Demand for metals remains well supported by a favourable macro-economic backdrop but China’s reform policy is expected to soften future metal demand.
The benefits of the weaker US dollar on higher commodity prices are outweighed by higher local currency input costs for producers in the mining sector.
Capex growth has turned positive for the first time in five years and the electric car revolution opens further avenues of investment for the mining sector.
Strict capital discipline among the miners has improved operational efficiency but miner’s valuations are not cheap.

Macro outlook supports demand

The global economy looks set to embark on a strong growth trajectory evident from the improvement in global purchasing manufacturing indices (PMI) since the second half of 2016. The optimism over global expansion increasing consumption of metals has led to a revival in the price of most metals this year. As a consequence, we have witnessed the top 100 diversified miner’s aggregate price appreciate 86% since 31 January 2016 (Source: Bloomberg).

Added to that, the current weakness of the US dollar is acting as an important catalyst in fuelling the commodity price rebound. As the world’s largest economy enters the late stage of the economic expansion cycle we expect to see tightening of the labour market combined with rising inflation, commodity prices and interest rates as the Federal Reserve normalises policy. The raw industrials index and the trade weighted US dollar tend to move inversely to each other with a negative 0.80 correlation. This counter cyclical relationship bodes well for base metal prices as investors look towards metals as a store of value versus the greenback. While the mining sector will benefit from higher commodity prices, the weaker US dollar could temper the benefits for producers that have a high proportion of costs in local currency.

China’s reforms take centre stage

A government led initiative in China’s construction industry since early 2016 underpinned the rebound of industrial metal prices. The emphasis on reforms as highlighted by President Xi at 19th National Party Congress in October 2017 suggests Chinese economic growth will gravitate more towards services and consumer spending. These activities are significantly less resource intensive and could soften demand for industrial metals. Added to that, the ongoing cooling of fiscal stimulus to the manufacturing and construction industries that kick started in H217, will further dampen new demand for industrial metals.

That being said, China’s supply side reform, to tackle environmental pollution, address unlicensed production and excess supply, resulted in significant escalation in metal prices last year. The widespread efforts improved capacity utilization rates within the aluminium, coal and steel industries. To a large extent, the impact of the capacity reductions in steel and coal appear to have already passed their peak, as the Chinese governments met their targets late last year.

Miners are back in business

After five consecutive years of negative growth in capex, total spending has finally turned positive, rising 8% since the prior year. A large part of the spending has been dedicated to sustaining production rather than expansionary projects. Miners are tapping into the new sources of growth led by technology driven innovation. At the forefront of this revolution, electric car production is expected to bolster demand for lithium, cobalt, copper and aluminium. Mining companies owning lithium and cobalt deposits are well positioned to benefit from rising demand owing to their use in battery cathodes.

Ongoing supply deficits projected

A vast variety of metals are projected to continue to extend their supply deficits into 2018 as demand outstrips supply. Declining inventory levels of global metals stocks namely – zinc, copper, aluminium, platinum, palladium and tin remain supportive of their price recovery. However deteriorating ore grades and falling reserves, make it vital for miners to undertake further exploration projects to maintain their current production.

Miners are not cheap

Owing to the challenging pricing environment between 2011 and 2016 the mining sector imposed a stricter capital discipline in an effort to shore up their balance sheet. Since mid-2016, valuations for the sector have climbed in lock step with rising profitability. Mining stocks currently trade at 17x earnings compared to the long term average of 10x, supported by higher earnings growth (Source: Bloomberg, as of 30 January 2018). Meanwhile, the current price to book ratio at 2x trades in line with its long term average of 1.7x as impairments charges reduced significantly. Recovering commodity prices, an emphasis on debt repayments and improving liquidity have helped alleviate pressure from ratings agencies as ratings outlooks for base and precious metal miners turn positive.

For more information contact:

Catarina Donat Marques
ETF Securities (UK) Limited
T +44 20 7448 4386
E catarina.donatmarques@etfsecurities.com

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ETF för Litium kan upprepa succén under 2018

Global X Lithium & Battery Tech ETF (NYSEARCA: LIT) är en börshandlad fond som var på mångas läppar under 2017. Denna ETF steg med fantastiska 59 procent under förra året, och var därmed en av de börshandlade fonder utan hävstång som utvecklades bäst under förra året. Det finns anledning att bevaka denna börshandlade fond. Det finns anledning att anta att denna ETF för Litium kan upprepa succén under 2018.

Eftersom USA ser ett växande skifte mot större batterier för att öka efterfrågan på elfordon, kommer industrin att höja produktionen från 68 gigawatt-timme litiumjonceller i fjol till 1,165 GWh under det närmaste decenniet, spår mäklarföretaget Berenberg.

Volatila investeringar

Emerging technologies kan skapa volatila investeringar, och Teslas upp- och nedgång under 2017 illustrerar det. Sammantaget förväntar analytiker fortsatt expansion för litiumkraft. Efterfrågan på litium började öka med tillväxten av bärbar elektronik.

Som fler länder planerar för elbilar att minska sitt beroende av bensindrivna fordon satsar investerare på att världen kommer att uppleva en av sina största förändringar i efterfrågan på råvaror sedan 1800-talet när petroleum ersatte valolja som belysningsbränsle.

Försäljningen av el- och hybridfordon ökade 50 procent under de första 10 månaderna 2017, jämfört med samma period året innan. Försäljningen av el och hybridfordon förväntas också öka till 31,5 miljoner enheter 2013, jämfört med 1,2 miljoner enheter 2017, enligt Jefferies Group.

Försäljningen av elbilar steg med 96 procent

I Kina ökade försäljningen av batteridrivna elbilar med 96 % i oktober från årets början och för de första 10 månaderna av året steg den kinesiska elbilsförsäljningen med 45 % jämfört med förra perioden, enligt en forskningsrapport från Nomura Instinet som publicerades den 21 november.

Med återhämtningen av ekonomin har råvarubranschen, som är nära knuten till råvarupriserna, traditionellt gjort bra som inflationstryck och konjunkturutvidgningar i den senare delen bidrar till att stödja efterfrågan. Med fler litiumbatterier kan produktionen av metallen tredubblas under de närmaste fem åren.

Historiskt sett är traditionella råvaru-ETFer varit starka kort i december och januari. Frågan är om LIT, en ETF för Litium kan upprepa succén under 2018?