Andy Home: Oil shock increases risk of metalshock as EV sales increase

Oil shock from the Iran War is recharging the market for electric vehicles (EVs) as high prices of gasoline and diesel fuel stimulate the consumer demand for alternative fuels.

The economics of EVs is driving sales just as much as government subsidies or 'green' ideology. This is especially true in the countries that are most vulnerable to a loss of oil supply and gas from the Gulf.

This has huge implications on the metal and oil markets, especially for key EV inputs like lithium, nickel, and copper.

Metal bulls have lost interest in the EV stories a 'couple 'of years back after the reality did not live up to early hype. Grid storage and data centres are the current hot topics for the lithium and copper markets.

The wars in the Middle East as well as Ukraine have accelerated the green transportation revolution.

POLAR OPPOSITES

On a broad scale, it appears that not much is happening in the EV industry. According to Benchmark Mineral Intelligence, global sales of new energy cars grew just 4% on an annual basis from January to august.

This mediocre growth rate masks regional markets with wildly different characteristics.

The US President Donald Trump has eliminated his predecessor's subsidy program, sending the country's electric vehicle sector into a steep decline. Sales were down by 33% in August compared to the same month last year, which brings the total year-to date contraction to 21%.

US automakers have reverted to conventional engines and cancelled planned investments in new electric models, battery supply chains, etc.

China is also a?weak point. In the period January-August, sales in China's biggest EV market fell by 12%.

This should be viewed in the context of the broader decline in the domestic car market. The total passenger vehicle sales fell by 24% in August compared to the same month last year. The EV segment has done relatively well. Last month, the penetration rate of new energy vehicles reached a record high of 65%.

China's automobile companies don't seem to be too worried.

Exports of EVs are at record levels.

In August, European sales increased by 36% compared to the same month last year. The growth for the year is 29% due to high fuel prices and government subsidies.

The growth outside of the three largest markets is the most spectacular. BMI reports that EV sales in the rest of world have more than doubled this year.

COST PRESSURES

According to Wood Mackenzie analysts, the total cost of ownership for battery EVs in China is now equal to that of traditional internal combustion engines.

In a period of high gas prices, the flood of Chinese exports with low prices are closing the gap on other Asian markets.

Consumer perceptions have also changed. Many people are buying EVs as an economic decision, not because they want to be green.

Wood Mackenzie has modelled what it calls an “electric shock” scenario in which high oil costs both accelerate the adoption of battery-powered cars by consumers and encourage governments to prioritize reducing their fossil-fuel dependence.

Battery performance is improving and EV costs are falling. This could lead to a structural change in the passenger car market much sooner than expected.

This scenario is more likely to occur the longer the Iran-Ukraine war continues and the longer Ukraine continues to target Russian oil refineries.

METAL STRESS

The metal supply chain will be put under more stress if the EV industry is moving out of the slow lane.

Wood Mackenzie estimates that even with accelerated demand for EVs, there will still be enough metal. But -- and this is a big but -- only if the investment in new production capacity increases at the same pace.

According to the company's "shock scenario", copper demand will only increase by 2% compared to a base case scenario where global EV sales continue growing at a modest annual rate of 4%.

The average annual mine production would then have to increase from 850,000 tons to 960,000 tonnes between 2025-2040.

The global lithium supply chain is controlled by China, which has a dominant position in the world. This will make it difficult to meet demand.

Over the past decade, EV markets have struggled with matching supply and demand, resulting in a series of price booms.

They could be caught off guard again, as EV sales are accelerating everywhere but the US.

Irony: While the Trump administration has slowed down the US transition to electric vehicles, it has unintentionally?persuaded the rest of world that it's time to go green.

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(source: Reuters)