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

Oil shock from the Iran War is recharging the electric vehicle (EV) industry as high prices for gasoline and diesel stimulate the consumer demand for alternative fuels.

The economics of EV sales is as important as government subsidies or green ideology. This is especially true in countries that are most vulnerable to a loss of oil supply from the Gulf.

This is a huge issue for the metal and oil markets, especially those that are critical to EVs, such as nickel, lithium and copper.

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

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 sent the country's electric vehicle sector into a steep decline after he eliminated his predecessor's subsidy program. Sales were down by 33% in August compared to the same month last year, and year-to date sales are down 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 the world's biggest EV market fell by 12% on an annual basis.

This should be viewed in the context a wider downturn on the domestic vehicle market. 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 new record of 65%.

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

The world is?exporting a record amount of EVs.

In August, European sales increased by 36% compared to the same month last year. The growth rate for the year is 29%. This is due to high pump prices combined with government subsidy schemes.

The most impressive growth outside of the three largest markets is not surprising. According to BMI, EV sales have more than doubled in the rest the world 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.

The battery performance is improving continuously and the cost of EVs are falling. This could lead to a structural change in the market for passenger vehicles much sooner than expected.

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

METAL STRESS

The metal supply chain will be put under more pressure if the EV industry moves out of its 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" -- it only works 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%.

This means that the average annual mine production would have to increase from 850,000 tons to 960,000 tonnes between 2025 and 2020.

The global supply chain is dominated by China, which has a dominant position in the lithium market. 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 accelerate everywhere but the US.

Irony: While the Trump administration has slowed down the US transition to electric vehicles, it has inadvertently convinced much of the world to go green.

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(source: Reuters)