Reading Seeking Alpha recently, I came across an article from a few years ago about how it was time to kill the electric car. The main point of the article was that the resources required to mass produce electric cars on the scale needed to make a difference simply do not exist in comparison to the resources required for traditional gas-guzzling cars.
Since the time of the article, almost 5 years have passed, and they have been a beautiful five years for the electric market. No longer are electric cars simply gas cars boosted with a battery, but as the McLaren P1 Hybrid above and the latest Tesla cars show, pure electric cars have become their own high end luxury car market.
The question becomes, is this a market that will continue rapidly growing, or as the previous article states, is this an expensive pile of cards that will come crashing down as the raw materials so essential in these cars runs out or is this a high potential market that can continue its rapid growth.
To start let us talk about the prices of the raw materials that go into these cars. When these articles were first written in 2011, iron ore prices were skyrocketing towards $200 per ton. Yet since then, partially due to a strong dollar and partially due to rapidly increase iron ore supplies, the price of iron ore has plummeted by almost 80% down to almost $40 per ton.
Yet despite this crash in iron ore prices, spending has continued, and the world's iron ore supplies are expected to continue growing. Such discoveries have continued leading to sources of other metals as has been clearly shown by shale oil and natural gas where the discovery of shale oil rapidly increased natural gas stockpiles.
Increasingly central to the author's thesis of the failure of electric cars was their strong usage of rare-earth metals which are often not recycled and whose production could not support high demand.
Yet despite the lack of supply, increasing sources of rare-earth metals are being found. In 2013, the largest rare-earth metal mine was found in North Korea, albeit with a questionable government in place. In 2014, a major mine found in Tanzania is thought to have the potential to make Tanzania the next major rare-metal producer.
Currently 94% of the world's rare-earth metal production comes from China with 70% of the lighter production coming from a single mine in China. Yet China contains only 5% of the world's surface area. Now we can start by assuming that China is just incredibly lucky to have all the rare-earth metals from the world in its territory. Or we can assume that the rest of the world also has significant rare-earth metals that have yet to be discovered.
The above graph of the worldwide production of Lithium, one of the most important metals in these car batteries (hence why they are called lithium-ion batteries) provides a classic picture of supply and demand in a market with rapidly increasing demand. As demand increases, the price of Lithium increases. In turn, this increase in price which supports additional exploration. This new found exploration rapidly increases the supply of the metal.
One of the major flaws I noticed in the author's work was the assumption that current trends will continue. Five-hundred years ago, oil was seen as a worthless substance oozing from the middle east. The first oil collected from western Pennsylvania was used for medicine and collected by hand one barrel at a time.
Yet today, the United States is one of the largest oil producers in the world, and the largest oil consumer in the world. When prices started skyrocketing after the 2008 crash, shale producers almost instantaneously found large sources of oil rapidly increasing American production. It was not that the United States never had those resources it was that it was never economical to extract them.
The same holds true in the present oil crash. As prices have come crashing down, exploration spending has been decimated and the number of oil rigs drilling in the United States has rapidly decreased. This has resulted in oil reserve replacements falling below 100% for the first time in 20 years for majors like ExxonMobil (NYSE:XOM). The resources exist - it is just about finding them.
What Can Be Made
Now that we have an introduction to metal prices and rare-earth metals, both of which have seen their supply rapidly increase over the past decade as a result of new discoveries, let us talk about the resources we do have - assuming growth continues as it has what kind of source of electric battery production can we get.
The above image of a Toyota (NYSE:TM) Prius shows the rare earth metals that go into the car's production. In fact, a single Toyota Prius consumes about 20-25 pounds of rare-earth metals compared to about 10 pounds of rare earth metals for a typical car.
However, the thing is that the worldwide production of cars has been increasing rapidly from 50 million in 2001 close to almost 100 million expected this next year. While a relatively small growth rate, the rare metal usage of 100 million cars would be equivalent to having 50 million electric cars in 2001. Beyond this, no one was complaining in 2001 about rare-earth metals running out in 2015, because as the demand has increased so has the supply.
At the same time, as the above graph shows, the global production of rare earth metals has rapidly grown. As the USA has no longer been able to financially compete with China, Chinese production has grown to replace American production. That means that supply should continue increasing to make up for American production.
However, perhaps most important in the lifetime of the electrical vehicle and the rare earth metals required, is the expected lifetime of electric cars. From 2009 to 2015, the expected lifetime of an electric vehicle battery has gone up by 350%. That number is expected to continue rising. And since these batteries are the largest source of rare earth metals in cars, that means demand for these batteries will decrease.
Throughout this article, we have talked about the supply and demand of electric vehicles along with its typical lifespan and the difficulty of finding these resources. The previous article discussed the failure of electric vehicles due to a lack of resources and recommended shorting the likes of Tesla (NASDAQ:TSLA). Instead since then, Tesla's stock has become a ten-bagger and Teslas have become a purely electrical symbol of prestige.
Instead of running out, the supply of these rare earth materials has rapidly increased while the prices of these rare earth materials has been decimated. This is true not just in the field of rare earth metals but also for iron ore, oil, and most other commodities. That is despite rapidly increasing demand as discoveries come online every day.
For interested investors, I recommend investing in major car companies who will find a way to profit off of the electric car future. Toyota, Ford (NYSE:F) and the other major car makers will all grow to major stakes in the electric car market. At the same time, Tesla, despite its potential in opening the market has yet to show a respectable profit let alone one based on its lofty stock price.
Disclosure: I am/we are long GM, F.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.