Carmakers Are Chasing Miners
Summary
- The mining sector has underinvested over the last few years due, in part, to COVID and an emphasis on capital discipline.
- The speed at which regulators and carmakers want to drive the transition to EVs suggests that battery metals will increasingly be in short supply.
- OEMs that want to be recognized as ESG leaders will need to secure deals, not just with any suppliers of battery metals, but with those supporting strong ESG credentials.
EvgeniyShkolenko/iStock via Getty Images
By Gianmarco Migliavacca
A looming battery metals shortage is bringing carmakers closer to miners in order to secure supply.
A key lesson for carmakers from the chip shortage was the need to increase control over supply chains and to look far ahead for potential bottlenecks. We believe that the next bottleneck will be the shortage of battery metals required for electric vehicles (EVs).
Many miners are already saying that the copper, nickel, cobalt, and lithium that may be supplied in coming years will not be sufficient to meet fast-rising needs tied to the electrification megatrend. The mining sector has underinvested over the last few years due, in part, to COVID and an emphasis on capital discipline. Meanwhile, the speed at which regulators and carmakers want to drive the transition to EVs suggests that battery metals will increasingly be in short supply.
In such a scenario, automotive original equipment manufacturers (OEMs) that are better able to secure long-term deals with miners for preferential access to critical metals should have a competitive advantage over those relying on metal exchanges. Tesla (TSLA), the cost leader in EV production, is clearly ahead of the pack as the most vertically integrated OEM, but major legacy OEMs including GM (GM), Ford (F), and VW (OTCPK:VWAGY) are making moves to secure access to battery raw materials. This explains why GM is bidding for a 10% stake in Vale's (VALE) base metals unit and, earlier this year, announced a $650 million stake in Lithium Americas (LAC) to help develop a mine potentially supporting as many as 1 million EVs per year. Similarly, Ford has signed long-term mineral supply deals with the likes of Rio (RIO) for lithium and BHP (BHP) for nickel, following Tesla, which already signed a deal with BHP for the supply of nickel back in 2021.
We believe that OEMs with greater control over their supply chains, including to mines, will also have better standing on environmental, social, and governance (ESG) issues, all else equal, because they should be able to hit more ambitious EV penetration targets. This, in turn, could enable them to meet more ambitious decarbonization goals. However, OEMs that want to be recognized as ESG leaders will need to secure deals, not just with any suppliers of battery metals, but with those supporting strong ESG credentials. The selection of mining partners will be a differentiating factor across OEMs, and we expect that the strongest OEMs are likely to match with the best miners from an ESG standpoint. In our view, this will offer insight to investors on which OEMs and miners deserve overweights in their portfolios.
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