Analysts from Bernstein forecast the transition to a "green...

Analysts from Bernstein forecast the transition to a "green economy" providing the most upside to cobalt prices, which it expected to rise 173% in the medium-term.

It forecast a 73% rise in nickel prices and 27% increase in copper, without giving a specific timeline, with the bank roughly estimating that one tonne of copper in electrical systems could eliminate 100-7,500t of CO₂.

However, the bank's analysts said in a note they remained sceptical about the long-term performance of lithium.

"To investors searching for strength in the value chain, cathode materials appear a sweet spot - enabling battery performance, technological barriers to entry, strong customer relationships, low substitution risk, high capital requirements, and limited customer insourcing," they said.

They said anyone who had invested early in nickel and cobalt had been vindicated so far, although they said what comes next posed a threat, with diverse approaches to solve high-nickel problems increasing competition, customer blending threatening control over IP, and more insourcing by major customers.

Bernstein analysts said electric vehicles (EVs) were still niche products in 2019, due to their higher cost than cars with internal combustion engines (ICEs) and limited mileage range, equivalent driving range and charging times would up sales to around 100 million EVs a year.

Last year, total world car sales were 86 million, and the top-selling EV was the Tesla Model 3, with 130,000 units sold according to Jato.

"While none of those things are true today, the rate at which the technology is moving toward that outcome is far more rapid than was anticipated one, two, or three years ago," they said.

Although traditional OEMs have been slow to embrace EVs, which the bank said was logical due to early movers falling short of targets and facing notable losses due to the non-competitiveness of EVs, they are now taking electrification seriously due to regulatory and social pressure, as well as falling battery costs.

Bernstein forecast EVs would reach cost parity with ICE vehicles by 2022, earlier than previously expected, as larger scale production and softer raw material prices, particularly lithium and cobalt, since April 2018, drove EV prices lower.

"Although battery technology plays a huge role in battery cost reduction, energy density, performance, and reliability gains, battery manufacturing scale, the scale and price competition of the upstream supply chain, and raw material price fluctuations now play a major role in further cost improvements," the analysts said.

Interestingly, Bernstein said it did not see charging infrastructure as a barrier to EV adoption and the commercial case for investing improves with higher EV adoption.

The analysts said it would be possible to develop fast charging technology comparable to the five-minute refuel of a petrol station, saying the only reason it hadn't happened yet was likely due to many remaining trade-offs being more economic than technical in nature.

"For instance, thinning the graphite anodes of today's batteries would theoretically bring charge times down from around 30 minutes to around 10 minutes with minimal additional R&D. The trade-off is that the lower energy density from thinner anodes could result in batteries costing an additionalUS$40-50 per kWh, or US$3,000-4,000 per car," the analysts said.

However, they said, given the substantial cost declines seen in the battery industry in the last five to 10 years, from over $500/kWh to the current $150/kWh, the cost threshold at which "extreme fast charging" became widely economically feasible was approaching.

"As such, broadly available extreme fast charging appears to be more of a question of ‘when' rather than ‘if'… perhaps in three to five years, which could materially accelerate mass-market EV adoption.

Increasing demand

In turn, demand for EVs was increasing, with Bernstein putting the tipping point in the early 2020s.

The analysts said EV sales growth had been faster than its most bullish "rapid-adoption" scenario, with 2 million EVs sold in 2018, up 66% year-over-year.

In response, the bank had increased its short-term projections, but kept its already-positive long-term scenarios unchanged.

"Beyond electric cars, we see new demand drivers for batteries and potential disruption in trucks, bikes, planes, and energy storage systems. Together, ‘beyond electric cars' represents 269GWh or 32% of demand by 2025 by our estimate," they said.

The analysts saw a strong potential for EV adoption across all forms of two-wheeled transportation and said, assuming electric motorcycles followed the same adoption curve expected for EVs in autos, annual sales of electric motorcycles could reach around 220,000 units by 2030, up from 8,000 in 2017, which represented around 2.2GWh of annual battery power sales.

It said the market for electric urban mobility vehicles was also likely to rise. Especially in cities in China and Southeast Asia, with annual unit sales of lithium ion battery e-bikes and e-mopeds estimated to reach around 25 million in China in 2030 and 18 million in Southeast Asia, up from 15.4 million and 8.6 million in 2018, respectively, and contributing around 125GWh of annual battery power sales.

Tier 1 battery makers on top

The increasing demand has led to tier one battery makers ramping up supply even faster than expected, but Bernstein said this was unlikely to be enough to meet demand, with technological barriers and safety concerns also on the rise, resulting in consolidation, which in turn was leaving tier one battery makers in an "increasingly formidable position".

The analysts said they therefore expected the big five battery makers to face increasing challenges to meet demand in the 2020s, with new players needed to fill the gaps, particularly in Europe.

Looking further ahead, Bernstein saw solid-state batteries (SSBs) as being inevitable and driving "massive" improvements in energy density, charge time, and safety.

But while there has been progress in this area, they are still niche and only likely to be used in mainstream vehicles after the mid-2020s, with decent volumes only likely to materialise in the late 2020s.

The price of solid-state batteries was also expected to be higher than lithium-ion until at least the late 2020s due to continued development on that side too.

"We believe sulphides are the best type of solid electrolytes available, which are under development by Toyota, Samsung, and Solid Power. Oxide electrolytes (likely being developed by QuantumScape) also hold promise.

"Among incumbents, Toyota, Samsung, and LG Chem are way ahead in battery technology and number of battery patents filed, with Toyota and Samsung in particular making huge inroads into SSBs recently.

Cathode-wise, they said cathode makers had ramped capacities that meet cell-maker/OEM needs, but these would exceed top-down consumer demand estimates until at least 2025.

"Troubles have begun at some customers - avoiding speedbumps requires strong and broad customer relationships with the largest producers who continue to gain share," the analysts said.

Bernstein was of the view that, in the long-term, those focused on enabling ‘one step beyond' technology, such as solid-state and silicon anodes, which are likely required to enable mass adoption, would benefit most.

"We favour those players with strong IP portfolios and R&D spending and working to commercialise these technologies. Umicore looks well positioned and is supplementing long-term relevance through an active role in EV recycling," the analysts said.

The bank said the greatest opportunities from rapidly advancing battery technology improving EV economics and accelerated demand would support tier one battery makers, such as Samsung SDI and CATL; tier one battery component makers, particularly cathodes, such as JMAT, Umicore and leading Asian suppliers; and raw material suppliers exposed to nickel, cobalt, and copper, such as Glencore, First Quantum, Antofagasta, and Ivanhoe.

"We believe vertically integrated OEMs (Tesla and BYD) are better positioned in a world where we may see tightness and bottlenecks in the supply chain. Among incumbent auto OEMs, Volkswagen and SAIC are our top picks globally," it said.