This past year has been a problematic one for electric vehicle (EV) makers.
I recently tried to order another electric vehicle and was told by my local Audi dealer that they are not taking new orders for the Audi e-tron GT. The lithium-ion battery shortage is now becoming increasingly obvious as companies struggle to cope with high lithium, nickel and cobalt prices, which threatens to postpone the electric vehicle revolution.
According to Benchmark, raw materials now account for 80% of the cost of a lithium-ion battery, up from 40% in 2015. Specifically, Benchmark noted that materials for the battery cathode, such as lithium, cobalt and nickel, have collectively gained about 150% in the past year, including 25% to 30% in the past month!
The demand for lithium has well surpassed the supply, despite supply having grown 22% from 2020 to 2021. Lithium supply is forecasted to grow nearly 30% from 2021 to the end of 2022, according to S&P Global Market Intelligence.
I should add that the war in Ukraine has also impacted electric vehicle manufacturers, as import bans on Russian products have taken a toll on the nickel supply. Higher demand for EVs has also contributed to the battery manufacturing struggles, as both the U.S. and China saw triple-digit sales growth on electric vehicles.
The shortage of raw goods has caused leading automakers some concern. On Tuesday, The Wall Street Journal cited Rivian Automotive Inc (RIVN) CEO RJ Scaringe’s warning that the shortage of battery supplies for EVs could surpass the semiconductor shortage.
Specifically, Scaringe said, “Put very simply, all the world’s [battery] cell production combined represents well under 10% of what we will need in 10 years.” He also added that this means “90% to 95% of the supply chain does not exist.”
Bloomberg similarly warned the EV battery shortage is becoming even more acute than the semiconductor shortage.
To help offset the impact of the shortages, companies like Rivian and Tesla Inc (TSLA) have raised the prices of their electric vehicles. And companies like Ford Motor Company (F) were forced to cap car reservations due to demand outweighing supply. After 200,000 of the new F-150 Lightning trucks had been reserved, the company stopped allowing reservations to be made due to manufacturing constraints.
But while the shortage of raw materials to build batteries certainly poses a challenge to the EV revolution, the revolution is still alive and well. Tesla, for instance, posted record profits for its first quarter.
Working Around the Shortages
While Elon Musk has said the high lithium prices are a “limiting factor” to EV growth and acknowledges prices may keep rising, he anticipates Tesla’s new Austin and Berlin manufacturing plants will help to overcome some of the bottlenecks. In fact, he expects the company will produce more than 1.5 million EVs this year.
Tesla has even gotten around some of the battery problems with its Tesla Model Y. The car has the newest 4680 battery cell, composed of 90% nickel. While most EVs have a driving range of 300 to 400 miles, this model has a 276-mile EPA range. This lower mileage and smaller battery allows Tesla to sell more cars.
Stellantis NV (STLA) has also taken steps to get around the shortages. CEO Carlos Tavares announced that the company aims to open up a battery factory in Kokomo, Indiana, in 2025. Tavares expects that by 2027 or 2028, due to bottlenecks, environmental regulations, and shortages of facilities that mine and refine lithium, there won’t be enough raw materials to make the batteries; so he believes automakers should take control of their own futures.
In fact, just this week, Stellantis and Controlled Thermal Resources Ltd. signed an agreement for CTR to supply Stellantis with battery-grade lithium hydroxide. Over the 10-year agreement, CTR will supply Stellantis with up to 25,000 metric tons per year of lithium hydroxide for its North American EV production.
Here’s the reality: Despite the shortages, there is still significant long-term growth ahead for the electric vehicle industry.
For example, BloombergNEF released its Long-Term Electric Vehicle Outlook on Wednesday, writing that EV sales are likely to more than triple by 2025. And the International Energy Agency expects the EV market to grow 3x to 4x in the next decade, according to its EV Market Outlook report.
In its Long-Term Electric Vehicle Outlook, BloombergNEF writes:
The rising cost of batteries does not derail near-term EV adoption. Some of the factors that are driving high battery raw material costs – war, inflation, trade friction – are also pushing the price of gasoline and diesel to record highs, which is driving more consumer interest in EVs
As long as you know where to look, you can profit from the EV revolution. Companies like Panasonic Holdings (PCRFY) and Toyota Motor Corp (TM) are leading the transformation to solid-state batteries, which Toyota plans to “stress test” in hybrid vehicles in 2025.
And Panasonic just shipped samples of its powerful 4860 battery cell to Tesla, ahead of an anticipated surge in North America. The company expects sales in its automotive business to climb 19% through March of 2023.
In regard to automakers, I expect Ford Motor Company (F) to emerge as an even greater competitor to Tesla in the coming months. In 2021, Ford became the number-two seller of electric vehicles in the U.S. It expects to sell more than 600,000 EVs across Europe by 2026.
Its future guidance is also quite optimistic. For full-year 2022, adjusted EBIT is expected to increase between 15% and 25% year-over-year, or between $11.5 billion and $12.5 billion. Adjusted free cash flow is expected to come in between $5.5 billion and $6.5 billion.
I should add that just this week, Ford announced its sales figures for May – and they revealed increasing EV sales that boosted its overall market share to 13.5%. During the month, Ford sold 6,254 battery EVs, or a 222% year-over-year increase. The Mustang Mach-E achieved a new monthly sales record of 5,179, with sales up 166% year-over-year. And the company realized its first sales of the F-150 Lightning, with 201 trucks delivered to dealers and sold in May.
Ford also continues to experience strong demand for its ICE (internal combustion engine) vehicles, as 24,300 F-series pickups, 18,985 Bronco SUVs and 6,089 Maverick pickups were sold in May. The company noted that its Bronco, Bronco Sport, Maverick pickup and Mustang Mach-E continue to attract new customers to Ford.
Company management commented, “While the global semiconductor chip shortage remains an issue for the industry, our inventory continues to turn at record rates with nearly 50% of our retail sales coming from previously placed orders. Our newest models, including Bronco, Bronco Sport and Maverick, continue to enhance our sales volume. Our electric vehicle sales, with the addition of the F-150 Lightning this month, increased 222% – growing at almost four times the rate of the industry.”
CEO Jim Farley also predicts a “huge price war” on electric vehicles, as he believes the building costs for electric vehicles will lower in the coming years. He plans to cut advertising costs for the company and create “multiple tiers of dealers” to ensure the next generation of EV cars, which will launch in 2026, will be affordable.
So despite the challenges that the industry faces, there is still plenty of potential upside for investors. It’s why, just last week, I recommended a new stock in Growth Investor that stands to skyrocket from the EV revolution. I consider this stock a “picks and shovels” play, as it distributes the chemicals needed to make the electric vehicle batteries.
Of course, I am interested in much more than the electric vehicle industry. Specifically, I see a huge opportunity in energy stocks. The reality is that oil and natural gas stocks are set to lead the overall stock market. It’s for these reasons that I’ve continued to add more energy, fertilizer and shipping stocks to my Growth Investor Buy Lists. In fact, I added eight energy, fertilizer and commodity-related stocks in last Friday’s Growth Investor Monthly Issue for June.
The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
Ford Motor Company (F), Panasonic Holdings (PCRFY), Toyota Motor Corp (TM)