Macro Research Bites #6: Industrial Metals in the Electric Vehicles sector (Truflation Guest Post)
This week, we bring on Stefan Rust, CEO of Truflation, as a guest author for our Macro Research Bites series. We dive into industrial metals like lithium, copper, cobalt, nickel and palladium – many of which will soon be tradable as perpetuals on Ostium – and explore their significance to the growing Electric Vehicles sector.
It’s been a turbulent year for commodities, with macro events, both in the US and the Middle East, taking their toll. This trend has been particularly pronounced in the metals market, where commodities are being buffeted by economic and manufacturing forces. Both the Dow Jones Industrial Metals and S&P Industrial Metals indices are recording losses of around -4.5% in the year to March 13th, buoyed more recently by a 2024 rebound after over 6% losses in 2023. These price changes impact not only miners and producers, but also downstream manufacturers with dependence on these raw materials.
For Electric Vehicle (EV) manufacturers in particular, capricious commodities prices complicate profit projections, even if the volatility is welcomed by day traders. Aside from copper, each automobile battery – the heaviest and most expensive component of an EV – requires over 100kg of nickel, aluminium, graphite, steel, lithium, and iron – as well as smaller amounts of manganese and cobalt.
For petrol vehicles, commodity prices have less of an impact on manufacturing, since the primary commodity of significance – oil – is passed on to the consumer at the pump. EVs, on the other hand, incur the bulk of the expense needed to power their functioning before they’ve rolled out of the auto plant. While the quantity of each metal used in modern EV battery production is relatively stable, the price of each commodity is anything but.
Lithium and Cobalt Feel the Pinch
Crypto markets aren’t the only ones to have seen volatility post-pandemic – lithium and cobalt declined nearly 75% and 50%, respectively, in the year following their 2022 peaks. Despite continued growth in demand for Electric Vehicles in the U.S., with over one million in annual sales in 2023 for the first time, sluggish demand in China and scalebacks in production from manufacturers like Ford and General Motors have weighed on industrial metals prices. Indeed, the EV market has grown to exert outsize influence on industrial metals like lithium, cobalt, and nickel. Approximately 60%, 30%, and 10% respectively of total demand for each of these metals is driven directly by lithium-ion battery production, critical to EVs.
Source: Statista
A combination of supply side surplus dynamics and lower-than-expected growth in EV sales in Asia drove a slide in lithium and cobalt prices in 2023. While demand for lithium and cobalt is beginning to rise again, aided by a rebounding market and reduced recession fears, there is still significant surplus available. Indeed, refinery production has remained steady over the last 12 months, even as demand has dropped. On February 5th, shares in Sigma Lithium (TSXV: SGML), one of the leading market players, fell by 14%, suggesting more pain to come – at least for metals producers.
Other companies have fared better; LG Energy Solution, whose batteries are used by Tesla, GM, and Volkswagen, saw its Q4 profits rise by 43%. As the global economy heats up again and metals recover from last year’s drastic fall: are we poised for a resurgence in the asset class?
Source: BloombergNEF
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Nickel Takes a Tumble
Nickel prices began to fall last year and then didn’t stop falling, from $28,000 per tonne 12 months ago to around $18,000 per tonne today, bottoming at $16,000 last month. Several mines have had to suspend operations as extraction has become unprofitable, but this supply reduction has yet to be reflected in any sign of a market recovery. The situation has been exacerbated by economies with lower capital costs, such as Indonesia, doing their utmost to flood the market in a bid to gain market share.
Source: Markets Insider
Nickel is now at its lowest price in almost three years, with short positions on the asset at the London Metal Exchange currently at a multi-year high. This is quite the precipitous fall since Nickel’s spectacular rise in March 2022, so severe it “broke” the LME. It unwound over $4bn in trades after nickel producer Tsingshan Holding Group pushed prices up to over $100,000 through uncontrolled buying, in hopes of reducing its short position.
Where Next for Palladium?
Palladium is currently trading around $940 per ounce, down from $1,700 a year ago. The metal is used to reduce exhaust emissions and its fortunes are linked to those of the EV industry, with the auto sector accounting for 80% of demand for the precious metal.
Palladium demand has been further impacted by some automakers switching to platinum for dampening emissions, a cheaper metal. Indeed, in February this year palladium prices fell below platinum prices for the first time since 2018, cementing a 39% decline since 2023 after rising prices from 2018 to 2022 prompted car makers to switch to using the (once) cheaper metal in autocatalysts.
Some analysts believe this makes now a great time to buy into palladium, with Citi predicting a short term spike in prices on thin liquidity.
EV Sector Growth
While the metals markets twist and turn, the EV sector remains one of the most promising industrial growth sectors today. EV continues to ramp up, with the International Energy Agency (IEA) reporting “exponential growth” in the sector, and more than a tripling in sales between 2020 and 2022.
Indeed, according to the IEA, electric vehicles now account for around 18% of global car sales - up from just 4% in 2020. With a current market value of around $388 billion, the electric vehicle sector is expected to be worth over $950 billion by 2030. This is a compound annual growth rate (CAGR) of 13.7%. This represents an enormous investment opportunity, especially for investors in the metals commodities markets.
About Truflation
Truflation is the first DRPp (Definitive Reference Point) protocol. The protocol tracks real-time data across networks, markets, and feeds. Tracking over 18 million items with three price feeds per item, Truflation’s censorship-resistant and accessible data indices provide the necessary data infrastructure to bring about systemic advancements in the DeFi economy, empowering dApps like DEXs to open limitless markets. From speculating on prices of orange juice and uranium, to enabling BTC-denominated oil, gas, and corn prices, Truflation provides the key to unlocking a diverse array of financial markets and instruments in the Web3 world.
