In today’s Money Morning…competition in the EV sector is strong in the Middle Kingdom…they’re called critical minerals for a reason…the push for downstream development…and more…
Earlier this week, my fellow editor (Ryan Dinse) reached out to our other fellow editor, Selva Freigedo. Looking to demystify the rampant growth and opportunities within the renewable energy sector.
And this is the answer that Selva provided for Ryan’s question on where to get started as an investor:
‘I would say some of the best places to get exposure to renewable energy are miners exposed to battery materials like lithium, cobalt, nickel, graphite, etc. And also, hydrogen. Australia has quite a chance to become a leader in hydrogen production for our region.
‘The renewables industry is now an inevitability, however, one thing to keep in mind is that this is a long-term trend.
‘We’re looking at investing timelines that expand for decades.
‘In saying that, though, I look at this stuff every day and things are already changing very fast, faster than what I thought.’
Well, she couldn’t have been more right. On both counts, might I add.
Because while the long-term thesis of the green energy boom is still a fact, these fast short-term changes that Selva mentions are also clear as day. Tesla Chairman Robyn Denholm’s $1 billion provocation to Australian miners is clear proof of that…
They’re called critical minerals for a reason
Yes, if you missed it, just two days ago Tesla basically confirmed it will be splashing a lot of cash on Aussie mining output. With Denholm explicitly stating that:
‘We [Tesla] expect our spend on Australia’s minerals to increase to more than $1 billion per annum for the next few years.’
Meaning that Selva was right on the money when she suggested looking into miners exposed to lithium, nickel, cobalt, and more. Because Denholm confirmed that that is exactly what Tesla is after too.
Which shouldn’t really come as a surprise. After all, it’s not like Tesla isn’t already sourcing some of these key minerals from Australia already.
Piedmont Lithium Ltd [ASX:PLL] was one of the big stories of 2020 for this reason. Nabbing a five-year supply agreement with Tesla in September.
But it seems the electric carmaker isn’t going to stop there. Looking to gobble up even more battery metals from wherever they can.
As for why they’re turning to Australia, demand is the obvious answer.
Which Denholm explained in no uncertain terms:
‘To put it a simpler way: electric vehicles account for less than 1% of vehicles globally at the moment. To reach net zero emissions, that needs to be much closer to 100% within 30 years. So that’s at least a 100-fold increase ahead, just for vehicles.’
I do, however, suspect that Tesla may be concerned about Chinese supply as well. Because even though they’re planning to beef up their Shanghai plant, competition in the EV sector is strong in the Middle Kingdom.
In fact, if it weren’t for Tesla, I’d wager that Chinese carmakers would be far ahead of their Western counterparts. With the Buffett-backed BYD proving a rather formidable force within its home market.
And for that reason, Tesla may have good reason to worry about domestic supply from China. Especially if the CCP believes it could give them a chance to one-up the US.
I digress though…
The point for you, as an Aussie investor, is that the battery metal boom may just be getting started.
Which is also just one part of the much bigger green energy transition we’ve been seeing lately.
The push for downstream development
Now, while all of this is certainly good news for the already booming commodities sector, the big takeaway in my opinion was Denholm’s call for downstream investment.
Meaning that Tesla is hoping Australia moves beyond just mining these raw materials. Looking into new ways of processing and supplying the actual refined product for the EV maker’s batteries.
Because while that is obviously a large undertaking, it is something that would present huge potential. Particularly as Denholm herself has experience in bringing local manufacturing efforts online.
As S&P Global reports:
‘Denholm helped set up a car factory for Toyota Australia in Altona, Victoria, in the 1990s and said that while Australia could manufacture full EVs at that scale someday, batteries would be a good starting point.’
And while that doesn’t mean she will or even necessarily needs to do something similar for EVs, it is the possibility that is important. Because as the Australian government has even reported in its own findings, we’re losing a lot of money by not investing in downstream processing.
They estimate that $213 billion is tied up in the Australian lithium value chain. 99.5% of which Australians don’t see a penny of because it is all done offshore.
Which is precisely why this downstream investment is so important.
If Australian investors hope to truly profit from the green energy boom, it needs to go beyond just the raw material. Because as valuable as it is, we could be doing a lot better if we started processing the stuff.
Fortunately, though, as Selva drives home, this is a long-term trend.
So, while the short-term opportunities are nice — like Tesla’s $1 billion lure — the truly valuable opportunities are (hopefully) yet to come.
Regards,
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Ryan Clarkson-Ledward,
Editor, Money Morning
Ryan is also the Editor of Australian Small-Cap Investigator, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.
