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Investors may read business headlines about control over essential commodities such as nickel, lithium, copper and cobalt without realizing the investment opportunity behind them. These metals are used to produce electric vehicles and other green energy alternatives.
Supply chain dynamics refers to the ebbs and flows in the supply chain that affect how long it takes for vital raw materials to reach manufacturers, if indeed they reach them at all.
There's an increasing need for essential "green metals," such as copper, nickel and manganese. These commodities are critical components in lithium-ion batteries that power EVs, and for the microprocessor chips that are in every smart device, from smartphones to military drones.
These green metals are not actually so rare or hard to find, but they tend to be present in dilute amounts. The challenge—and expense—lies less in finding them, and more in extracting, processing and purifying them for use by manufacturing plants. Here, I'll discuss those challenges and what current supply chain dynamics could mean for the EV market.
When Governments Get Involved
The global push to electrify the transportation industry is driving up demand for green metals. Governments across the world are investing heavily in EVs as a solution to high-polluting combustion fuel vehicles. As of 2021, there were over 16.5 million electric cars on the roads, with more joining them every month. EVs require a variety of minerals.
It's common to find such vital commodities labeled "strategic." This often pushes up stock prices, such as when European Metals Holdings announced the classification for its Cinovec lithium project in the Czech Republic. Following the announcement, stock prices rose 18% in Australia and 17.3% in the U.K.
But when a government labels a certain asset as strategic, it could be a preliminary to taking control over it and restricting access. Strategic powers can be used to leapfrog open market forces and affect exports and pricing. For example, the Czech government holds a 70% interest in CEZ, a Czech utility company that has a majority indirect stake in the Cinovec project.
This being the case, the recent declaration could pave the way to state-controlled decisions about the cost and availability of the vital mineral.
We're already seeing countries control access to essential commodities. For example, Indonesia banned exports of nickel ore in 2020, limiting trade to refined nickel products. This forced companies to build refineries within the country, so Indonesia could benefit from the increased value of processed nickel. Previously, it sold unrefined nickel ores for lower prices, and other countries enjoyed the profits. The move boosted Indonesia's nickel revenues from $3 billion to $30 billion within 2 years.
The Philippines recently followed suit proposing to raise export taxes on raw nickel ores. Zimbabwe is also banning the export of unprocessed lithium or lithium ores.
Government Control Fuels Concerns Over Access
It's understandable that governments are acting to support their citizens by increasing their GDP and making it possible to invest in better infrastructure, healthcare and other services. But manufacturing industries are anxious about what impact such steps could have on the price of essential commodities, and even on their ability to access vital raw materials at all.
The decisions by Indonesia and Zimbabwe are a boon for China and Chinese-owned companies. For example, in Zimbabwe, several Chinese corporations are getting around the lithium ban by developing mines and processing plants in that country.
It's estimated that China controls over 71% of global extraction and 87% of processing capacity of green metals, giving it significant leverage over those vital components. This raises concerns that China could use its position to block access to these materials for rival companies and governments. That could cause prices to increase, or deprive certain countries and corporations of raw materials.
Because of that, other countries need to rapidly accelerate their extraction and processing of essential commodities.
From Challenge To Opportunity
What causes headaches for manufacturing companies could be an opportunity for investors. With demand rising and countries jockeying for control over supply chains, the price of essential commodities may likely go up. What's more, the cost of extracting green metals means that there's unlikely to be enough physical supply to meet demand for a green future.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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