Electric vehicles (EVs) have been, by virtue of requiring lithium-ion (L-ion) batteries (and thus lithium), the hottest investment thematic of the 2020s to date.
Despite attracting a loyal following since the late 2000s – and an early-arriving crowd of lithium bulls – we’ve only seen the EV market truly hit scale and “blow up” in recent history.
Across COVID, the world has been surprised to see EV sales remain robust.
This came despite obvious difficulties you’d expect from lockdowns meaning people can’t go to caryards.
Maybe calling EV sales’ recent performance history ‘robust’ is too salient a way to put it. Many others would agree that EV sales have exploded since 2019.
But after three years of enjoying a centre-stage role in the zeitgeist of the global investment and finance world, EV sales are now slowing down.
The EU remains a strong jurisdiction for EV sales, which makes sense in a region where range anxiety isn’t as big an issue, like the US and Australia.
But Volvo has reported its January EV sales fell in China (-50 per cent) and the US (-66 per cent). Meanwhile, Ford’s EV sales in the same period were down 11 per cent. Subaru has also reported a decline.
And in China, EV demand wholemeal was down for January of 2024.
Sounds bad, right? Well, as with all things economics, the story isn’t that straightforward. It’s mixed. Especially when you consider Kia’s sales were actually up 57 per cent in January of 2024.
Price-cutting wars reveal red flags
Let’s get the most obvious reason EV sales are falling out of the way first: EVs are too expensive for most people.
The one major criticism you’ve probably heard about EVs in general is that they’re priced beyond most people’s budgets. On the whole, this is true – and prices are dropping, but we aren’t there yet.
So we’re now seeing lots of EV makers introduce price cuts. Trying to appear more attractive to consumers who want an EV but are repelled by the price is an obvious reality of commercial business (and a net win for consumers).
Tesla has been the most popular brand of EV for years, but it’s now facing competition from China’s BYD – which saw sales grow 50 per cent in January of 2024 alone.
This contrasts with reports from elsewhere that other Chinese EV makers are off to a shaky start for 2024, per the South China Morning Post. Note: BYD are far larger.
BYD are boasting this stat in more or less the same breath where China has become the world’s largest carmaker. UBS expects China to remain dominant through 2024.
In fact, China’s gotten so good at producing EVs, some are accusing it of flooding the market with cheaper models. Bad for competition, good for uptake.
So, you can guess what happens next. Cue a price-cutting war at Tesla to appeal to consumers.
On the flip side of the coin, however, companies must not cut prices so far that their shareholders start to worry about earnings. So that’s one reason why EV prices are staying higher for longer.
After its February 2024 financial report was released, Tesla was punished by shareholders for exactly that reason: Tesla is currently making less money off cars. Down the share price went.
Some brokers are punishing Tesla too, with the Tesla stock being downgraded at some trading desks.
But competition isn’t the only thing triggering price-cut wars between EV makers anymore.
There’s another issue: lithium prices are dropping so low, EV producers can’t justify charging as much anymore. Consider that Lithium-ion battery prices at the OEM level are at record lows, per BloombergNEF.
Of course, we can’t talk about EVs without talking about lithium, so first, let’s get that out of the way.
Slower EV sales not helping lithium prices
By now, you’ve probably heard that lithium prices are on the way down. Part of this is due to low EV demand, and analysts don’t see this reversing in 2024.
But there’s one big positive here for EV bulls to remember – that only means the vehicles are getting cheaper, which can only encourage uptake moving forward, even if at slower rates.
Shareholders might not love it, but with scale, there’s no reason it can’t be profitable. But that can be a bad thing for shareholders of upstream lithium producers, too. Australia’s IGO (ASX:IGO) has blamed poor EV sales at home for its decision to cut down production.
Australian EV demand reflected 7.2 per cent of total sales in 2023 per some sources, albeit, that’s coming off a low base.
That 7.2 per cent share reflects only 87,000 vehicles. And as a share of Australia’s 25.69 million strong population, assuming one car to a person – that’s less than one per cent of the population.
This commodity price influence on EV prices has been looming over the sector since last year, but if you were only watching lithium stock prices (as opposed to commodity movements), you’d be forgiven for having missed it.
Despite Pilbara Minerals (ASX:PLS) and Core Lithium (ASX:CXO) being among the top five shorted stocks on the ASX for about half a year by this point – and Core has had to since shut down some operations because of low lithium prices – Aussie traders kept on snatching up lithium stocks through 2023.
Just look at Chariot Corporation (ASX:CC9) and Wildcat Resources (ASX:WC8) – both posted impressive gains in 2023. And both stocks listed on the ASX only after lithium prices had already started to decline from the glory days of 2022.
Supply and demand considerations
I’ve written before on this phenomenon and I’ve pointed largely to two major sources of this lithium price downturn.
The first is the “Pork Cycle” – the OG economic theory that is more often called the commodity cycle, but, research into meat market economics was the founding research that gave us the theory.
In short, as lithium prices went up, more and more miners went into lithium. Eventually, those with the money and scale to become viable producers did so.
As more and more became richer, more suppliers entered the game, until – here’s the catch: supply and demand equalise, and, prices thus go down.
The second point I’ve discussed is the China story, where the Chinese economy has failed to recover in a post-COVID world the way everybody thought it would.
There was no 2023 reopening boom after COVID-zero lockdowns ended (which culminated in riots,) and the country remains in deflation.
As a result, it’s not really buying as much as it used to right now.
Commodity markets globally, in turn, have suffered – everything from rare earths to iron ore to lithium to copper and nickel are down (note: nickel is another supply-side story and related to massive Indonesian production, largely funded by China, that has hit world markets only in the last three years.)
In any case, Chinese deflation is a factor there, too.
But then there’s the third major reason lithium prices are falling at hand – declining EV sales. More speculation-friendly traders are getting out of lithium, seeing EV sales slow, and deciding there’s too much risk until the market picks back up.
Lithium investors have found themselves perfectly trapped between three vortexes, and each are out of any one entity’s control.
So what are happening to EV sales?
On the whole, it’s true to say that EV sales have slowed down globally. Of course, this isn’t a uniform effect in each country.
So far I’ve talked about the recent history of the EV thematic, growing pressures on EV carmakers, the fall in lithium prices, and a slowed-down China.
But there’s another big factor that has hurt the momentum of EV sales more than prices or COVID-borne supply chain mishaps could have.
I’m talking about the winding back of government subsidies across the world in recent years that have removed incentives for consumers to buy EVs in the first place.
The removal of those subsidies has hurt demand in China, as well as New Zealand, and one needn’t be a macroeconomic Sherlock to deduce it’s hit US demand, too. China has the benefit of sheer numbers to be able to say that it’s still seeing record EV demand growth, however.
Regardless, Australia is the same. State by state, subsidies have been wound back here at home.
This problem is a big one and it’s the kind of thing that only each jurisdiction’s government can address or alter.
(It’s probably no surprise that incentivising consumers to adopt popular but new technologies with tax cuts helps a lot.)
So, at the consumer level, we have overdone complaints regarding range anxiety, life-of-vehicle maintenance costs compared to petrol cars, and second-hand price values.
But the fact that EVs were basically a household tax benefit, but now aren’t, is a larger factor behind falling sales than true EV believers may like to admit.
EV megatrend likely not defeated
So could this be the final blow to the EV thematic? Have we seen one little run through the late 2010s-early 2020s and now it’s over? Back to the petrol car?
Sure, it’s possible, I suppose.
But that’s very unlikely to happen, and this is where government regulation and policy become important once more.
Market pundits like to talk about free markets and hands-off small government, but the reality is, the EV thematic has been one intertwined with politics and ‘red tape’ all along.
To that end, two key documents have been, and remain, absolutely crucial to a world where EV demand is likely to continue into the 2030s and decades thereafter, harmonising with midcentury decarbonisation targets.
Those same midcentury climate targets have been the fundamental force driving forward enthusiasm for EV markets broadly.
The two documents I’m referencing are the UN’s Paris Agreement, and, the Biden Administration’s Inflation Reduction Act (IRA).
Let’s do a speedrun through why each document matters for the EV market.
Paris Agreement – United Nations (2000)
- The Paris Agreement provides a document with a unified language that nation-states can use
- Having harmonious (or similar) nation-by-nation targets provides a level of certainty to investors
- The Paris Agreement sets out methods by which nations (and thereby their respective markets) can provide renewables and green tech financing
- Sets up a structure for Governments to report progress on the trajectory towards satisfying climate targets
Inflation Reduction Act – United States of America (2022)
- Biden’s IRA sends a signal to the rest of the world the most powerful economy has rejuvenated its dedication to climate target
- The bill provides billions in funding for EV technology across battery research, charging station rollout, and other infrastructure
- Reiterates commercial EV tax credits as an alternative to former subsidies – including for State governments to incentivise fleet electrification
The IRA is by far the more contemporaneous document, and so has prompted more timely discussion – but its overall intentions seek to put America on track to meet overhead Paris Agreement targets.
Especially considering US-based firm Consumer Reports states there are 45 interested buyers in the US, at least, for every EV produced.
There’s one big risk here to outline here, of course: a 2024 Trump election.
Energy Infrastructure Partners’ Managing Partner Roland Dörig recently told Bloomberg EIP would not be making significant investments into American renewables until the outcome of the 2024 election is decided.
He didn’t use those exact words, but, that’s what he meant. Food for thought.
So, the EV thematic is more likely than not to hang around for a good while yet.
Especially considering US-based firm Consumer Reports states there are 45 interested buyers in the US, at least, for every EV produced.
And even if Trump does overturn the IRA – we still saw EV sales climb under Trump from 2016-2020, whose enthusiasm for fossil fuels and old world thinking was part of his appeal to many Americans.
And that means that those publicly-listed companies in the EV space with enough scale to survive probably won’t be going anywhere, just downsizing.
Battery tech stocks likely to stay strong
Turning our gaze back outward to the global context, here we have to delineate lithium stocks from battery stocks.
As EV demand continues, one big risk that overhangs the overall profitability of the sector – where lithium and L-ion batteries are involved – is substitution risk.
In everyday language: the risk of a better tech than L-ion batteries coming around. And to that end, it’s not like this isn’t already an issue.
Toyota recently claimed it is on the cusp of mass-producing solid-state batteries, a superior type of battery to L-ion which could, at scale, very well threaten OEMs margins when it comes to L-ion batteries.
With that said, the sheer size of the structural lithium economy the Invisible Hand of the market has built in the last twenty years is set to ensure L-ion hangs around for a while yet.
Should superior battery tech come along, it’s possible one day L-ion batteries may reflect a cheaper “type” of EV to own, while solid-state battery EVs could be the new premium seller for Tesla and its competitors.
That could still be profitable enough for companies to remain in the space, and in that scenario, lithium carbonate would likely remain a staple commodity. We’d probably also see an uptick in the pace of EV demand growth.
And so what that implies is that stocks exposed to both L-ion battery upside, and that of competitor technologies, stands best placed to weather forward uncertainty (or volatility).
The ASX has at least one constituent of its own far along in its path towards developing its own lithium-ion replacement technology – while remaining fixed in the L-ion space.
That standout example is Altech Batteries (ASX:ATC).
Altech Batteries playing both sides
At this time, microcap battery and battery materials tech stock Altech is developing both next-gen silicon anode materials for L-ion batteries – its Silumina AnodesTM product line – as well as solid-state sodium chloride batteries for Battery Energy Storage Systems, which is trademarked CERENERGY®.
In this way, Altech is playing both sides of the market: leaning into L-ion dominance while also being exposed to disruptive battery technologies.
With its Silumina AnodesTM IP, Altech is seeking to disrupt the EV space by introducing a higher-capacity silicon-based anode material that allows L-ion batteries to perform better.
According to Altech, its anodes – the part of a battery that allows electrons to “flow” to the drivetrain of a car – allow standard L-ion batteries to retain more energy opposed to a battery using anodes made only of graphite.
The inclusion of silicon into the anode makeup is the ultimate value proposition, and should that be proven to be commercially attractive to OEMs, Altech may stand well poised to benefit from massive revenues, should its tech be able to solve range anxiety concerns in standard EVs.
Silicon has ten times the capacity of graphite, and whilst the industry is aware that silicon is the most promising anode material because it is so reactive, it swells and cracks.
Altech’s patented Silumina AnodesTM technology addresses this issue by placing a nanometre layer of high-purity alumina around the silicon, stopping the swelling and cracking issues.
Then there’s the company’s solid-state battery tech efforts, ultimately company IP which Altech refers to as its CERENERGY® battery, destined for the lucrative and fast-growing battery storage industry for renewable energy.
Altech’s CERENERGY® project sees the Company commercialising a 120MWh battery plant on Altech’s land in Germany to produce sodium chloride solid-state batteries (formerly called sodium nickel chloride batteries).
Altech’s joint venture in the CERENERGY® project is the world-leading German government research institute Fraunhofer.
Fraunhofer has spent the last eight years developing the project, ready for the right time to commercialise.
Substitution risk as upside potential
CERENERGY® batteries have the added benefit of being exposed to energy transition and decarbonisation thematics outside of the EV market.
The batteries are designed for grid-scale energy storage applications.
This is the world of battery tech outside of EV batteries, which I’ve written about before.
But instead, these larger batteries boast bigger goals in mind – namely, allowing power grids to become truly renewables-based by storing solar and wind power when it is produced, for returning to the grid when it is required.
All in all, this means that a downturn in EV sales doesn’t necessarily spell death for Altech in the same way IGO had to scale back production due to lower EV demand (or, at least, so its Directors claimed.)
Should Toyota’s solid-state advancements reflect the biggest risk to L-ion batteries in the near term, then it’s advantageous Altech has been in the solid-state battery space for years.
This means it’s possible that Altech could actually benefit from substitution risk – a claim that very few other stocks can make.
And as for concerns surrounding EV demand and what it may means for the company, Altech is set up in the EU – the one jurisdiction on earth where EV demand has seen the least amount of decline.
So when are EVs set to recover?
All in all, it’s not easy to name exactly when one can expect the pace of EV sales to reflect the high-impact growth the sector has observed in recent history.
It’s not clear if this will occur without the re-introduction of tax benefits to lure consumers towards the tech (which is why Biden’s IRA has introduced new benefits, though, not as clear-cut as first-generation subsidies.)
All in all, dropping lithium prices are likely to see the price points on non-luxury EVs continue to fall, which is likely to eventually lead to more people buying the vehicles.
This might see some weakness in EV stocks, namely Tesla – as of February 9 2024, currently the worst performing S&P 500 stock YTD.
But an indicator of consumer willingness to buy an EV, weakness in an EV maker’s stock price does not make.
Analyst firm Canalys sees a growth rate of 27 per cent by the end of 2024, reflecting 17.5 million EVs sold.
S&P Global Market Intelligence has called “reports of the demise of EVs … greatly exaggerated.”
BloombergNEF, meanwhile, downgraded its estimate on end-of-2024 EV sales down from 17.5 million vehicles to 16.7 million – a change of pace from Canalys, though, not a monumental difference at only 800,000 units.
That means BloombergNEF see a growth rate of 22 per cent for EV sales.
In the background of all of this, Benchmark Minerals Intelligence (BMI) see the lithium price recovering in 2028 – per the commodity cycle and current supply dynamics.
But with the Paris Agreement still hanging over the heads of governments everywhere and the world’s strongest economy sending a strong signal with Biden’s IRA – and EV prices dropping – it’s unlikely that the petrol car has had the last laugh.