A cross-sector view of the EV revolution
By Matt Zloto; Andrew DeVries; Andrew Moulder, CreditSights
Published: 20 September 2021
The invention of the internal combustion engine (ICE) in the late 19th century changed personal and commercial transportation forever. Since that time, ICE technology has evolved and proliferated to the point where ICE-powered vehicles are fundamental to how people and things move around the world. As of year-end 2020, there were nearly 1.2 billion ICE passenger vehicles and more than 13 million commercial vehicles on the road.
However, concerns regarding climate change have caused people, governments, and companies to consider how we can reduce greenhouse gas emissions – including moving away from ICEs. Governments around the world have been enforcing ever-stricter regulations mandating improved fuel efficiency and reduced emissions in an attempt to reduce greenhouse gas emissions. In order to reach the ultimate goal of many governments, a net-zero economy, the widespread adoption of electric vehicles (EVs) is a necessity.
Advances in battery technology and government incentives have encouraged the growth of electric vehicles from less than 1% of global passenger vehicle sales in 2015 to more than 6% in the 4th quarter of 2020. We believe this trend has reached a tipping point in 2021 where consumers, Original Equipment Manufacturer (OEM) and governments align to push the electrification forward with significant growth over the coming decades.
Thus far in 2021, we have seen OEM automakers announce greater and greater commitment to electrification – both with massive capital spending plans and with targets to end ICE production in the relative near term. To name a few notable commitments to EV and autonomous vehicle (AV) spend, Ford has committed to spending US$30 billion by 2030, GM has committed US$35 billion by 2025, and VW has committed €73 billion by 2025. These investments have been paired with commitments to fully replace ICE offerings with EV offerings as early as 2030 in some cases.
Given this level of OEM investment, the high levels of current and expected governmental support, improving the economics of EV ownership and increasing consumer interest we and industry sources expect to see a huge increase in EV sales as a percentage of total passenger vehicle sales in the coming years. Most industry prognosticators have centred around ~30% of global passenger vehicle sales by 2030. Bloomberg New Energy Finance (BNEF), a leader in the field, recently increased their projection to 33% of global sales by 2030 and 68% by 2040. In the event that governments move even more quickly to incentivise EV adoption BNEF thinks that adoption could be even higher.
Key sector takeaways
European and US autos – Mixed implications
- Global vehicle electrification shift remains a multi-year trend. EVs accounting for 30% of sales by 2030 has been the general goal post, but 2020/2021 has served as a critical xinflection point , and the goalposts may now be moving to an even more rapid pace for EV market growth. In the leading global markets of Europe and China, vehicle electrification has been driven by stricter emission standards and incentives/subsidies, while in the US, President Biden is following a similar path over the next few years.
- Declining battery prices, in particular, have been the major driver of increased adoption as battery pack price/kWh has declined from over US$1000/kWh in 2010 to US$157/ kWh in 2019, and to US$137/kWh in 2020. Many OEMs suggest that a price below US$100/kwh is the level for cost parity with internal combustion engines, and we highlight that battery prices are expected by BNEF to just about reach that US$100/kWh by 2023.
Metals & mining – Positive implications
- Battery demand will be a material driver of metals consumption in the coming years and, without additional investment, supply for certain metals may be insufficient to meet demand. We expect that prices will remain high enough to incentivise investments to expand capacity. As a result, the sector will benefit from tighter supply/demand fundamentals (positive), but increased Capex to drive production growth will impact FCF (negative).
- Lithium, one of the key metals for battery production, is a relatively small market with ~180 kt of demand in 2020 but lithium demand is set to explode to ~1,670 kt by 2030, according to Bloomberg New Energy Finance. While projected lithium demand is expected to outstrip supply in the latter half of the decade, new capacity can be brought online to help balance supply & demand fundamentals given the abundance of reserves globally.
- Cobalt will also benefit from the EV growth story, but the industry is moving towards higher nickel cathode chemistries that require lower cobalt content. As such, nickel is likewise projected to run into supply issues absent additional investment. We expect this supply deficit will help bolster nickel pricing and incentivise investment in nickel laterite and sulfide projects.
- The EV growth story will also drive demand for both copper and aluminium. Copper will not only benefit from EVs but also from green infrastructure, power generation, and energy storage. Similarly, aluminium will also benefit from the secular light-weighting trend in the automotive sector.
Explorations & production – Negative implications
- Electric vehicles are expected to result in ~19 mmbd of avoided gasoline and diesel demand growth through 2040, according to BNEF forecasts. However, passenger vehicles, the core segment for EV growth, represents ~30% of crude demand and the impact of electric vehicles is expected to be offset by trends including population growth, petrochemicals demand, and aviation demand with Platts pegging 2030 global crude demand at 114 mmbd. Longer-term headwinds in the form of electric vehicles and higher mileage standards, however, serve as headwinds to growth beyond 2030.
- The world will still need oil for a long time and meeting future demand and offsetting natural declines from existing assets will require continued investment from the global upstream industry, with ~38 mmbd of new production needed over the coming 20 years to meet 2040E demand of ~100 mmbd.
Refiners –Negative implications
- Downstream/Refining is likely to be one of the most negatively impacted subsectors within our coverage over the longer term. BNEF has a widely-cited forecast that if 60% of total light-duty car sales in the US are EVs by 2040, this would equate to 33% of total passenger cars, thereby reducing gas demand by the same amount. This drop will hurt both utilisation and profitability unless refiners are able to curtail supply and/or find new avenues for growth. CreditSights has real concerns that there is nothing the refiners are doing or planning at the moment to address this longer-term risk, but we list potential ways to offset these headwinds.
Midstream energy – Mixed implications
- While rhetoric towards clean energy continues to accelerate, peak oil and gas demand is not a realistic near-term outcome. Crude demand is expected to grow 1% annually through 2030 to 114 MMbpd in spite of EV demand impacts, according to Platts.
- Increasing EV penetration will drive higher grid demand for power, and as a resulthigher natural gas demand ( projected to increase by 15% over the next 20 years).
US utilities – Positive implications
- We see growth in electric vehicle usage as an obvious positive for utilities and, to a lesser extent, independent power producers (IPPs) with the caveat being the potential for significant rooftop solar growth still creates a small potential long-term risk to bondholders in each sector.
- The consensus in the market is 30% US EV penetration in 2030 is expected to lead to a 2-3% increase in power demand and while a 2-3% increase in demand doesn’t move the needle very much in some sectors it equates to almost a decade of normal load growth for utilities (2010 to 2019 deliveries increased 1.5%). This additional load growth requires some new generation (wind, solar, gas and storage) but more importantly, new transmission lines to bring the power to market and significant new spending on the distribution front to support the increased residential demand.
European utilities – Positive implications
- We do not believe growth in demand from EV charging is a big issue. Various scenarios suggest demand from EV charging in Europe will reach around 130TWh by 2030, which represents around 3% of total European electricity demand in 2020. There will need to be considerations around generation planning but utilities have big plans for growing renewable capacity and so should be able to easily accommodate the increase in demand from EVs. Higher volume sales will be a small incremental positive for the utilities.
- In our opinion upgrading and expanding the network will be the bottleneck in terms of EV growth and in facilitating the energy transition. Various estimates have suggested network investments of between €5 billion and €10 billion will be required per country by 2030 to enable the energy transition, but most regulatory regimes have yet to incorporate this.