A futility-scale experiment in metals and magic

Half a trillion dollars. This is the price tag of the EV revolution, according to an analysis of global carmakers’ EV plans that Reuters did last year. The exact figure was $515 billion, with the timetable running to 2030, and, as Reuters noted in the analysis, it was significantly higher than a previous forecast that put the price of the EV revolution at $300 billion. Blame it on natural inflation and more ambitious plans.

The analysis came out in November. The prices of basic metals were already on a rise, mostly driven by precisely carmakers’ EV ambitions. Now, four month later, metal prices are through the roof, with copper hitting an all-time high in the first week of March, the LME suspending nickel trading after the price went crazy high, and lithium also hitting a record. That EV revolution price tag just grew substantially.

The most obvious reason for the latest rise in metals prices is the West’s reaction to Russia’s actions in the Ukraine. A wave of sanctions aimed at punishing Moscow for these actions splashed across industries, affecting quite adversely exports of all raw materials, including metals essential for the carmaking industry and not just for it.

Reuters’ John Kemp described the sanction dilemma, which wasn’t in fact a dilemma, in a recent column, where he argued that the Western governments were faced with a choice between the moral imperative (punish Russia for its invasion of the Ukraine) and the economic imperative (avoid economic pain for their own populations.)

Right or wrong, the choice was made. The question now is how to live with the consequences. Judging by the scale of metal price inflation, not to mention energy price inflation, the answer is shaping up to be a grim one, and not only for the EV industry. Steel plants in Spain are shutting down because of soaring energy costs. In Germany, some are reducing output. And some heavy industry majors are voluntarily cutting imports from Russia to signal their position on Ukraine.

Hardly anyone in the carmaking industry could have anticipated such a turn of events just a month ago. And yet even a month ago there were pretty clear signs that the revolution carmakers are pouring billions into might not turn out as planned. Metal prices were already on the rise, the shortage in new mines was still there, and uncertainty about customer demand for EVs was also still there. In other words, the anti-Russian sanctions only highlighted — and, of course, aggravated — an already serious problem, or rather, a whole set of problems.

"First, what happens [after the sanctions] is that we have an escalation of cost that comes from raw materials and energy that is going to put more pressure on the business model," said Carlos Tavares, chief executive of Stellantis, earlier this month.

The second thing that will happen is a decline in demand as inflation hits households. Governments in Europe are scrambling to find ways to cushion the blow but there is only so much of it you could cushion. Pain will be felt across the EU and living standards will fall, experts have been warning about this. And this will be happening as EV production becomes costlier, meaning the price tag of the finished product will be higher.

The word stagflation, already mentioned with respect to the economic situation in the United States is now also rearing its head in Europe as well. It was, in fact, clear from the start that Europe will absorb most of the sanction kickback, a lot of it voluntarily. The only thing that is not yet completely clear is just how powerful this kickback could end up being.

Metal exports from Russia are not directly the object of EU or U.S. sanctions, for now. Traders and buyers are shunning them either because of the other sanctions, on Russia’s financial system, for instance, or because of a virtue-signaling urge that has become so common among large corporations in the past few years. Yet sanctions against Russian metal exports may well be on the quickly-emptying sanction tables in Brussels and Washington. Then again, Russia might decide to curb metal exports in response to the Western sanctions. In either case, there will be more suffering for carmakers.

Germany’s car giant Volkswagen plans to invest more than $97 billion, or 89 billion euro, in technology over the next four years in an attempt to boost the EV share in its total sales to a quarter by the end of 2026. The announcement was made less than four months ago and raises some questions about VW’s leadership’s awareness of the fundamentals of the metals and battery minerals market.

Now the questions are about to multiply because what the car industry has on its hands is nothing short of a perfect storm of rising inflation and falling supply of all the essential raw materials for electric — and all other — vehicles. Just how much more expensive this trend will make EVs is one of the most interesting and important questions.

What governments will do to help the industry after all the billions already poured in EVs is also a question worth thinking about. Of course, its sister question of what governments can afford to do is no less entertaining.

The answers to these and other questions might be less entertaining and more sobering. They might also drag after them other questions, such as whether carmakers took the time to study in depth the supply and demand balance in the mineral resources market and the outlook, in light of their plans. After all, the decline in investment in mining is not a sudden, new thing. According to a BlackRock report, global investment in mining peaked in 2012 and has halved since then.

Another question worth asking well in advance would have been to what extent governments would be willing to subsidise the mass switch from internal combustion vehicles to EVs, preferably while taking into account things like the above-mentioned investment trends in mining and inflationary developments. Granted, nobody can foresee everything but some crucial factors with a direct bearing on EV adoption can and must be tracked closely when you make plans worth billions of dollars.

It seems, however, that both EV-enthusiastic governments and carmakers did what many renewable-energy advocates have been doing: making bold assumptions and acting on them — or pushing others to act on them — apparently confident that it is enough to want something in order to make it happen, pretty much like magic.

Sadly, we inhabit a magic-free world and in order to make something happen, you need to plan for it, taking into account all factors that could affect your plans rather than just the ones that support your plans, such as government incentives and ICE car sales bans, and the emission-cutting narrative.

Investments in the electrification of transport globally last year surged by more than 76%, according to Visual Capitalist, which cited data from BloombergNEF. The total came in at $273.2 billion and was the second biggest chunk of energy transition investment last year, after renewable energy, which enjoyed total investments of $365.9 billion.

It is safe to say these will increase substantially because currently, demand for EVs outstrips supply. Yes, despite all the investments and all the government support, the EV market is experiencing a shortage. Of course, the latest surge in demand has more to do with petrol prices than concern about emissions but the end result is the same: there are not enough EVs to go around.

This will naturally push prices even higher, ultimately presenting a dilemma for buyers and possibly hitting appetite for EVs over the longer term. Because even when prices at the pump start declining — it may happen later rather than sooner but it will happen — prices for EVs will remain much higher because of the fundamental raw material supply shortfall.

Global adoption of electric vehicles will rise. It will rise in wealthy countries where the percentage of people rich enough to afford going electric will still be substantial enough even as the general living standard falls. It will rise in China, the world’s biggest EV market, because of the government’s pointed efforts in transport electrification. Yet it is becoming increasingly hard to talk about an EV revolution as a watershed for the energy transition beyond which nothing will be the same again.

The more realistic scenario would be that emission-conscious wealthy individuals and companies will boost the global EV fleet in the coming years but a lot more slowly than forecasters have been anticipating because of higher costs and inflation.

Planned bans on internal combustion engine vehicles might have to be reconsidered, just like nuclear and coal plant closure plans have been reconsidered in Europe. And the EV revolution will turn into evolution, which is inarguably the more natural way of doing things. Revolutions, after all, are known for devouring their children.