Supply fragility to 'fuel commodity supercycle'
(Kitco News) - In a post-COVID world, EV battery metals are the hot commodity, with surging demand putting pressure on already very fragile supply chains, according Lewis Black, CEO of Almonty Industries (TSX: AII), which mines tungsten in Spain, Portugal and South Korea.
"This journey started probably almost a decade ago with hybrids. And then, Tesla CEO Elon Musk came along, and he turned the Blackberry into an iPhone," Black told Kitco News.
As the economies across the globe reopen, the wave of enthusiasm around electric vehicles will surge. "It's a classic market-driven event," he said.
And with more countries issuing bans on gasoline cars within a decade, the main issue becomes supply.
"In Western economies, cars are rotated every four-to-five years. What's happening with EVs is that it's actually saying you need to break this lease cycle immediately," Black said. "That's where the demand issue has come from."
The bigger problem is that the existing supply chains cannot meet the quickly rising demand. "There is currently no way that there is a supply chain that can support that. Even if China was the one-stop-shop, they don't even have enough raw materials to provide," Black explained.
Germany and Britain, for example, want to ban all new fully fossil-fueled cars by 2030. "Everyone is racing to look at the supply chain. Where are we going to get the raw materials?" asked Black while noting that the world could be a decade away from getting the new supply chain that ticks off all the boxes, including ESG concerns.
The supply worries are likely to trigger diversification efforts as North American car manufacturers opt for more options to get the raw materials needed for the EV batteries.
"China has spent 30 years developing a very efficient supply chain. And it's so easy to buy from China," said Black. "Lithium, nickel, tungsten — all these products that are used in EVs are dominated by China. China also dominates the battery production."
When you factor all of that in, you get "a perfect storm" when it comes to metals used in EV batteries. "That is what ultimately is going to fuel and continues to fuel the commodity supercycle," Black pointed out.
And this supercycle could last for years to come. "Where do you stop? Today, it's cars, but tomorrow, it's trucks and mines? You're going to see dramatic electrification of your life," Black said. "From a commodity point of view, it's fantastic because we're going to see great prices for a long period of time."
Semiconductor shortage: why that matters
The current semiconductor shortage revealed the fragility of supply when it comes to EVs, added Black.
"The semiconductors are dominated by the U.S., followed by South Korea. When COVID shutdowns began, companies started to run down their inventory. What they didn't know was that demand for electronics was going to rise as everyone got locked up at home," he said. "Everyone started shopping. But there was no inventory. Semiconductor shortages are now a global problem. The time it takes to make a semiconductor is 18 weeks."
The world will face "the same problem" with raw materials used in EV batteries. "No one's building a new factory anytime soon. No one is ramping up capacity anytime soon. They will be slowly inching it up," Black said.
Solutions for the U.S.
A few solutions for the U.S. will be stockpiling, diversification, and working with countries closely aligned to the U.S., noted Black.
The risk with China is contract security. "In China, the state trumps everything. So if it's considered the national interest that they cannot honor a contract, then that's just the way it is. This is the risk analysis that you would do," Black said. "For American manufacturing, it's a more common-sense approach to want to buy from three or four other sources located in countries that perhaps are more allied with the United States."
Manufacturers need options in order to preserve their supply chain. But it will take time to diversify as building a new mine could be a decade-long endeavor.
"To build a mine that adheres to all the stringent ESG rules could take you three-to-four years in planning. Then it will take you at least two years for permitting. And then you have a further two years of ramp-up. You're eight and a half years from the day you decide this is where I'm going to dig to when you ship," Black added.