Investec’s Taking Old-School Approach to the Battery Revolution

(Bloomberg) -- Forget lithium and cobalt. The best way to tap into the growing popularity of electric vehicles is still good old copper. That’s the view of Investec Asset Management, which oversees $197 billion.

In lithium, there are no futures or spot contracts listed in major exchanges, and most producers also make other materials such as fertilizers, diluting gains from the commodity’s meteoric rise. In the case of cobalt, while it trades on the London Metal Exchange, volume is less than 1 percent of trading in copper, limiting investors’ capacity to go in and out of the market.

“We prefer the likes of copper over these niche metals because of liquidity,” Hanre Rossouw, a Cape Town-based portfolio manager at Investec, said by telephone. “With lithium, you’re at risk of buying a bit of a fad. It’s such a small industry that any addition of a new mine could cause an oversupply. With cobalt, there are very limited companies that give you exposure.”

Demand for copper will outstrip production in 2019 by 330,000 metric tons, the International Copper Study Group said in April. The longer-term supply outlook for both copper and gold is dimmer, as companies focus on paying down debt and returning cash to shareholders, instead of investing in new mines, Rossouw said.

Reduced spending means the pipeline of copper mines scheduled to come online in the next few years is the smallest this century, both in terms of number and production capacity, according to BMO Capital Markets. The lack of new supply growth from 2019 to 2022 probably will push the market into deficit, according to Colin Hamilton, managing director for commodities research at the bank.

Demand for copper in batteries for electric vehicles will surge to 295,000 tons by 2030, from just 7,907 tons in 2016, according to a Bloomberg New Energy Finance report last year. On top of that, usage for the metal will also rise with the construction of charging stations that will power the vehicles, Rossouw said.

Cobalt for delivery in three months climbed 18 percent to $88,750 a ton this year, with just 187 contracts changing hands. That compares with 4.25 million copper contracts in copper, which has seen prices slipped 5.8 percent this year to $6,826 a ton.

“If prices get too high, that leads to a self-destructive cycle where very high prices will incentivize new supply,” Rossouw said. “Especially with the smaller, niche minerals, one has to recognize that risk. That’s why we prefer copper."

©2018 Bloomberg L.P.

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