How to invest in battery metals

Two years ago the price of lithium was riding the crest of a wave. The increasing use of batteries for electric vehicles (EV) was forecast to ramp up demand for it, along with the world’s appetite for fellow battery metals cobalt and nickel. Graphite, which we examine later, was also expected to climb.

In 2023 demand for EV batteries duly rose by 40%, says the International Energy Agency (IEA). “Globally, 95% of the growth in demand for batteries related to EVs was a result of higher EV sales, while about 5% came from larger average battery size due to the increasing share of SUVs within electric car sales.”

What's the outlook for EV battery prices?

Compared with 2022, EV battery demand for lithium grew more than 30% in 2023 and made up 85% of total lithium use, according to the IEA. Cobalt saw requirements from battery manufacturers grow 15%, equivalent to 70% of total demand. While battery needs accounted for only just over 10% of total nickel use, in 2023 demand for it rose almost 30% year on year.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

However, the values of all three of the above-mentioned EV battery inputs have since “fallen to such bombed-out levels that producers are curtailing output and deferring new projects”, notes Andy Home for Reuters. So what went wrong? It’s very simple. Lithium, the periodic table’s lightest metal and the Earth’s 25th most abundant element, isn’t scarce. And sharp price rises in 2021 and 2022 spurred excessive production.

Lithium was more than 10% in surplus in 2023. Cobalt and nickel supply exceeded demand by 6.5% and 8% respectively. Prices cratered, leading to a near-14% fall in battery prices in 2023. The last year in which battery prices experienced a similar drop was 2020, says the IEA.

So what next for EV battery-metal prices? Goldman Sachs Research expects global average battery prices to plunge by 25% by the end of 2024 and sees scope for another 28% slide by 2026. There are two main potential drivers for the drop. “One is technological innovation,” says Goldman Sachs. “We’re seeing multiple new battery products that have been launched that feature about 30% higher energy density and lower cost.”

The second is a continued downturn in battery-metal prices. Almost 60% of the cost of batteries stems from metals. “Roughly 40% of the decline is... coming from lower commodity costs, because we had a lot of green inflation during 2020-2023.”

Meanwhile, growth in demand from the EV sector is easing. Certainly, 2024’s EV registrations are forecast to improve by 19% worldwide, with 16.9 million sales and a 19.7% market share, according to European pricing monitor Autovista. Yet the plain truth is that EVs aren’t selling as fast as expected.

The vehicle industry’s shift toward EVs is facing serious challenges. Northvolt, Europe’s top battery producer, recently filed for bankruptcy. Stellantis announced the closure of its UK van plant, while Volkswagen and Ford also warned of significant job cuts and plant closures. General Motors has incurred a $5 billion charge to reorganise its Chinese business. The US risks falling further behind in its green transition, says the Financial Times, as EV adoption lags and Donald Trump’s plans to cut subsidies threaten progress. Carmakers have scaled back production plans, with US and European EV output expected to drop by 50% and 29% respectively next year, according to investment research group Bernstein.

The global EV volume outlook for 2028 onwards is up to 400,000 units lower than previously forecast, says Autovista. What’s more, while the global EV share is expected to reach 22.6% in 2025, 44.6% in 2030, and 69.5% in 2035, “the mix of vehicles being sold and the evolution of battery chemistry have dramatically changed the metals’ demand dynamic”, says Reuters’ Andy Home.

Hybrid batteries gain momentum

“Pure battery electric-vehicle (BEV) sales have underperformed expectations due to buyers’ concerns about limited driving range and charging infrastructure,” he says. “By contrast, hybrid and plugin hybrid cars, which have both a battery and internal combustion engine, have soared in popularity.”

Extended range electric vehicles (EREVs), which use a combustion engine simply to charge the battery, have a driving range of more than 621 miles.

EREVs now account for 31% of all plug-in hybrid sales in the world’s largest EV market, China, says researcher Adamas Intelligence, which expects them to enjoy similar success in Europe and the US. Adamas notes that a hybrid’s battery-pack capacity is a third of a BEV’s, meaning a similar-sized reduction in lithium, nickel and cobalt quantities used per vehicle.

In China, lithium is now 88% cheaper than at its peak in late-2022. Yet there’s a flipside. This extended slump in lithium prices “has already forced an array of stalled projects, scrapped deals and production cuts across the world as producers seek to weather the downturn and protect... margins," says Mining.com.

In Australia, Albemarle Corp recently shut half of its processing capacity and stalled expansion plans. Piedmont Lithium has cut 48% of its workforce this year and is seeking a funding partner for its North Carolina mining project near Charlotte, reports The Charlotte Observer. Piedmont’s CEO Keith Phillips thinks low lithium prices don’t support exploration, so lithium shortages look likely. Benchmark Mineral Intelligence is forecasting a supply shortage starting as early as 2025, says the Investing News Network. “While there are currently 101 lithium mines globally, future supply may struggle to meet growing demand, particularly with China expected to drive a 20% annual increase over the next decade,” it says.

To summarise the lithium price’s outlook: consensus opinion still anticipates an ongoing weak market. Yet although the long-term EV prognosis is less bullish than previously expected (and no one knows how president-elect Donald Trump’s promised tariffs will work) it remains auspicious, while future supply is likely to be squeezed. A contrarian viewpoint maybe, but a lithium rebound could be on the way. If so, how do you take advantage?

How to play a lithium rebound

Albemarle Corporation (NYSE: ALB), with a market value of $12 billion, is the industry leader in lithium and lithium derivatives. Although it’s not a pure lithium play, its diversification (supplying products for fire safety, oilfield drilling, pharmaceutical manufacturing, and food safety) provides downside risk protection should lithium not rally as expected.

The shares sell on a price-to-book value (p/b) ratio of only 1.2. Albemarle now just needs an earnings rebound to become a very attractive investment. A 2025 lithium rally would provide that, making the stock an interesting recovery buy.

Over to cobalt and nickel, which have also been significant battery inputs. However, EV manufacturers are using less cobalt, thus dampening demand. Furthermore, as noted above, battery requirements account for only about 10% of total nickel use. Both metals have also slumped by two-thirds since early 2022.

Unlike most commodities, cobalt is mainly a by-product, with 60% derived from copper mining and 38% from nickel extraction. Around 76% of 2023 global cobalt output came from copper-cobalt mines in the Democratic Republic of the Congo (DRC). Analysts at Fastmarkets see that percentage remaining unchanged in 2024 and 2025. On this basis, increasing copper and nickel mining are set to ensure an oversupply of cobalt into 2025, which would depress the price.

Granted, that’s not guaranteed. The DRC is hardly the most politically stable environment, raising questions about the reliability of supply. Moreover, demand for copper and nickel will drop if the world enters recession, so mines may be mothballed and cobalt or nickel supplies curbed.

“Oversupply and weak pricing in the nickel market is challenging… the future viability of projects in countries such as Australia and Canada,” says Rob Searle at Fastmarkets. “Australian nickel-cobalt operations have higher mining and processing costs and the glut of nickel that has arrived in the market over the past three years [means] many of these are no longer economical.”

Cobalt and nickel stocks to consider

The overall outlook for cobalt and nickel, then, remains mired in uncertainty. Again, Trump’s potential tariffs will soon add another layer of doubt. What’s more, as explained above, pure-play cobalt producers don’t exist. Yet for investors prepared to endure the risks, there are cheap ways to play cobalt and nickel.

Canada-based Sherritt International (Toronto: S), with a US$46 million market capitalisation, is a world leader in using hydrometallurgical processes to mine and refine nickel and cobalt. There are risks, notably a 50% Cuban joint venture (the other half is owned by Cuba’s government). Yet they are fully factored into the company’s valuation: on a 2026 forward price/earnings (p/e) ratio of 1.7 and a price/book value ratio of 0.12, Sherritt is cheap as chips.

Then there is Brazil’s Vale (NYSE: VALE), the world’s largest producer of nickel and iron ore. The company is worth $42 billion. Nickel provides 10% of its revenues, so it’s hardly a pure play on the metal. But trading at book value and on a forward p/e of five, Vale is another cheap mining stock.

For those who prefer a fund-based overview, WisdomTree Battery Metals (LSE: AMPS) is a sterling-priced, UCITS-eligible exchange-traded commodity (ETC) fund designed to provide investors with a total return in line with the WisdomTree Battery Metals commodity index, minus fees and costs.

Finally, a snippet about graphite. Actually a nonmetal, it’s another key battery input. In lithium-ion batteries, graphite is a main constituent of the anode, acting as a host for the lithium ions. It’s a relatively light material compared with nickel and cobalt, but still accounts for 10%-20% of a battery by weight.

Seventy graphite mines are now operating globally, mainly in China and Africa. “More than 300 new graphite mines will need to be built by 2035 to meet demand for electric vehicle and energy-storage batteries,” says International Graphite, a producer. If they’re not, look out for big graphite shortages – and rising prices – in a few years’ time.

Nouveau Monde Graphite (TSX Venture Exchange: NOU) says it’s “on track to become North America’s largest producer of natural graphite” as it aims to become “a strategic supplier to the world’s leading battery and vehicle manufacturers”. Planned production from its “world class” Canadian Matawinie Mine is 103,000 tonnes per annum of graphite concentrate over 25 years.

Nouveau Monde is very high risk. With no turnover yet, just expenses, the company depends on continued money raising to fund development. With the stock price falling from February 2021’s C$25 to just C$1.92 now, more equity issuance would dilute existing shareholders. Yet new investors who can stomach the hazards could be well rewarded over the next few years.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.