Is the buzz over electric vehicles worthwhile for investors looking to get in on the ground floor of the emerging technology?
As with all industries in their infancy, there are risks and rewards.
The world is on deathwatch for gasoline vehicles. Increasingly, governments are approving regulations that would faze out the use of gasoline-powered vehicles. Norway wants to stop the sale of fossil-fueled vehicles by 2025. France and India want to nix gasoline engines in new cars by 2040 and 2030, respectively according to Global X Funds. It’s likely that governments around the world will jump on the bandwagon.
[See: The 10 Best Ways to Buy Tech Stocks.]
That’s all well and good, but who profits from the change in the industry?
“It is about digging into each company and finding out how they will benefit from the changes in materials use,” says Chris Terry, a metals & mining research analyst at Deutsche Bank Securities in New York.
Not all companies in the automotive sector are set to profit equally. For instance, a manufacturer of windshield wipers probably won’t see any difference, because electric vehicles need no more or fewer wipers than other cars. Likewise, tire makers and manufacturers of headlamps and seats might not see a boost to demand.
Even car manufacturers aren’t a certain bet. Companies that make gasoline and diesel vehicles can make electric ones instead.
“For electric vehicles, the underlying technologies are not uniquely proprietary,” says Ken Fisher, executive chairman and co-chief investment officer at Fisher Investments.
But what if there was an area where new competitors might be delayed or slowed down?
Fortunately, there is such a group, those companies that produce the key raw material that is used to make electric batteries.
Game-changing technology. Growing demand is on the way for one key raw material in particular. The game-changing technology for electric vehicles has been the lithium-ion battery, and it is there that there are some big bucks to be made. Global X claims that some electric vehicles use in excess of 10,000 times more lithium than a smartphone — meaning that 1 million electric cars would use the same amount of lithium as every smartphone ever sold.
There are about 17 million cars and light trucks sold or leased annually in the U.S., so the opportunity for investors of lithium-ion batteries is enormous.
[Read: How to Invest in the Car of the Future.]
Better still, there are reasons to believe that the portion of electric vehicles will steadily grow.
“We are looking at getting close to 30 percent of new vehicles by 2030 in the U.S.,” says Luke Tonachel, director of clean vehicles and fuels at the Natural Resources Defense Council in New York.
If U.S. demand for cars and light trucks doesn’t change by 2030 that equates to approximately 5 million new electric vehicles. That’s a lot of cars and a lot of lithium to be produced by mining companies.
It is in such enterprises that there are major potential profits to be made.
How to invest. Setting up a new mine of any sort can take years. A mineral deposit must be located, feasibility studies must be completed, and finally, capital raised, all before production can start.
This long timeline is no less true for lithium producers. As demand for lithium increases in line with battery demand, the supply will take a while to catch up. During that catch-up period, prices for the metal will rise. Eventually, of course, higher prices will prompt more supply as mines get developed and once again moderate the cost of the metal.
But for the time being at least, the miners who already produce the metal should do well.
With that in mind, take a look at resource firms FMC Corp. (NYSE: FMC), Chile’s Sociedad Quimica y Minera de Chile ( SQM), and Albemarle Corp. ( ALB) all of which are in the lithium business.
Investors wanting a broad way to play the trend might consider the Global X Lithium & Battery Tech exchange-traded fund ( LIT), which tracks a basket of stocks involved in the industry. It has annual expenses of 0.76 percent or $76 per $10,000 invested.
[See: 10 Great Tech ETFs That Stay Under the Radar.]
The fund is heavily concentrated, with 77.9 percent of the value in the top 10 holdings, and with one stock alone, chemicals and lithium company FMC Corp., accounting for 23.3 percent, on the same date. Three-fifths of the securities held are from the basic materials business.
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Should You Ride the Electric Car Trend? originally appeared on usnews.com
