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Surging demand for critical raw materials in the EV revolution

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The wheels are in motion: Investors must be ready for decades of historic growth amid surging demand for electric vehicles and critical raw materials.

News about the climate crisis rarely makes for good reading. Take, for example, the latest news from Europe. According to data from the Copernicus Climate Change Service, Europe saw its hottest ever summer in 2022 (the previous hottest was in 2021), with the third warmest autumn on record. What’s more, in recent weeks, oppressive heatwaves have returned to Europe. Wildfires are back in ruinous fashion, with thousands evacuated from the Canary Islands, whole cities in Italy shut down amidst 40-degree heat, and popular sites like the Acropolis in Greece closed to tourists for the foreseeable future.

EV Market Expansion

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Yet, amongst the worrying pronouncements from the media and climate scientists, there is some cause for hope. According to one of the International Energy Agency’s (IEA) latest reports, the total market share of electric vehicle sales has more than tripled in the last three years, moving from a lowly 4% in 2020, to a 14% market share in 2022. What’s more, the IEA predicts sales will grow an additional 35% in 2023, as the electric vehicle revolution gathers pace.

The immense growth in global EV sales can be characterised as a mass popular awakening. Consumers across the globe are sitting up and take notice of the non-stop climate news coverage. The behaviour dial is shifting and markets are reacting, as prospective buyers now consider the environmental impact of a new vehicle as salient as performance power or safety rating. According to a 2022 study from Ernst & Young, for the first time in history, 52% of consumers who were intending to buy a car over the following 24 months said they would choose an EV or hybrid vehicle.

Investing in High-Growth Opportunities

But what does this mean for the financial markets, and where do investors now hedge their bets? Which stocks should investors direct their capital to in an age of growing uncertainty? Electric car manufacturers like Tesla, Rivian and Xpeng have already delivered strong investment returns over the years: the data shows that stocks of EV-related companies have been consistently outperforming traditional carmakers since 2019. Yet there are plenty of promising – and often overlooked – investment opportunities outside of car manufacturers.

With any new mobility product comes the need for greater infrastructure, support systems, technology and end-of-life treatment centres. The EU’s EV Charging Infrastructure Masterplan estimates that by 2050, approximately €1,000 billion needs to be invested in private and public charging infrastructure, power grid upgrades and capacity for renewable energy power generation. Historically, demand uncertainty has hampered investor appetite for EV charging opportunities, but as the recent figures show, demand has been growing at an extraordinary pace. Deploying investment in areas such as charging infrastructure will bolster consumer confidence in electric vehicles and encourage further uptake – which, in turn, will result in better investment returns for the long term.

Likewise, investing in EV battery stocks may be an attractive option for investors seeking growth opportunities. Industry research platform MarketsandMarkets estimated that the global EV battery industry was worth $56.4 billion in 2022. It is set to grow at compound annual growth rate of 19.9% to reach a value of $134.6 billion by 2027. There is increasing recognition of the opportunities this presents; for example, approximately $73bn in planned US battery plants were announced in 2022 alone, according to consultancy Atlas Public Policy.

Investing in Minerals of the Future

However, beyond charging stations, power grid upgrades and batteries, there is another area of the EV market that requires urgent investor attention. The production of electric transport solutions is not possible without a few key ingredients, such as lithium, cobalt, copper, nickel, germanium, and manganese. Whilst at first glance, it may seem counterintuitive to allocate more capital to minerals extraction and mining exploration when trying to save the planet, this is in fact necessary to avoid future supply shortages and achieve the transition to clean transport.

Without this, we will simply not be able to extract enough critical raw materials to build the batteries that will power the cars, planes, and locomotives of the future. Take for example, the lithium market, where prices have risen 800% over the past three years on the back of soaring demand and supply crunches. In order to meet net-zero goals, the mining and metals sector will need to deliver its biggest purchase order in human history. That is to say, mining companies must move to radically scale-up the production of these materials, following decades of underinvestment.

Crucially though, the ramp up in mining capacity has to take place in a responsible and sustainable manner, without damaging the local environment, releasing vast amounts of greenhouse gases, or negatively impacting local communities. Investors and industry actors must therefore direct funds to projects with a clear plan to mitigate these risks and promote responsible sourcing practices, such as operations powered by renewables or those reprocessing waste tailings in the region. This is particularly important in more complicated jurisdictions, such as the Democratic Republic of the Congo, which produces around 70% of the world’s mined cobalt, a key component of EVs.

And investment is more than just money, more than returns, portfolios, and certainty for stakeholders, but also about collaboration. No one country can achieve net zero on its own. Global low-carbon economies are only possible when we all work together, and that includes the financial markets. The battle to reach net zero is far from won. In fact, without the full force of private investment, we are likely to fall short of the IEA’s Net Zero 2050 Scenario. The good news for investors is that the EV sector’s unprecedented market growth presents promising opportunities to be taken advantage of.


Source: global banking and finance

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