Will Glencore’s electric dream become a metals market reality?

By David McKay for MiningMx

IT couldn’t be confidently claimed that Ivan Glasenberg, Glencore CEO, is given over to hyperbole. In fact, his group’s grassroots exposure to the markets through its trading division means it’s probably more tuned into the ebbs and flows of the commodity market than most other mining companies.

Yet his comments regarding advances in electric vehicle (EV) technology and its consumption had him audibly excited. Speaking during Glencore’s interim figures presentation earlier this year, Glasenberg said the impact of future EV consumption would have a profound effect on the demand of many of the minerals his company mines.

On Glencore’s assumption that 30% of all vehicle sales in 2030 were EV – equal to 26 million units based on 2016 global vehicle sales of 87 million units – an additional 2 million tonnes (Mt) in copper metal demand would be generated. That compares against a current total demand of 23Mt for the red metal of which about 11Mt is generated from China.

The impact on other minerals is yet more pronounced.

Nickel, for instance, would see demand increased 50% or 1.2Mt against current global demand of 2.1Mt, while the cobalt market would be sent into a tailspin. Cobalt used in car batteries of the future were estimated to create some 260,000 tonnes of additional demand against current global demand of 100,000 tonnes. It’s also worth noting that cobalt doesn’t occur as a discrete resource but always as a by-product of copper which would make the current owners of long-life copper mines and resources very jolly indeed.

That, at least, is the current spin on the technological market disruption posed by EVs. Quite whether the world is actually progressing uniformly to that scale of technological adoption is quite another matter, and complicated by questions around definition.

In the meantime, it’s worth contemplating the yin to Glasenberg’s yang; in other words, one miner’s gain may turn out to be another’s loss.

This is especially true in respect of the platinum group metal (PGM) market. As of 2016, about 40% of platinum demand was driven from use of the metal in autocatalysis in internal combustion engines (ICE). As for palladium, platinum’s sister metal, the consumption is even greater with some 79% of total demand from autocatalysts, and 80% for rhodium.

“It took 120 years to build the modern copper industry. The electric vehicles revolution could require the supply base of copper to double again. This will be a prodigious feat.” – Paul Gait.

As a result, the rise in EVs – by which is meant electric vehicles that exclusively use batteries in their powertrain or ‘BEVs’ – could negatively affect demand for PGMs. Generally-speaking, analysts are taking the view that the negative impact of EVs on PGM demand is not a question of if, but when and by how much?

According to analysts at RMB Morgan Stanley, there’s little disruption to the PGM market posed by EVs up to 2020. That’s partly because of the cost of owning them. The cost of manufacturing the battery, for example, has fallen 30% in the past five years owing to improved chemisty, the scale of production, and cathode evolution. However, the rate of cost decline in car batteries has slowed considerably lately undermining those optimists who thought they would fall as rapidly as batteries had in mobile phones.

As a result, EV sales are still relatively low – equal to about 1% of total car sales in 2016 – while the market is also supported by government subsidies and other incentives. In the South African context, an EV may be light on the environment, but heavy on the purse.

According to BusinessTech, an online publication produced by MyBroadband, owning a EV either in the form of a pure battery-powered or a hydrid of some stripe, is expensive. BMW’s BEV, the 1.3, costs R606,800 while the more popular Nissan Leaf retails at R474,900. As for hybrids, the Mercedes Benz C350e retails at R804,900 while the Volvo XC90 and the Porsche Cayenne 2 costs R1.2m and R1.5m respectively.

The publication also makes the point that while some of these vehicles are cheaper to recharge than filling up the tank with gasoline or diesel, there is the expense of time related to recharging and the lower range of some vehicles. “The majority of electric vehicles currently on the market can only handle between 120km to 320km on a single charge,” said BusinessTech.

Anxiety regarding the range of battery-powered automobiles before they require re-charging is another influencing factor in their potential adoption by society. As a result, EVs tend to be a second car, mostly for affluent consumers, who always fall back on the ICE vehicle for long-range tasks such as holidays.

Nonetheless, RMB Morgan Stanley believes BEV market share will gradually begin to improve partly because the cost of owning an ICE may also rise in line as emission standards are tightened. As a percentage of total auto sales, BEVs will comprise about 9% by 2025 and 16% by 2030. This is much less than the 30% estimated by Glasenberg, but more again than the consensus of 5% for BEVs by 2025 as set down by Trevor Raymond, director of research for The World Platinum Investment Council in its June edition of Platinum Perspectives. Yet there’s no ignoring the way it’s moving.

“A large range of forecast error exists around the actual point at which cost parity may be reached; however, the direction in trend is clear,” said RMB Morgan Stanley. “PGMs operate within the most exposed portion of the auto value chain – as a pure play supplier to ICE,” it said. The factors affecting the adoption of BEVs are complicated.

BARRIERS TO ADOPTION

Charging times are a distinct disadvantage. Among the more anticipated of BEV brands is the Tesla, the battery in which takes about 10.5 hours to charge from 20% to 90%, a drain on the household equal to the simultaneous use of a stove, dishwasher and heater. Whilst this BEV can be charged to 60% from 20% in only 20 minutes, the consumer limits range and runs the risk of halving the battery life long-term.

According to a report by Deloitte, about 55% of South Africans are willing to wait a maximum of only an hour to charge an all battery powered EV. In comparison, it takes three to four hours to fully charge an EV at a so-called super charging station and six to eight hours at home.

“You can see the face of an owner of a BEV literally drop when you suggest you’ve moved the CO2 emission from the street to the power station.” – Trevor Raymond

There’s also the question of exactly how the national grid who accommodate the strain on baseload power even assuming that the distribution and regulation of battery recharging points either at home or on the high street has been rolled out and managed effectively. And what of the additional pull on peak power demand?

“You can see the face of an owner of a BEV literally drop when you suggest you’ve moved the CO2 emission from the street to the power station,” said Raymond commenting on the prospect of having to rely more on coal-fired power stations baseload power. “‘Oh’, they think: ‘I hadn’t thought of that’”.

State treasuries also have some thinking to do about the disruption posed by BEVs as the fiscus stands to lose revenue where a petroleum and diesel fuel levy is imposed.

ELECTRIC DREAMS

Whilst the impact on the PGM market is disputed, there’s no doubt BEVs and hybrids will give an important kick to Glasenberg’s “electric dreams”.

According to Paul Gait and colleagues at AB Bernstein in London, the impact of EVs of various types is set to be transformative, if only to remove the world’s reliance on China as a source of commodity demand. “It took 120 years to build the modern copper industry,” said Gait. “The electric vehicles revolution could require the supply base of copper to double again, but this time in only 20 years. This will be a prodigious feat and is simply unachieveable at today’s commodity prices,” he said.

It’s estimated that in the event the transition to EVs does take place, the global mining industry will need a capital increase of between $350bn to $750bn but – importantly – only in specific commodities such as copper, nickel and cobalt.

Exame BNP Paribas said in April said inventories in cobalt were almost certainly expected to decline in the coming years since it was critical to battery manufacture and there’s currently difficulty in substituting it. “We could see global inventory falling below the buffer level (which is three months of demand) as early as the next five months; failing that, in 2018 at the latest,” it said. As a result, the cobalt price is expected to remain well supported in the coming years.

And whilst reliance on China for commodity demand may still be released somewhat, there’s no ignoring the fact China by dint of its sheer size will become a crucial participant in the electric car revolution. According to Exame BNP Paribas, the Chinese government is planning to invest heavily in infrastructure to support EVs and BEVs in particular, if only to minimise its own pollution problems.

For instance, it plans to quadruple the number of recharging poles to 4.8 million by 2020 through more installations among households while its National Development and Reform Commission – the centralised entity that manages China’s macroeconomic policies – plans to build 12,000 public recharging stations. “Our calculations suggest this would translate into additional copper demand of 96,000 tonnes by about 2020 (about 1% of global demand) – and of just over one million tonnes by 2025,” it said.

“The truth of the matter is that I don’t know how many coal-fired power stations you’re going to be able to build in the middle of Africa.” – Mxolisi Mgojo.

Batteries for energy storage, known as stationary energy storage systems, is also on the rise and expected to create a particular demand for vanadium, a mineral in which South Africa is relatively rich, through the development of the vanadium redox flow battery (VFRB). According to Fortune Mojapelo, CEO of Johannesburg-listed Bushveld Minerals, the growth in demand for VFRBs which can either be on or off-grid has given the Industrial Development Corporation confidence to support Bushveld’s proposed R130m vanadium electrolyte plant which will have annual production capacity of 200 to 400MWh.

It has the likes of Mxolisi Mgojo, CEO of Exxaro Resources, thinking. Exxaro’s chief operating focus is thermal coal which is largely sells to power stations which burn it for electrical generation. What, though, is the potential market disruption of 1MW to 3MW units that would provide energy in lieu of having to build capital intensive coal-fired power stations, especially where the demand is in remote areas of Africa requiring significant transmission infrastructure build?

In an attempt to anticipate market disruptive technologies, Exxaro established Cennergi, a joint venture with Tata Power, an Indian company. This, however, was to enable the firm to participate in the drive towards renewable energy.

Cennergi had already installed 234MW of renewable energy capacity, but Mgojo asks whether there is a requirement to build on this scale in the future? “We are saying how do you build a small genset, bring in other smart systems, smart platforms, and get that to work with the right partners,” he said. “Once you get that you ask how you roll it out to the rest of Africa because there is a need for that energy?

“The truth of the matter is that I don’t know how many coal-fired power stations you’re going to be able to build in the middle of Africa where there’s no infrastructure to get the coal there.” Currently, many African consumers are burning diesel, which is expensive.

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