Silicon Valley’s Biggest Risk Is This Industry’s Gain… for Now
We’re at a dangerous tipping point.
It could be devastating for one of the world’s economic backbones: technology.
It could also lead to a collapse of one of mining’s darlings.
Now, besides oil and gas, marijuana, and other resources, I follow tech.
And readers here, as well as those who subscribe to Oxford Resource Explorer, know that technology – its impacts and innovations – is key to my energy and resource investing philosophy.
It’s simple: Technology is the driver of everything.
Not only that – tech and mining are dependent on each other.
Tech companies need the raw materials to build all their dazzling gadgets, including the ones that operate mines. And mining is dependent on increasing demand from the technology space in order to have a place to sell its raw materials.
Unfortunately, there’s a collision on the horizon. For technology companies, they’re facing supply risk and falling profitability. For miners, they’re in the driver’s seat for now… but the question is for how long? And is it sustainable?
A Game Changer Sparking a Metal’s Boom
In February, Tesla (Nasdaq: TSLA) shares fell nearly 9% on earnings.
The electric vehicle carmaker continues to burn through cash at an alarming rate. And it may have doomed itself, as the potential profitability of its most vaunted product is in jeopardy.
The Tesla Model 3 was considered a game changer in the EV space when it was unveiled in March 2016.
As the company’s most basic model, the Model 3 costs a mere $35,000.
No longer were the cars for the rich and elite… instead “anyone” could own a Tesla. Hundreds of thousands of people put down a $1,000 deposit to secure their spot for the world’s first mass-market EV.
The original goal for Tesla was to make 10,000 models of the Model 3 per week, or half a million per year.
In 2017, the company managed to produce a grand total of 2,700 models of the Model 3. There is some hope that output will hit 5,000 per week this year…
This means that not until 2019 – or possibly 2020 – will the nearly 500,000 customers who put down their deposits actually have the chance to buy a Model 3.
The Model 3’s unveiling in March 2016 started a bull run on cobalt, one of the most valuable metals for EVs and other technologies…
The price of cobalt has since shot up 250%. It’s gone from $23,000 per metric ton to $81,000…
Now, it wasn’t all Tesla’s doing.
And in July of last year, Great Britain announced it would ban the sale of all gasoline and diesel cars by 2040. France, India and Norway have similar plans. Plus, China, Germany and eight other countries are looking to develop similar strategies.
This has been a boom for cobalt miners, who have seen their shares rocket higher in the last year.
But is this just the beginning? Or is it the beginning of the end?
The Great Shortage of 2020
Cobalt is essential for EV batteries, many of which comprise a lithium-ion chemistry.
And lithium-ion batteries are in nearly every electronic device on your person and in your home.
This has sent everyone from automakers to refiners to tech companies scrambling to lock up supply at low prices.
And just recently, South Korea’s top oil refiner, SK Innovations, agreed to buy all of Australian Mines Ltd.’s cobalt and nickel from its Sconi (scandium, cobalt and nickel) mine for the next 13 years. At current prices, that’s a $3.9 billion deal.
Apple is one of the world’s largest consumers of cobalt. Every iPhone contains 8 grams of the metal. Now, that’s considerably smaller than the 21 kilograms needed for a typical EV battery.
In comparison, EV sales notched a record high in 2017… a total of 199,826 cars. Tesla’s Model S was the best-seller in the U.S., reaching 27,060 units.
The problem is, globally, EV sales are expected to be a moonshot from here – rising to more than 1 million sold per year in the 2020s.
This will be crippling.
The reality all these companies are facing – from Apple to BMW, Volkswagen and Samsung – is that we’re about to witness a squeeze as cobalt demand is set to launch higher…
Last year, global cobalt demand for EVs grew 13%.
By 2025, this segment will need 160,000 metric tons of the metal.
That’s a 189% increase over what the world consumed last year.
And by 2030, global passenger EV cobalt demand will top 324,000 metric tons.
By then, global supply will be outpaced by just the needs from the passenger EV space… That doesn’t include consumer electronics or larger EVs, like buses.
This is the great shortage on the horizon.
And it’s going to start weighing on the bottom lines of Apple, Tesla and other companies.
Once companies have gone directly to mines to source raw materials, there’s nowhere else to go. There’s no more money to be saved in the supply chain, unless you transition to something cheaper – like nickel-manganese-cobalt.
But this also paves the way for battery recycling.
Here’s the other reality… China controls 80% of the world’s supply of cobalt. More than 50% of the global cobalt output originates from the Democratic Republic of the Congo. But it’s all controlled by Chinese companies.
Humanitarian concerns have pushed companies to source cobalt from anywhere but the DRC. That gives Australian and Canadian miners an advantage.
At the moment, Glencore PLC (OTC: GLNCF) is in talks to supply cobalt for Tesla, Apple and Volkswagen.
But it won’t sign fixed-price deals.
The bottom line: Don’t expect cobalt prices to see the same boom we saw in 2017. I believe prices going forward will increase at a more stable rate. And Tesla may have given birth to its own worst enemy.
Prices can’t soar infinitely higher. And maybe now’s the time for investors to start looking toward nickel and manganese miners in preparation of that.