Reading 2022-03-28


Notes from reading

The conflict in Ukraine sent the price of oil to a 14-year high earlier this week, and that’s brought many investors to a straightforward conclusion: that surging oil prices will cause prices at the gas pump to rise, which should incentivize more people to make the switch to electric vehicles (EVs).

The conflict has also sent natural gas prices and, in turn, the cost of electricity soaring. After all, short-term electricity prices have surged 1,000% over the past year or two in many parts of Europe – the world’s biggest EV market.

That matters because when consumers consider making the switch to EVs, they factor in the total cost of ownership – that is, operating and fuel expenses over the vehicle’s life – as well as the upfront cost of the car.

An EV’s engine-equivalent – its battery – is the most expensive component of the vehicle: it accounts for around 40% of an EV’s total cost, according to consultancy Oliver Wyman. And while battery costs have dropped every year for the last 10 years, they’re set to increase in 2022 as the prices of key metals – nickel, cobalt, aluminum, and lithium – hit multi-year highs.

Russia is the world’s third-biggest producer of nickel. And when you consider that EV batteries are typically 80% nickel, you quickly start to see how a high nickel price could be set to increase the cost of EVs.

Russia is also the world’s third-biggest producer of aluminum, which explains why the metal’s price hit a record high this week too.

  • EV batteries have one major disadvantage compared to conventional internal combustion engines: they’re heavier, which reduces vehicles’ ranges. One way to fix that problem is to replace weighty steel parts in the vehicle with aluminum – a lightweight but strong metal

Now, does that mean you should sell out of your EV stocks or short Tesla? Not necessarily: as always, things are more complicated than they seem.

  • There are cost savings that come from other parts of the battery that could offset some of the impacts of rising commodity prices
  • Climate-conscious governments might step in with new EV subsidies to offset rising costs and stay on track toward their green targets
  • EV makers may have hedged some of their commodity exposure for this year, or locked in price agreements directly with miners.
  • And interestingly, Tesla is changing the battery cell chemistry that it uses in its non-long-range vehicles to one that doesn’t require any nickel – a move that could help increase its cost advantage over other manufacturers