EVs: ‘We see decarbonization feeding right back into the metals space,’ analyst says

Bank of America Head of Metals Research Michael Widmer joins Yahoo Finance Live to discuss the Inflation Reduction Act, what it means for EV batteries, cobalt batteries, lithium, and supply chain woes.

Video Transcript

- Guys, switching gears here, the EV provisions in the Inflation Reduction Act is setting up for some power dynamic changes for metals and leading to a dismal outlook for cobalt. For more on this, let's bring in Michael Widmer who is the Bank of America Global Research Senior Metals Strategist here. First of all, just set the stage for us. For those of us who are not tracking this on a daily basis, what do we need to know as the broader context for where we sit?

MICHAEL WIDMER: So the broader context really is one where we do see much more incentives now coming through to put EVs onto the road. And just in very simple terms, when you're thinking about EV batteries, they're normally lithium-ion batteries. And demand grows from the EV side of things is so strong that the lithium market, in broad numbers, needs to double in size almost every other year. So we have some spectacular growth trends here coming through, where we see decarbonization feeding right back into the metal space and the metals demand space.

- Michael, are supplies so low that we could see production shutdowns, the automakers, as they switch to EVs? You know, I'm just trying to get a sense on how bad this could look.

MICHAEL WIDMER: Look, I think for me, you can look at it from a cost perspective. When you're just looking at the raw material costs in an average EV battery, you're now back to the levels they were back in 2018, '19. So we have had a genuine cost inflation. I don't think we're quite there yet in terms of having outright constraints. We just have to pay more.

But the reality is when you're looking further down the line, say, over the next five to 10 years, it will be a pretty tough job, I think, for the mining industry to supply all of those metal units that we do need to facilitate decarbonization. We need metals in energy generation, in storage, and then you're talking about EVs also in electricity consumption.

- What does that mean for the cost for end consumers of these vehicles? As we're seeing more of the purchasing start to lean towards electric vehicles, for the companies that are manufacturing them across all of these materials that we're talking about, they're also needing to net some of these long-term partnerships to ensure that they have the necessary materials to produce the capacity that they're even anticipating for some of their own production plants.

MICHAEL WIDMER: Yeah. Look, I think there's two aspects here. I think the first one is just the supply security and the supply safety. And I think when you're looking at the Inflation Reduction Act, there are some provisions in there that actually incentivize more domestic production, more domestic assembly, I think. And that's partly targeted, I think-- or should partly help to mitigate some of those supply chain concerns, but you need to see the investment coming through.

In terms of inflation, in terms of what it means for the consumers, look, the reality is that we have seen car prices increase. Actually, I think, take Tesla, for instance, right? And this is just a direct result of raw material cost inflation.

- Michael, who are some of the key players in this industry and companies that you follow?

MICHAEL WIDMER: On the-- you mean on the metal space?

- On the metal side. Yeah.

MICHAEL WIDMER: Oh, look, there is all the standard brand names in lithium market. In the US, you would have someone like Albemarle, for instance, just to throw one name into the box. You have other regions in Latin America where you have got someone like SQM. So it's a very broad base. You have American producers, Chilean, Australian producers. You have got Chinese operators in there as well.

And all of them-- this is the interesting bit. All of them do see that you do have a very strong demand growth profile coming through. So all of them are trying to increase production. The question is just from a commodity perspective, whether they can do it actually quickly enough so we don't have any constraints on the way to decarbonize the global economy.

- This has a lot to do with batteries. But on the other side, there's the materials that go into the chips themselves and where we're trying to ramp production there. What is the kind of differentiation that you would see between the ability to mine the necessary materials that are needed for chips versus batteries? Or perhaps there's an overlap that I'm not privy to.

MICHAEL WIDMER: No, look, I think I give you a very concrete example, for instance, on the cobalt side. I think the metals you can really only mine where the metals are-- where the metals are available. And so take the case of cobalt, for instance. Cobalt can only be mined-- or can be mined in different countries, but the main supplier at the moment is the Democratic Republic of Congo.

If you wanted to change supply chain, you always come back to the Democratic Republic of Congo, supplying more than 50% of the raw material markets. And that I think from a car supplier perspective and EV battery manufacturers' perspective is, to some extent, a concern. It is a concern because you do see periodic uncertainty over supply leaving the DRC. We just now had one of the companies having had their exports curtailed by the government in the DRC.

So that probably is one of the key differences. Metals can only be extracted from places where they are actually available. Then you're looking further downstream you can diversify maybe a little bit more. But ultimately, you are stuck with your upstream supply sources.

- Michael Widmer, Bank of America Global Research Senior Metals Strategist, good to see you. We'll talk to you soon.