Weekly Wisdom – September 5, 2024

By Hightower Great Lakes on September 5, 2024

Transportation Going Electric  

A few weeks ago we shared our first favorite long-term theme, power demand and grid infrastructure. The world is becoming ever-more reliant on electricity amid new technological advancements, which are being felt across all sectors of the economy.

U.S. power demand growth has been nearly zero percent over the past decade and is expected to grow at a 2.4% compounded annual growth rate (CAGR) through 2030. 25% of this growth is expected to come from transportation, and recent trends show that electric and hybrid vehicles are becoming more popular among consumers.

Chart 1: Power Demand to Grow at a 2.4% CAGR through 2030[1]

The Electric Vehicle Market

As of 2023, over 40 million electric vehicles (EVs) were on the road. Global EV sales grew by 3.5 million last year, up 35% y/y, and accounted for approximately 18% of all cars sold.

However, EVs and plug-in hybrid vehicles (PHEV) are being bought only in a few major markets and have lagged in underdeveloped nations. In 2023, 60% of global EV/PHEV sales were located in China, with 25% in Europe and 10% in the U.S. Combined, the three regions accounted for 95% of all EV sales.

The EV market in China is the largest in the world. One in every three cars sold is electric and over eight million new EVs were registered in 2023, up 35% y/y. China is also the world’s largest exporter of vehicles, exporting 4 million in 2023, with 1.2 million of those being EVs. EV exports grew 80% y/y in 2023, with overall vehicle exports growing 65%.

Europe and the U.S. saw solid growth last year across EVs as well. New EVs totaled 1.4 million in the U.S., and 3.2 million in Europe, growing 40% and 20% y/y, respectively.

Clean vehicle tax credits have helped increase EV sales in the U.S., and the Inflation Reduction Act extended the credits through 2032. The tax credits can be worth up to $7,500 if the criteria are met. Tax credits in Europe, Germany specifically, were phased out in 2023 which has impacted EV and PHEV sales.

German electric car sales grew 25% y/y in 2023, after growing 30% in 2022. Overall, EV sales remain strong in Europe, with 25% of all cars sold in France and the United Kingdom being electric, and almost 95% in Norway, the highest in Europe.

Chart 2: Global Electric Car Sales Grew 35% in 2023[2]

India and Thailand’s EV markets saw great growth in 2023. In India, EV registrations grew 70% y/y to 80,000, relative to a growth rate of under 10% for total car sales.

EV registrations quadrupled in Thailand to 90,000 with a nearly 10% share of all car sales being electric – similar to the share in the U.S. Tax benefits and subsidies have aided both countries in EV growth.

Thailand is looking to become an EV manufacturing hub, with the goal of bringing in $28 billion of investments over the next four years.[3]

As EV and PHEV production and adoption ramp up, emerging markets and developing economies will likely show greater interest in these forms of transportation.

EV and PHEV demand will continue to improve as competition increases and more models are created. Up-front prices for EVs are still more expensive than internal combustion engine (ICE) vehicles, but over a five-year period of ownership, EVs are 10-20% cheaper after accounting for cumulative costs.[4]

In 2024, 25 new models are expected to come to market, although none are slated to have a starting price below $30,000. ICE vehicles will be preferred in the meantime until EVs become more affordable.

The Metal of Electrification

A greater demand for EVs means a greater demand for the materials needed to produce the vehicles. On average, EVs use six times more minerals than ICE vehicles, a majority of which are within the batteries.

Graphite, copper, and nickel are the main materials, and copper has been called the “Metal of Electrification” with EVs using 2.5x more copper than conventional vehicles.

Copper has the highest conductivity of any non-precious metal and has become an integral material in the production of emerging technologies that channel large amounts of electricity.

Chart 3: EVs Use 6x More Minerals than Conventional Cars[5]

How We Are Exposed to this Theme

From the materials needed in the manufacturing process to the end sale, there are many ways to gain exposure to the growing EV market. Our preferred method is through owning the companies supplying the materials, specifically Freeport-McMoRan (FCX) and Cleveland-Cliffs (CLF).

Commodity demand closely follows economic activity, especially in China which is the largest consumer of copper. FCX is the world’s largest copper producer and will continue to be a beneficiary of electrification and the growth of renewable energy given copper’s importance in the manufacturing process of these technologies.

CLF derives 97% of its revenues from steelmaking and is the largest producer in North America. Similar to FCX, global commodity demand is one of the main drivers of its business.

CLF reduced its debt by $237 million in the previous quarter and is growing its exposure to the automotive industry through electrical transformers. Both FCX and CLF will gain from the increased need for EV components such as copper and steel, among others.

Automakers provide the greatest exposure to the EV market. EV sales saw great growth in Q1 2024, up 15% in the U.S., but PHEV demand is growing even faster with sales up 50% y/y in the first quarter.[6]

Tesla (TSLA) and BYD Company are two market leaders within EVs. TSLA sold 1.8 million cars in 2023, up 37% y/y, and BYD sold 3.02 million in the same period, up 61% y/y.

BYD is a prominent Chinese EV manufacturer which supplies its vehicles to much of the Asia-Pacific region. TSLA remains a top of the U.S. EV market, with over a 50% share in the U.S.[7]

Within automakers, Toyota Motors (TM) is our preferred manufacturer. Its EV sales grew significantly in the last quarter, up 123% y/y to over 1 million vehicles, which represented 43% of its total sales.

It sold 998,000 hybrid electric vehicles (HEV), up 123% y/y, and 43,000 battery electric vehicles (BEV), up 149% y/y. TM has taken a hybrid approach to the EV race and offers more affordable options than competitors, both which have paid off.

A Growing Market

The EV total addressable market is expected to reach nearly $2 trillion by 2032, from $671 billion today.[8] There are several ways to gain exposure to the growing market for EVs; the suppliers of raw materials, the automakers, or end-market distributors of replacement parts and repairs.

We believe transportation will follow the larger technological trend of electrification, and EVs will become more popular throughout the coming decade.

Click here to read last week’s Market Note (8/30).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

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All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: Goldman Sachs. As of May 14, 2024.

[2] Source: IEA. As of April 2024.

[3] Source: Bangkok Post. As of October 26, 2023.

[4] Source: IEA. As of April 2024.

[5] Source: IEA. As of May 5, 2021.

[6] Source: IEA. As of April 2024.

[7] Source: Market Watch. As of June 7, 2024.

[8] Source: Fortune Business Insights. As of August 19, 2024.