The world is changing right in front of us. Some technologies are a slow burn, while others seem to have the potential to change everything overnight.
AI seems to be in the latter camp, with its unstoppable force, while electric vehicles (EVs) are taking much longer to be adopted and their uptake is requiring significant assistance from governments in developed markets.
Slow-burn technologies are easier to build bear cases for, particularly related to the rate of adoption, but ignoring the end state of a technological shift (even if it takes longer than planned) is foolish.
People tend to overestimate the rate of change and underestimate the extent of change. There’s a perfectly applicable saying known as Amara’s Law or Gates’s Law: “Most people overestimate what they can achieve in a year and underestimate what they can achieve in 10 years.”
In other words: don’t allow the slower-than-expected adoption of EVs to seduce you into believing that the current technological shift isn’t real.
The question that might come to mind is: what is the relevance for South African investors of this change in the way we move around? Aside from considerations related to automotive stocks and the seemingly endless buzz about Tesla, there’s an issue that is far closer to home — what happens in the platinum sector.
As the world’s largest producer of platinum, South Africa would be severely wounded by the metal becoming irrelevant. Though it’s unlikely that demand for catalytic converters in vehicles will disappear entirely, it’s not impossible that prolonged pressure on platinum group metal (PGM) prices would lead to several mines becoming economically unviable, with job losses and the destruction of value along the way.
Nobody allocates capital to a break-even project, so demand doesn’t have to disappear completely for there to be an unprecedented crisis in the PGM mining industry. The crisis is arguably under way as we speak, with the likes of Sibanye-Stillwater taking steps to prepare for a long and ugly winter of discontent for the PGM industry.
The irrefutable link between the prices of these metals and EV adoption is the reason investors and traders alike are watching the PGM stocks alongside the news of EV-related trends. The challenge is that the headlines about EVs are sensationalist by nature because clicks on online articles drive revenue, so it’s hard to look through the noise and get to the real story.
This is also a politically sensitive area, with progressive parties pushing for EV incentives and conservative parties looking to spend elsewhere and to protect existing industries. When there are political incentives at play, the level of accuracy of information falls through the floor.
These factors make it difficult to assess whether the PGM industry is investable or not, as the rate of EV adoption is described as a failure in some quarters and a success in others. It’s even harder to judge from South Africa, where we are closest to the raw materials being affected and furthest from the consumers actually buying these cars.
In the UK, the government offers various grants in the form of discounts on the purchase price of low-emissions vehicles in certain categories
One thing is for sure: uncertainty about a technology’s lifespan puts a real dampener on what people are prepared to pay for the related assets.
Gold has stood the test of time and gold-producing mining houses trade at relatively high multiples. PGMs are in a completely different position. Whether we are in slow burn territory or in slower burn territory for EVs, the direction of travel is in favour of the low-emissions technology. That’s not good for PGMs.
Though supply-and-demand issues are nothing new in the PGM (or broader commodity) sector, the difference is that demand is going through a secular change rather than a cyclical one. The usual argument, that a long period of low PGM prices eventually leads to a supply crunch and super-profits for those that survive, won’t apply here if demand never recovers.
Though PGM miners keep trying to convince the market that a supply deficit is coming, it says a lot that Anglo American Platinum was unwanted by BHP and is also on the unbundling list at Anglo American. PGMs are a hot potato right now, with terrible share price momentum since the beginning of 2022. Though history has taught us that the best returns in the sector come from buying at a time of despair, it’s also highly debatable whether the prices reflect despair yet.
The PGM basket price is complicated, as it includes different elements, but the overall theme is that prices are lower than they were a decade ago. Over that time, the costs of getting the stuff out of the ground have gone up significantly. You don’t need to be a mining expert to know that this is problematic. For context, the gold price has roughly doubled over 10 years. Despite the lack of increases in the PGM prices, platinum stocks are trading at similar levels to 10 years ago — and, in some cases, even higher. That doesn’t sound like despair.
Moving on from the supply side of this equation to the demand side — and thus the root cause of the challenges — my recent trip to the UK and France gave me an opportunity to notice not just the vehicles around me on the road, but the way incentives are offered for buying them. To get the real story about EVs, you need to move past the politically charged headlines and speak to actual owners.
Based on what I saw on the roads in and around London, there’s significant adoption among upper-income groups in urban areas. While we obviously shouldn’t get too excited about extrapolating this behaviour and assuming that the same is happening in lower-income or more rural areas, there’s also no denying that automotive manufacturers are out there to make a profit and will build the cars being demanded by the most important (that is, the wealthiest) customers.
Of course, they will also build the cars being demanded by regulators and governments.
An enormous amount of money has been invested in the electric vehicle wave. European governments aren’t shy to force a particular direction by means of regulation. They still have much egg on their faces from the push for diesel and the related emissions scandals, but that hasn’t stopped them from putting maximum effort behind the EV offensive.
With helpful proximity to key supply chain inputs for an EV, China was well positioned to become an EV powerhouse
In the UK, the government offers various grants in the form of discounts on the purchase price of low-emissions vehicles in certain categories. They also give workplaces a grant for installing EV charging stations. But perhaps the biggest win of all is that the benefit-in-kind rate (a tax concept similar to a fringe benefit in South Africa) for an EV company car is hugely discounted. If you can offer incentives to your staff and reward yourself as the founder by driving a new EV and paying very little tax on it, then why not?
It was Charlie Munger who said: “Show me the incentive and I’ll show you the outcome.” The outcome of the incentives across Europe is quite clear to see, with about one in five new car registrations in 2023 being for an EV. But even this level of adoption pales in comparison with China, where EVs have become so strong that the China export market is now a serious threat to the established European competitors such as Stellantis and VW Group, putting their valuations under pressure.
With China as the biggest market for EVs worldwide, the economic incentive for the development of its domestic EV manufacturing base is obvious. The government recognised the need to reduce emissions and take advantage of China’s ability to produce just about anything.
With helpful proximity to key supply chain inputs for an EV, China was well positioned to become an EV powerhouse. Judging by the numerous headlines about tariffs on Chinese EVs and fears of a trade war between Europe and China, the products are good enough and, most importantly, affordable enough to be a major concern for the big names. China has quite brilliantly used a technological step-change as the perfect opportunity for disruption.
Perhaps the best way to assess the EV trend is to experience one of the vehicles — preferably in a market where there has been investment in related charging infrastructure. IM did exactly this in the UK, where it quickly became obvious that EVs make a world of sense as urban vehicles, particularly for wealthier consumers who can plug the vehicle in at home (vs parking on the street). Where reliance on the external charging infrastructure is limited, owning an EV is a blissful experience.
The fun does take a knock when you need to use public chargers, with the potential for long and irritating waiting times and other problems, like dealing with charging infrastructure that isn’t always working properly. This is why the most logical thesis for eventual adoption is a world in which two-vehicle households have one EV and one internal combustion engine (ICE) vehicle for longer trips or for any situations where “range anxiety” is an issue. And in all likelihood, that ICE vehicle will be a hybrid with much lower fuel consumption than the world has been used to.
Though there’s obviously a huge difference between developed markets and emerging ones, it is true that new technologies tend to be adopted in the wealthiest nations first and that, as economies of scale are achieved in the manufacturing process, the prices drop to the point where emerging markets can afford the products.
This is where the threat from China is of gravest concern for European manufacturers and the PGM industry at large, as China has the best chance of producing affordable EVs for a market like South Africa.
Yes, there is still great uncertainty about the rate of adoption. Yes, there will be good quarters and bad quarters for EV sales. But to bet against the extensive investment behind new technologies and what they mean for levels of demand for ICE vehicles is a brave bet indeed.
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