Over the next 20 years, electric vehicles (EVs) may have a much greater influence on the London Metal Exchange than the oil market. Put simply, motorists are going to have a lot more copper in their cars.
The Tesla Model 3 and Chevy Bolt (both of which will be launched imminently) will be the first mass market EVs that can be driven 200 miles on a single charge — the minimum many commentators say is needed if cars solely powered by batteries are to go mainstream in the US.
Their arrival marks an inflection point. Once EVs start matching conventional vehicles for convenience, the speed at which they become commonplace will depend primarily on price.
At the moment batteries are the main obstacle. The packs needed to power a midsized car for 200 miles currently cost about $15,000. So the models that use them are more expensive than a $25,000 Toyota Camry — America’s top selling passenger car last year. The relative costs are even more prohibitive in the compact vehicle segment that dominates the European, Chinese and Indian markets. But we expect this disadvantage will narrow significantly over the next decade as battery costs halve.
At BHP Billiton, our mid-case forecast sees dramatic growth in electric vehicles. Today, there are about 1.1bn light vehicles globally. About 1m of these are EVs. By 2035, we are likely to see about 140m EVs on the roads, or 8 per cent of the total fleet of 1.8bn.
That should be a big boost in copper demand. Today’s conventional internal combustion engine cars contain about 20kg of copper. Hybrids use about 40kg. An average pure battery powered electric car requires about 80kg, four times the amount of a conventional vehicle. Most is spread across the wiring harness (roughly one quarter); the engine (roughly two-fifths) and the battery (roughly one-third).
Building the EV fleet will use about 11m tonnes of copper. Subtract the amount that would have been used in the conventional vehicles ‘displaced’ by EVs, and that figure comes down to about 8.5m tonnes of genuine new demand — equivalent to more than a third of total global copper demand today. At current prices this would be worth about $38bn of a $100bn annual market.
In comparison, that level of EV growth would displace about 2m barrels of oil demand per day in that year, worth about $37bn annually at today’s prices in a $1.8tn market.
Long-term forecasting is not an exact science. At BHP we use scenario analysis to understand the range of plausible outcomes. For example, there is clear potential for EVs to use more copper than they do today as the class evolves. And it is worth noting that in our high case forecast, which assumes faster technological change and more policy support, the size of the EV fleet in 2035 is more than double what we incorporate in our mid case.
Other LME commodities should benefit from these trends. Although lithium gets a lot of press for its role in batteries, nickel, manganese and cobalt, (in that order) will see more volume growth in our view. Aluminium will also continue to benefit from the push to make cars lighter. But the combination of market size, diversified demand and long-term supply constraints make copper the pick for our portfolio.
Yes, copper has remained range bound this year (underperforming other LME commodities) reflecting modest demand and smoother than expected supply growth. But over the long term, the metal will continue to benefit from continued urbanisation and the development of consumer markets in emerging economies. EVs and increased investment in renewable energy will build on ‘traditional’ sources of demand and help offset losses due to substitution and miniaturisation.
Meanwhile grade decline, water scarcity in major production areas and permitting difficulties in established jurisdictions will make it harder to add supply. Higher prices will be needed to balance the market over the long term.
Huw McKay is vice-president of market analysis and economics at BHP Billiton.
The Commodities Note is an online commentary on the industry from the Financial Times.
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