- EV could capture 50% of the market in the next decade
- Rise of EV means demand for copper
- Chile ETF ECH and CPER are two ways to play the trend
In the world of energy there is no greater symbiotic relationship than between a barrel of crude and the internal combustion engine. Fully 40% of every barrel of oil produced is used for gasoline creating one of the most lucrative and long lasting economic relationships in history of mankind. But in the next decade that relationship will weaken materially as the advent of the EV begins to take hold all across the world.
As of now, electric vehicles are a niche market. At present they only constitute just 2% of US car sales. But although their market penetration is miniscule, regulatory pressures, advances in battery technology and massive capital spending by auto manufacturers indicates that in the next decade the world will make an inexorable shift away from the polluting and expensive ICE engine.
The primary argument for the EV cars has always been based on the idea of pollution free transport but EV automobiles are actually a far simpler and superior engineered product. An ICE engine car requires massive maintenance and support for its more than 10,000 individual parts. The maintenance on an electric vehicle is virtually non-existent with the exception of tires and brakes. An EV vehicle has no moving parts in its engine and the newest breakthroughs in battery technologies promise hundreds of thousands of miles of maintenance free driving in the foreseeable future.
Therefore it is not difficult to imagine that a decade forward the EV engine could capture as much as 50% of the market especially if the advances in battery technology and the persistently higher costs of oil crude production make the total cost of ownership for EV far less expensive than the ICE engine. In short, in the very near future the EV vehicle will not only be more powerful, but also far less expensive than the old fashion ICE car. Once that value proposition becomes evident the move towards EV will become a tidal wave.
All of this promises to be good news for the copper business because the future of EV transportation is inextricably tied to copper – a key ingredient in battery technology. While conventional cars have 18-49 pounds of copper, battery electric vehicles (BEVs) contain 183 pounds, and a battery electric bus contains 814 pounds. That is almost a tenfold increase for the metal and that bodes well for Chile which is the biggest miner of copper in the world.
One way to profit from this trend is to get long the iShares MSCI Chile ETF (NYSE:ECH), the ETF which invests into a broad range in Chilean businesses including miners. Over the past decade the ETF has been a complete bust producing a negative 2% annual return to investors as Chilean society struggled with corruption and wealth inequality. But surging demand could overcome many sins and over the past year the ETF has returned more than 17% as investors started to bet on the EV revolution. If the demand for copper does indeed rise as EVs gain market share on ICE the Chilean economy will undergo a massive transformation as wealth and opportunity will increase. There is every reason to believe that ECH could double in the next five years despite some investor fears that a new left of center government could increase taxation and mineral rights in the region. But while fears of regulation have put a damper on the stock as of late, Chile is most definitely not Venezuela and in fact a moderate reform of the country’s vast mineral wealth would improve the economy and productivity of its mines.
Meanwhile those investors fearful of the political risk could complement their position by being long CPER ETF which is a pure bet on the price of copper.
If the political situation in Chile creates further frictions in production the price of copper will continue to increase and will more than offset any declines in ECH.