Stephen Bailey

How we are plugging into the Battery Revolution

Stephen Bailey

Stephen Bailey: How we are plugging into the Battery Revolution

Over a century ago, Henry Ford revolutionised the industrial manufacturing process through his use of the assembly line for the Model T. He was also a supply chain pioneer, favouring vertical integration which allowed him to take control of parts supply and ensure that the production line kept on rolling. To do this he secured supplies from coal and iron ore mines, bought timberland and sawmills; built a railroad and acquired a fleet of ships; and had it all converging on a factory located on River Rouge in Michigan. His desire to achieve self-sufficiency even led him to build an ill-fated town in the Amazon – Fordlandia – in an attempt to produce his own rubber.


You might well be asking yourselves what all of this has to do with electric cars. Aesthetically and technologically, today’s electric vehicles (EVs) certainly bear little relation to forbearers such as the Model T. However, the importance of logistics and supply chain management is as essential now as it was then.


When populating our recently initiated Battery Revolution theme (11% of the Macro Equity Income Fund as at 31 January 2017), we have kept the lessons of Henry Ford’s supply chain in mind. One of the clearest implications is that one needn’t be invested in the end product in order to benefit from its sales growth. If there are pinch points in the supply chain, then this is where the economic value from demand growth is likely to accrue.


That EVs will become mass-market no longer seems open to debate. For years, they have been tipped to eclipse the internal combustion engine, as the world strives towards cleaner transport. A combination of policy action – the UK government banning the sale of all diesel and petrol cars and vans from 2040 for example – and technology improvements (and therefore falling costs) are accelerating the growth of EV sales.


Gaining exposure to this trend can be somewhat of a conundrum, given the variety of different participants at different stages of the supply chain. The car manufacturers themselves look prohibitively expensive, especially for investors with an income requirement. Tesla, for example, does not pay a dividend and its shares trade on a ‘blue-sky’ valuation.


Furthermore, like Henry Ford before them, auto manufacturers are scrambling to secure supplies, but the power here lies not with them but with the resource owners. Last year Volkswagen tried and failed to secure a five-year fixed price supply of cobalt, with miners showing little interest in giving up potential price upside.


So perhaps it is better to invest in the supply chain for EVs? Here, the battery is king – accounting for around half the cost of an EV (source: Bloomberg New Energy Finance). You not only have the option to invest in battery manufacturers, but also in the essential EV battery commodities like lithium, cobalt, nickel and copper.


There are numerous companies which focus on these specific commodities, but many are high risk investments. In addition, those that focus on lithium appear to be appealing to a sense of resource scarcity over which we have doubts – there is a substantial pipeline of lithium projects seeking finance.  


For these reasons, we believe the best option for exposure to EV growth is to target cobalt, nickel and copper and that this is best achieved via the diversified miners. We view these stocks as a ‘disruption-proof’ way of investing in the electric vehicle trend, without having to predict which auto manufacturer or battery technology will become the market leader.


We believe the mining sector has addressed its legacy issues after over-investment during the commodity ‘super-cycle’ years led to overproduction and falling prices when demand growth slowed in line with the Chinese economy. Capital discipline has been reasserted with capex reduced and debt paid down. This is resulting in eye-watering levels of free cash-flow which is allowing for dividend payout increases such as the near-trebling announced by Glencore last week.


Glencore is one of the stocks we hold in the Battery Revolution theme. The miner and trading house has a stated strategic intention to focus its business on the growth of the EV industry. Glencore is a world leader in cobalt production and in December it unveiled plans to double its output over two year horizon as battery demand from EV manufacturers ramped up.


We also own Rio Tinto and Anglo Pacific within the theme. While Rio Tinto is more renowned for its iron ore production, it has substantial production in copper and is in the process of bringing lithium operations in Serbia online. Anglo Pacific Group has to-date been mostly associated with owning royalties in coking coal production, but it has adopted an astute strategy of re-investing the proceeds from coal royalties into the acquisition of new royalties in electric battery commodities such as copper, nickel, cobalt (and vanadium – a possible alternative to lithium in battery manufacture and a key means of producing strengthened steel alloys which are in high demand in China).


Given these stocks’ exposure to bulk commodities and fossil fuels, one might well question whether Battery Revolution exposure is diluted by other factors. This is a key consideration for us as thematic investors: the need to find stocks offering sufficient – and undervalued – exposure to a macro-theme, which are not likely to be derailed by other drivers. In this instance, we have the happy circumstance where these stocks offer complementary rather than conflicting macro-thematic profiles. They sit within not only the Battery Revolution theme but also the Infrastructure Spending Macro-Theme, which is designed to capture the benefits of an unusually synchronised upturn in global economic growth. The outlook for many bulk commodities is robust, due not only demand-side factors, but also because of supply-side developments where China has allowed production capacity to reduce.


As the old adage goes, in a gold rush it is best to be in the business of selling shovels. The diversified miners give exposure to the Battery Revolution theme without the risk of backing the wrong horse when choosing between the various battery technologies and vehicles which could be in the vanguard of the EV charge.

Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

Investment in Funds managed by the Macro Thematic team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The Fund’s expenses are charged to capital. This has the effect of increasing dividends while constraining capital appreciation. The performance of the Liontrust GF Macro Equity Income Fund may differ from the performance of the Liontrust Macro Equity Income Fund and is likely to be lower than its corresponding Master Fund due to additional fees and expenses.


This content should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy.  It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust. Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.
Monday, February 26, 2018, 1:00 PM