On Oct 25th, Tesla’s market cap passed the $1trn mark, making it the first carmaker to ever reach that threshold and valuing it at more than the next nine largest automakers combined. Whether its current price-to-earning ratio of nearly 400 is justified is for anyone to debate (it is less than ten for Toyota or Volkswagen). What is clear is that electric vehicles (EVs) companies are in high demand. Rivian, which only started producing EVs this year just went public today with a valuation of over $100bn, making it the largest U.S. IPO since 2014.

Behind this market fever is a surge in EV sales even as overall car sales dropped during the pandemic. European EV sales grew at an annual compound rate of 60% between 2016 and 2020, with EV sales accounting for 10% of all sales in 2020. As for China, the other key market, sales are on track to reach 3 million vehicles in 2021 (nearly three times the 2020 levels and 1/4 of the global passenger EV fleet). Add to that zero-emission vehicles targets in more than 70 jurisdictions, the need to achieve net-zero economies, and $330bn of investments in electric and battery technology by car manufacturers over the next five years and it is clear why some are bullish about EVs' prospects.

With this growth comes a series of important imperatives. One will be to build the charging infrastructure. There is almost no charging infrastructure to support electric heavy-duty vehicles, for example. Yet 4 million heavy duty chargers are needed by 2040. This will be capital intensive: heavy duty chargers and fast public chargers alone account for nearly half of the $589bn of charging infrastructure investments needed over the next two decades, according to BNEF.

Another imperative will be to ensure a sufficient supply of materials to build up battery production. EVs and battery storage have already surpassed consumer electronics as the largest demand source for Lithium. By 2040, they will have overtaken steel as the largest consumer of nickel, according to the International Energy Agency. This is driving up prices. Cobalt, Nickel and Lithium have all surged over the past year, with the latter seeing a near 300% increase in a year in China - the world’s dominant player in the manufacturing of EV batteries.

The cost of batteries will go up in the short term as a result, reversing years of cost declines. The long-term impact is expected to be limited, however, as companies reduce their dependence on cobalt - the battery content of which is expected to drop 65% by 2035 - and new Lithium production comes online. Medium term expectations are thus for a price decrease, with BNEF projecting battery cost to drop below the price parity point of $100/kWh as early as 2024, from about $137/kWh in 2020.

Efforts will also be needed to ensure battery production is done in a sustainable and responsible way. As tailpipes emissions decrease and EV production grows, emissions associated with road transport EVs will move up the supply chain. By 2040, materials alone could account for up to 60% of a vehicles’ life-cycle emissions, with the emissions coming from processing rather than mining. This will make battery recycling critical as the process can be cheaper, less energy and less carbon intensive than mining new materials. Importantly, it will help to deal with the tsunami of spent batteries that will come online over the next decades. To give a sense of scale, the volume is expected to grow from 2GWh today to 1.3TWh by 2040 – a 650-fold increase!

Dealing with that volume will require a tripling of current recycling capacity by 2030. Large EV markets will want to build this capacity at home. This will help cut costs (about 40% of EV battery recycling costs is transport related) and reduce dependence on foreign supply chains. The Union of Concerned scientists, for instance, estimates that at a 95% recovery rate, the US could meet up to 40% of its metal needs for EVs by 2035. No surprise then that in the recently adopted US infrastructure bill, more than $6bn are allocated to strengthening the US battery material processing and recycling capabilities.

Much like Tesla’s new super-fast Plaid mode, which goes from 0 to 60mph in 2 seconds, EVs are now in hyperdrive. Ensuring their future remains golden will require the path to be green.

Driving Down the Golden EV Road