John Pfahl of SRK: Cobalt Will Be “Overwhelmed” and Pushed Out of EVs

Technological development in the battery space and demand from consumers will eventually overwhelm the cobalt market, necessitating its removal from the equation and the end of the metals’ run in electric vehicles (EVs), according to John Pfahl of SRK Consulting.

Speaking to INN on the sidelines of the Prospectors & Developers Association of Canada (PDAC) conference this week, Pfahl said that while incentives for battery manufacturers and auto makers to engineer cobalt out of their products was reducing cobalt content in batteries, increased demand would squash any breathing room for the resources’ supply.

Even with reduced cobalt content, demand “will still overwhelm the cobalt market,” said Pfahl, who also said that the forecasts for EV uptake were still on track.

“For now cobalt is fine (because) we’ve got more cobalt supply than we’re going to use, and that can scale to a certain extent — but you do hit a limit of cobalt pretty quickly (as demand picks up),” he explained.

“If the battery makers don’t take cobalt out … we will hit a point where we are short of cobalt again.”

Pfahl said that future supply shortage in the face of increased demand would “probably be the last run of cobalt” before it was removed or substituted completely, something that battery makers have been working on for a while now. “Necessity is the mother of all invention, and there’s a lot of need to not use cobalt.”

Cobalt has been notoriously unloved in the battery space, known for sourcing difficulties as it’s often a by-product of mines focused on other metals. Those mines also tend to be located in less-than-ideal locations such as the Democratic Republic of Congo, which exposes investors and operators to heightened risk and tricky ethical questions around child labor. The other resources most commonly used in batteries — nickel and lithium — don’t have the same concerns.

Pfahl said the long-term future of the industry was still sound even as the COVID-19 coronavirus scare slows down the global economy, saying it was likely to be a “blip” in the first quarter of 2020.

2019 in review

Looking back on 2019, Pfahl also offered thoughts on how the EV market was faring, saying that the big story through the previous year was the “sustained success” of the Tesla (NASDAQ:TSLA) Model 3, which he described as “one of the bright spots of the industry.”

2019 was also the year the subsidies for electric vehicles in China — the world’s largest EV market — were scaled back. Pfahl said that this didn’t appear to have dampened expectations, however.

“Obviously when the Chinese subsidies came off at the end of the second quarter, that really hurt the Chinese market,” he said. “But we knew that was happening, and it looked like it was likely to impact it, and sure enough it did. It was a change, but it wasn’t a surprise.”

The overarching trend and development in the space was how much attention EV development was getting from the automotive sector, he said.

“What I think is impressive is the amount of money the auto manufacturers are pouring into EVs,” he said, and noted that while the broader media appear to be down on the industry, and general excitement about new vehicles also appears to be down, companies such as Ford (NYSE:F) and Volkswagen (OTC Pink:VLKAF,FWB:VOW) are putting significant money into EVs, including creating new models.

“The industry doesn’t seem to be shying away from (EVs) at all.”

Pfahl’s theory for a less enthusiastic public is that, because EVs had become so much more common, they had stopped being as exciting.

Competition is key, price (still) an issue

Increased competition is also helping the industry develop going forward, he said, adding that there is no such thing as a “Tesla killer” in any of the new upstarts or major automakers jumping on the hype train.

“We need more companies that are putting more desirable EVs out, and that will get consumers to flip and see this as a common thing — no longer is it a novelty to be worried about,” he said, referring back to an argument he has made before that carmakers need to stop making EVs niche offerings and start marketing them to the masses.

“Tesla is not going to revolutionise EVs by itself. They’ve done a great job of driving the industry forward, but the other companies need to step up to really make it mainstream.”

Lower year-on-year EV uptake in 2019 compared to 2018 was not much to be concerned about, said Pfahl.

“Because 2018 was such a growth year, people all of a sudden thought that EVs were here, that they would just go to the moon from there.” That was yet to happen because of accessibility, he said.

“One of my key points back in 2019 was that they were still too expensive … and that’s still the case. We’re not going to see this huge widespread uptake with them costing as much as they are and without a lot of attractive models out there … so I think that the industry is about where we expected it to be for anyone that pays attention to it.”

So what’s the sweet spot for EV pricing that would see mass uptake? Around US$25,000, according to Pfahl.

“If you look at the top selling vehicles in the US (putting aside pickup trucks), it’s Camrys, Accords, CR-Vs. They’re all US$25,000 cars,” he explained. “Until EVs can get close to that price point, they’re going to struggle to reach the masses.”

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Securities Disclosure: I, Scott Tibballs, hold no direct investment interest in any company mentioned in this article.

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