Raw materials will determine vehicle electrification

FARMINGTON HILLS, MICHIGAN - Investors require and deserve the best information and analysis to make informed investment decisions in raw materials needed for personal-vehicle power electrification.

Therefore IÂ’m going to use logic, my natural-resources market knowledge, as well as the agendas being followed by the global automotive OEMs. IÂ’ll provide information to allow you to decide if and how you want to invest in such critical metals.

Today there are two political drivers for vehicle electrification that — at least momentarily — trump market economics. The political reasons are forcing automakers to spend enormous amounts of money. None of them can afford the outlays and the drivers divert economically disastrous numbers of engineers away from improving petroleum-fueled, internal combustion engine efficiency. The political drivers are beliefs that:

• Global demand for oil has already grown beyond the ability of the oil producers to meet it. Therefore countries, such as the U.S. — which already imports the bulk of its oil, will continue to do so until they are totally dependent on imported oil. Then they will be unable to influence the price, or even the availability, of their domestic oil supply; and

• Notwithstanding the importance of the foregoing, ‘greenhouse gases,’ i.e. CO2 emissions from oil-sourced fuels are creating a detrimental, man-made climate change that must be and can be halted and reversed. Elimination of oil products for fuel is the so-called ‘global warming’ agenda.

It does not matter whether the above two drivers are true! It only matters that politicians believe that they are true and act upon them to promote legislative agendas to simultaneously reduce dependence on imported oil and to reduce CO2 emissions.

American politicians have bought into both drivers. They have mandated that personal vehicles sold in America operate more efficiently, using less fuel per mile traveled. Simultaneously theyÂ’re moving towards zero emissions of CO2.

There are two ways for automotive manufacturers to achieve the goals above simultaneously. One, which I will not discuss here, is to switch to hydrogen as the fuel.

This is today far beyond any financial capacity of any car company or even of the entire global car industry. The participation of the richest national governments would be required to create and mandate systems: firstly, a hydrogen production; and secondly, a distribution system to replace their petroleum-fuel equivalents now in use. The other solution for the OEM automotive industry is to switch the power trains used by personal vehicles. Internal combustion engine operation would be replaced by direct drive of electric motors; power would be supplied by onboard electrical generation or storage systems.

The global automotive industryÂ’s business-models have been fractured by the political demands cited. Now a kind of product nationalism has now confused the situation even more.

One example is in Japan, where car makers either recognized the dominance of politics over economics earlier than any other country’s car makers, or (Toyota) got lucky. This due to GM by getting out of the electrified car manufacturing business (again) at the end of the 20th century. It was Toyota’s opening, which it took even at a very high risk of failure. That move has given Toyota the single-best competitive advantage of all time in the U.S. car market. It’s mass production of the ‘perfect car of the moment’ for the politically dominated U.S. car market: the hybrid Toyota Prius.

GM CEO, Rick Wagoner — whose word is unquestioned internally — decreed in 2005 that the ultimate goal of the world’s personal vehicle manufacturers is now to build vehicles that produce electricity on board without any generators using moving parts.

Further, this electricity is to be supplied directly to electric motors directly driving the vehicle wheels. This ultimate electric car, Wagoner informed his supplicants within GM, would use a fuel cell ‘burning’ hydrogen to produce electricity in place as needed and in the amounts needed by simply controlling the flow of hydrogen to the fuel cell. Let’s call this the GM goal, because, in fact, that’s what it is.

ItÂ’s a fine goal in a perfect world where scientific and engineering advances could be dictated by the mere application of the correct amounts of money. This goal would solve all of the political problems associated with dependence on foreign oil and global warming.

GMÂ’s goal is actually accepted in theory by most of the worldÂ’s car makers; but no one today can either achieve that goal or knows how to achieve it. LetÂ’s see then where we are right now on the road to the GM goal; and letÂ’s look at the different paths that the worldÂ’s largest car companies are on to achieve the goal. This will tell us, for the near term at least, which raw materials are already critical and which raw materials will continue to be critical and which new ones may join the list.

In 2008, the existing global ‘fleet’ of cars and trucks comprises approximately one billion units. This year alone there will be 100 million new vehicles added to the world fleet. However a certain number will be scrapped — at least 10% in the U.S. but more like 5%, or less, in every other market on earth. This is because only the richest nation on earth, with an economy driven by a consumers, can have ‘planned obsolescence’ as a policy.

So, since new production exceeds the scrap rate, the total global fleet is growing by as much as 50 million cars and trucks annually. China, alone, is this year adding 8.4 million cars and trucks to the world total. This is around 10% of total new vehicle production from a country the production from which was negligible just a decade ago! It is projected that Chinese vehicle production will reach 20 million units a year by 2015, and that this production will then be more than either the U.S. or western European total for that year.

LetÂ’s begin a raw material analysis and letÂ’s start with iron. A premise: that todayÂ’s global fleet of one billion vehicles were comprised entirely of mid-sized U.S. built automobiles, and we will assume this to be the case here to make the calculations easier.

Then, according to the U.S. National Research Council, each vehicle would contain, on the average, about 1 ton of iron-based products, 1,382 pounds of conventional steels, 435 pounds of cast iron, 263 pounds of high-strength low alloy steel, and 45 pounds of stainless steel. Thus 1 billion tons of steel and iron are tied up in the "rubber tired, rolling polymetallic deposts."

Annual world production of iron and steel is more than 1.5 billion tons. China accounts for a third of the global total iron and steel production. Automotive steel is the highest-quality high-volume steel produced. Key underlying factors include:

• World vehicle scrap volume may well be 50 million units a year — with about one-third from the U.S.; and

• It is more economical to feed high quality prepared (separated as to origin and type) scrap into electric arc furnaces (EAF) as a feed than to produce the same grade of steel from iron ore in a blast furnace.

So, currently at least half of each yearÂ’s new automotive grade steel probably comes from scrap. I say probably because China is not as well equipped with electric power hungry EAFs as it would like to be, but China has a lot of blast furnaces.

Regarding demand for iron and steel, it will not matter much what power train the personal vehicle of the future uses. This because, even if it does not have a cast-iron engine block and components, the future vehicle will have sturdy iron armatures and steel drive shafts for its electric motor(s). So the mid-sized American car of the future will probably use over 80% of the quantity of iron and steel used today — even if its drive train is hybrid or electric.

Total demand for new automotive steel made from iron ore is not likely to exceed 3-5%. This contemplates todayÂ’s scrap rate and scrap volume, and assumes a modest yearly increase in vehicle production globally into the indefinite future. So the iron ore demand for new steel is not important so long as EAFs are more economical than blast furnaces.

In summary, investing in iron ore or steel producers because of their part in the OEM automotive supply chain is not, in my opinion, a good idea.

Investors need to follow the publicly owned scrap managers or the integrated scrap-steel producers. Both are going to benefit greatly from the demand for new cars in the BRIC countries. In America an example of the first type of company is Commercial Metals and of the second is SDI, the steel maker that just purchased OmniSource, which was, until SDIÂ’s purchase, the largest American privately owned automotive scrap processor.

SDI is now able to get the lowest cost scrap feed in the American steel industry giving its EAF produced steel the best margin advantage in the industry. Scrap companies and ore producing and/or scrap processing integrated steel producers are the plays in automotive steel. (Note: both types of companies are also plays for steel based durable goods requiring high quality steel, but that end-use-of-steel industry is not my focus today).

GM’s ultimate goal will be the total conversion of the world fleet of vehicles from internal combustion power train — utilizing hydrocarbon fuels — to fuel cell powered, electricity on demand, power trains utilizing hydrogen as a fuel.

Step one for the vehicle makers is to reduce the need for internal combustion engine operation to part-time only; this by integrating an electric motor and its storage battery power supply into vehicle drive trains. This type of integrated power train is known as a hybrid.

Hybrids became practical only when a more ‘powerful,’ higher energy density storage, rechargeable battery than the lead-acid SLI-type (starting-lighting-ignition) became available in the 1990s. For whatever reason (most likely because the more powerful battery, the nickel metal hydride type, NiMH, cannot be used to start an internal combustion engine) it failed.

GM, which was the first car maker to have a look at the NiMH battery rejected it and rejected originally the concept of a hybrid power train. Toyota went ahead with the NiMH utilizing hybrid and kept producing them until, after the politicization of the vehicle power train process occurred. The Toyota Prius became a smash hit with the American public.

In 2008 Toyota ‘owns’ the hybrid market globally; since 1999 it’s produced and sold over 1 million hybrid Priuses.

This number, however, represents no more than 0.2% of the total vehicles produced globally in that same period. Toyota uses, and is committed to using, the now proven long-lived, safe, and reliable NiMH battery.

In fact Toyota has announced that it will increase its production of such batteries to a capacity of 1 million units per year by 2011. It will have the capacity to produce 1 million Prius-type hybrid power-trains annually by 2011.

This production level will equal 10% of ToyotaÂ’s 2011 projected production of vehicles of all types and something less than 1% of the world total production of vehicles.

Even though Honda has announced that it will join Toyota in producing NiMH utilizing hybrids shortly and will have the capacity in 2011 to produce between 200,000 and 500,000 such vehicles annually by then the two companies, which expect to sell most of their hybrids in the U.S. domestic market, will still only produce between them a maximum of 15% of their total vehicle production-and 1.5% of global vehicle production-as NiMH utilizing hybrids.

In 2011 at least 98% of all vehicles produced globally will use an internal combustion engine fueled by hydrocarbons.

Diesels best Priuses on greenhouse gases. So far, no one mass-produced a hybrid using a diesel engine. A tiny number are now being offered, but too few to even register within the numbers of vehicles produced globally today.

This is unusual since half of all European vehicles use diesel engines.

It is understandable because EuropeÂ’s high fuel costs have driven the development of very efficient small diesel engines. And European companies, with their very high costs, have been reluctant to spend money on what, until just recently, they considered marginal improvements in efficiency and emissions. It is underreported in the U.S. that some VW and Peugeot turbo diesel powered cars not only get better fuel efficiency than the Toyota Prius but also have the same or lower greenhouse gas emissions.

Different oil supply factors drive the markets of the U.S., Europe, Japan, and mainland Asia. These factors will drive also the speed with which those regions adopt or consider adopting the GM goal.

Europe is less profligate with its oil and its imports of oil than the U.S. Diesels already constitute the majority of vehicles made and sold in western Europe; and their fuel efficiency is far superior to that of gasoline powered American cars. European car emissions are also much lower than those of comparable American products.

Hybrids are being slowly introduced into Europe, but they are mostly diesel hybrids and they are mostly on large heavy high-end cars such as Mercedes where fuel economy and emission requirements are so urgent that even marginal improvements are sought.

ThereÂ’s a problem with manufacturing hybrid power trains utilizing NiMH batteries: a limit on the total production, due to resource limitations.

Today all of the rare earths, about 120,000 metric tons a year, are mined in China. Of this tonnage at most one-third or 40,000 metric tons is the rare earth metal, lanthanum. A Toyota Prius NiMH-battery uses 12 kg of lanthanum, and so far almost none of the OEM-supplied batteries have been returned for recycling.

They are still functioning; and documented lifetimes of 300,000 miles have been recorded. Therefore for Toyota to build 1 million Prius vehicles in 2011 will require 12,000 metric tons of lanthanum. Adding HondaÂ’s projected production that year will increase the demand to 18,000 metric tons of lanthanum.

It is rumored that Toyota, when it announced that it had chosen to make NiMH-based power trains until such time as lithium based hybrid power trains became safe for customer use. It had intended to announce that it would ramp up production of the Prius to 3 million units per year in 2014-15.

So it is easy to see why Toyota did not make that announcement.

It would have meant that in 2014 Toyota alone would have needed 100% of global, i.e., Chinese, lanthanum production. Considering that Honda, the worldÂ’s third largest in volume and second largest profitable car maker, also announced it had chosen the NiMH battery for its hybrid power train. This since, as it said, the lithium battery is not ready for mass production, the 2014 demand for lanthanum by just these two companies would exceed the worldÂ’s new production and there is very, very little lanthanum available from battery scrap.

The bottom-line is that even if Toyota and Honda were to obtain the entire Chinese lanthanum production they would together only be able to produce 3 million hybrid vehicles in 2014, and no one else would produce any. Thus the NiMH hybrid production in 2014 would be just 2.5% of projected global vehicle production for that year. A smaller percentage of new cars than in 2012!

If NiMH-based hybrids lasted forever it would still take 400 years of lanthanum production to build 1 billion of them to replace the current, 2008, global fleet.

NiMH-based hybrids are safe, reliable, long-lived, and at least twice as economical to operate as a comparable American car of the same size and cargo capacity (825 lb for the Prius). If the Prius were only sold in the U.S. it would still take 100 years to produce enough of them to replace the internal-combustion fleet as it exists in 2008!

In the near term then — considering the demand for the safe, reliable, long-lived, fuel efficient Prius — I would urge, once again, investors to buy into the Western mining companies in Australia, the U.S., and Canada that can produce rare earth metals before 2014.

Toyota and Honda must be getting ready to pounce. No matter what happens on the road to the GM goal for power trains, there will never be enough lanthanum to meet the impressive demand for safe, reliable, long lived, fuel efficient hybrid.

Lanthanum demand, just for this use, is never going to meet, much less exceed, the supply. Investors know what that means for price.

Did I mention that China is building NiMH hydride batteries for its domestic electric motorbikes and cars already? That lanthanum used for this purpose is gone from the Western market forever.

Did I mention that China already has reduced this year’s total export tonnage of rare earth metals — of all kinds — to under 38,000 tonnes; and that Japan's projected 2008 demand is 40,000 tonnes?

Now letÂ’s talk about lithium batteries.

They are too expensive to make a lithium battery hybrid to compete with the Prius. Because lithium batteries with sufficient power density must be hand assembled from large numbers of small cells, manufacturing processes are a costly, labor intensive nightmare. It is estimated that the lithium battery alone for a Chevrolet Volt will cost (todayÂ’s technology) from $10,000-15,000!

Unlike that of the NiMH battery the lifetime and reliability of lithium batteries is unknown. Ford Motor, for one, is not considering the use of any lithium technology known today, because it feels that customers will balk at short-lived, very expensive to replace power train components. This when they can buy long-lived, reliable NiMH batteries for much less.

GM seems to have recognized this fact; and they are trying to skip over the hybrid phase of the path to the fuel cell powered electric car. Then GM would produce and market the next step beyond the hybrid power train in the anointed path.

This would be the plug-in hybrid in which there is an onboard internal combustion engine. But its sole purpose is to recharge the drive battery and/or directly provide electric power to electric drive motors through powering a generator.

This seems like a great concept but the problem is the carÂ’s range before a recharge.

GM is marketing the projected 2010 Chevrolet Volt plug-in hybrid as a vehicle with a 40 mile range. Recharging is to be via plug-in to an ordinary household-type 120-VAC, 60-cycle, American outlet.

Many other carmakers are trying to take this path so as to skip the hybrid stage and not try to compete with wildly successful Toyota. Even Toyota and Honda are staying in the plug-in game. Each has announced that it will add capacity to build a “small number” of lithium batteries and deliver “some’ plug-in hybrids as soon as 2010.

Toyota and Honda however both see plug-in hybrids as a niche market ultimately for only a few high-end buyers.

Nonetheless, even though GM has designed a lithium battery-based plug-in hybrid power train that, it says, will use only 1 kg of lithium per vehicle there is a raw material problem.

According to the latest U.S. Geological Survey report on lithium, there were 25,000 tonnes of it produced last year globally. Of that, 20% — or 5,000 metric tons — were used for batteries.

Assume that all of the current lithium battery production for laptops and other portable devices were discontinued immediately. This would mean that, at most, a total of 5 million lithium battery-based Chevrolet Volt-type plug-in hybrids could be made annually by all carmakers combined.

Yes, the production of lithium could be increased and perhaps even doubled within a decade, but lithium is not produced and stored for future uses it is produced to meet an actual market demand.

Increased demand would come only from plug-in hybrid requirements and the very few producers of this metal, such as ChileÂ’s SQM, a subsidiary of the Canadian fertilizer giant, POS, are increasing production but only cautiously.

Just to be pedantic, if lithium battery powered plug-in hybrids lasted forever, it would take 200 years for them to replace the existing global fleet of internal combustion powered vehicles and 60 years to do the same in the United States.

Does anybody really think that GM is going to re-invent itself as a company that makes a couple of million plug-in hybrids a year at a loss? GM today makes 9 million internal combustion-powered cars at a loss, so I guess switching over to plug-in hybrids could be an improvement.

Now youÂ’re going to say to me that all of these car types, hybrid, plug-in hybrid, and battery only are just steps to the goal of a fuel cell powered car.

By the way, battery powered cars would need to be based on lithium technology, because NiMH does not lend itself to surviving the initial drain necessary to overcome the friction and the inertia of a ton of iron and steel. Actually such a vehicle would today need a lead-acid battery system for the initial ‘start’ or a flywheel or capacitor system, or both, for starting. I doubt whether anyone will go to a battery-only system unless some marvelous battery technologies come along or people can be satisfied with shorter ranges and top speeds.

So now we come to the goal of a fuel cell powered electric car. LetÂ’s call it the Wagoner; and its producer: Toyota/Chery-GM-Ford, the Japanese/Chinese auto company formed from the collapse of the American owned and operated OEM automotive industry in 2012. This was just before Hillary Clinton was elected to her first term, succeeding the retiring John McCain.

It is now 2025, and 90% of the worldÂ’s car production is powered by plentiful hydrocarbon fuel produced from oil shale and tar sands. Nuclear produced electricity globally is being used to produce hydrogen for the growing number of internal combustion engines being built to burn hydrogen only.

The remaining 10% of the new cars being built in 2025 are NiMH hybrids and lithium battery-based plug-in hybrids.

No battery-only powered vehicles are being produced as it has been decided that this will be wasteful of precious battery metals such as lanthanum, lithium and cobalt. It is estimated that by 2015 there will be enough hydrogen production to power all of the cars being built that year, all 150 million and that by 2060 only hydrogen will be used for vehicle propulsion by internal combustion engines.

This scenario is based on the fact that today each fuel cell, which can deliver enough power for a mid-sized American vehicle, will require 1-3 ounces of platinum or palladium.

This yearÂ’s production capacity for platinum and palladium is approximately 14 million ounces. This is more than enough metal to equip each new car made and sold in 2008 with a catalytic converter using 1-4 grams of platinum and palladium each. But there isnÂ’t much left over.

However letÂ’s argue that half of the platinum and palladium is left over. This would be 7 million ounces. TodayÂ’s fuel cells can only use platinum, so in our hypothetical we have three-and-a-half million ounces of platinum available. At one ounce per fuel cell this will enable us to build 3-million fuel-cell-powered vehicles.

Now you’re going to say that each fuel cell powered vehicle takes away the demand for one internal combustion-powered car’s catalytic converter. This is true but the average catalytic converter uses only 1/8 of an ounce of platinum so it will take the ‘retirement’ of eight catalytic converter-equipped internal combustion-powered cars to release enough platinum (actually it will take nearly 30 of them because catalytic converters use just 1 gram each of platinum [plus palladium and rhodium]).

It is believed by many geologists today that platinum group metal-production is at a maximum. So, even if it could be kept up forever, and even if hydrogen were freely available, it would take as much as 100 yearsÂ’ full production of unlimited lifetime cars to replace the existing global fleet today with platinum requiring fuel cell burning hydrogen vehicles.

In the short term, the next 25-50 years, manufacturers will switch to diesels and hybrids to conserve oil and to lower emissions. In your lifetime the automotive raw material plays will be lanthanum, nickel, cobalt, copper, lead, magnesium, molybdenum, neodymium, lithium, platinum, palladium, and rhodium. Your best bets today are the rare earth metals, nickel, cobalt, and magnesium.

Be sure that cars and trucks are going to get more and more expensive and be made to last longer and longer due in no small part to the permanent increases in the costs of natural resources. Also be assured that the yearly model change which was devised by GMÂ’s founder to counter FordÂ’s strategy of marketing by model rather than year will soon end. Longevity of power trains will be the factor that decides the life of a car and how long you keep it.

You might want to invest in automobile service shop chains. They will proliferate as car makers and brands (Plymouth, Edsel, Oldsmobile) vanish and high technologies (hybrids, plug-in hybrids, diesels, and even some few hydrogen powered internal combustion cars (BMW, Honda) and fuel cells (Honda) begin to spread into the market.

The high school dropout is not going to be your service man of choice for your hybrid nor is the dealer shop of the manufacturer who doesnÂ’t offer them.

ItÂ’s a good thing that you donÂ’t need to wait for a new NiMH battery because they are in very short supply. How long do you think it will take to get a handmade lithium battery replacement? Perhaps the play in plug-in hybrid service will be service shop waiting room entertainment systems and nearby motel accommodations.