Jay Forrester wrote in his 1961 publication, Industrial Dynamics, about the now infamous bullwhip effect when small shifts in customer demand for products result in distorted responses from actors further upstream in the supply chain.
Many MBA students around the world are introduced to Forrester’s breakthrough procurement theory by playing the beer simulation game, developed by MIT. The lack of predictability in customer behavior can have wild responses four or five steps further upstream in a supply chain, resulting in huge delays to increased demand.
The disconnect between finance, mining companies, car battery manufacturers, automakers and consumers could result in the mother of all bullwhip effects over the next decade. Battery makers, while in agreement that the days of the internal combustion engine (ICE) are numbered, are still on the fence regarding the exact proportions of materials used in new projects. Carmakers, on the threshold of releasing their first ranges of electric vehicles (EVs), are hopeful that customers will not turn their noses up the price tag of EV cars. And this new supply chain is relying on mining companies to be able to deliver much higher quantities of targeted raw materials key to EV technology. Mining is waiting for Wall Street to bankroll that charge.
“The multi-billion dollar projects are off the table, even with this story coming through,” Colin Hamilton, managing director of commodities research at BMO Capital Markets, said at the recent CRU-Cesco conference in Santiago. “This is why we have a gap on the supply side.”
Not helping the matter is the continuously evolving technology going into EV batteries. Will vanadium prove to be a better material than lithium in large-scale batteries, for instance? Can nickel sulfate become an effective replacement to cobalt? Are hydrogen fuel cells (HFC) totally out of the picture? While there are very few HFC-fueled cars in the world, they tend to be located in areas such as Silicon Valley and Bay areas where R&D decision makers live.
This could prove to be a massive influencing factor in the phasing out of ICE. Copper mines, especially when talking about greenfield discoveries, run incredibly deep and can take a decade to develop from discovery to production when taking into account permitting, finance and construction, according to CRU. Even a lithium salt deposit can take several years to develop.
The gap might, however, be at the tipping point, Hamilton said. It’s probable that lenders will show more interest in big mining projects 6 or 12 months from now, when the incipient shortages from mining start to get more noticeable.
As InvestorIntel reported from the CRU-Cesco annual meeting of the copper industry in Santiago, now is a great time to get into exploration. The tide is changing, and there is a big consensus surrounding the fact that the copper market is heading for shortages. Many companies working on mining projects targeting supplies to the EV industry will present their projects at InvestorIntel’s Buds, Batteries and Blockchain (BBB) conference in Toronto between May 3-4, 2018.
Those shortages might also extend to lithium. While many lithium projects are underway in both Argentina and Chile, the market might be underestimating how quickly those companies can supply chemical-grade lithium needed by battery manufacturers, said Daniela Desormeaux, a lithium expert.
Government policy is holding back the development of some of the biggest deposits in Chile, said Jose Jara, a researcher at Chile’s Catholic University. Jara suggested that the current government should consider offering special contracts to involve private mining companies in Chilean lithium projects instead of waiting for a lengthy congressional debate to structurally open up the industry to lithium project investment by foreigners.
Like in any bullwhip motion, the EV revolution will be determined by consumers. Nissan’s EV business development manager, Luis Felipe Clavel, said his company has largely addressed consumers’ concerns over EV distance range as the new Leaf model will travel 600 kilometers in one go. Wide-scale EV adoption now ultimately lies with cost, he said.
“I think the big thing now is the cost,” Clavel said. “At Nissan we have to satisfy a necessity for most of our customers to get from Point A to Point B in the cheapest way.”