The Consequences of Coronavirus

Dear Shareholders & Friends,

The Coronavirus, or COVID-19 as it has come to be known, has already had a massive impact on global trade. Almost half of the seaborne container transports from China to Europe have been cancelled in recent weeks. Even with bulk goods such as coal or iron ore, almost nothing works anymore. The first car manufacturers and suppliers have had to shut down their factories in Europe because of a shortage of key inputs. Due to the long transport distances, the full impact of the production cuts in China will only become apparent in the coming weeks.  

Just how much the car industry depends on suppliers, especially from China and South Korea, was made clear by the recent difficulties experienced by Audi and Mercedes. According to various media reports, neither group is ramping up production of their electric SUVs to the desired extent because of an alleged lack of battery cells.

It is with good reason that the big “Gigafactories” have so far been located in China and South Korea, exactly where electric cars are produced on a large scale. At Tesla, it has so far been the USA. It is also no coincidence that a similar development is now taking place in Europe, albeit with a time lag. While the large volume manufacturers increasingly want to produce more and more electric cars, suppliers such as CATL or LG Chem are now pulling up large battery factories in Europe as well.

Supply chain not secured

However, this is still a long way from ensuring security of supply because the value chain begins with battery raw materials such as cobalt and lithium. Both metals have so far been comparatively highly dependent on supplies from regions that are not necessarily politically stable. In the case of cobalt, a large part of global production comes from the Congo. In the case of lithium, the triangle of Argentina, Bolivia and Chile forms a focal point. Extensive lithium-bearing brine deposits are located there.  

The two global lithium market leaders, Albemarle and Sociedad Quimica y Minera (SQM), together produce more than a quarter of the world's lithium here. In Bolivia, President Evo Morales was driven out of office not long ago. In Chile, there are repeatedly major protests against the political elites. Even Argentina cannot necessarily be described as politically stable with Eramet citing this instability as one of its reasons for deferring further lithium investments in the country (see story here). Furthermore, the extraction of lithium from the salt lakes located there is associated with considerable environmental pollution. And finally, the quality of the raw material is not always sufficient to produce high-performance batteries from it. For additional insights on the geopolitics of lithium, one of my past newsletters can be accessed here.

In contrast, lithium extracted from hard rock has two decisive advantages: Firstly, the quality of the material is generally better. Secondly, the large deposits are located in much more politically stable countries such as Australia or Canada - therefore not far from the American car industry.

Even before the outbreak of the Coronavirus, global trade grew more slowly than the world economy. So a certain degree of decentralization took place. The epidemic should accelerate this development. After all, the disruption of supply chains from Asia to Europe, among other places, reveals the disadvantages of too much globalization. Production locations in politically stable regions should benefit most from this.  

For our German-speaking audience:

Recently, I visited Aktionar TV for an interview about electric vehicles and their impact on raw material supply chains. Please watch the video below:

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