AIA Engineering: A long term investment that may gain from shift to Electric Vehicles
By 2030, purchase of ICEVs (Internal Combustion Engine Vehicles) will completely stop as they will enter a vicious cycle of increasing costs, decreasing convenience and diminishing quality of service. - Tony Seba in Rethinking Transportation 2020-2030. (1)
EVs (Electric Vehicles) require more copper wiring than standard internal combustion engines. For example, the battery in an electric car contains about 38 kilograms of copper, 11 kilograms of cobalt and 11 kilograms of nickel, according to Glencore. Those materials, along with manganese, stand to benefit from more demand for electric cars, Glasenberg said. (2)
EVs will influence the demand for metals:
Today’s conventional ICEV contains about 20 kg of copper. Hybrids use about 40 kg, an average PBEV (Pure Battery EV) requires about 80 kg, four times the amount of a conventional vehicle. Today there are about 1.1 Bn light vehicles globally, about 1 million are EVs. By 2035, we should see 140 million EVs or 8 % of the total 1.8 Bn fleet. Building the EV fleet will use about 11m tonnes of copper. Subtract the amount that would have been used in the conventional vehicles ‘displaced’ by EVs, and that figure comes down to about 8.5m tonnes of genuine new demand — equivalent to more than a third of total global copper demand today. (3)
Other LME commodities should benefit from these trends. Although lithium gets a lot of press for its role in batteries, nickel, manganese and cobalt, (in that order) will see more volume growth in our view. Aluminium will also continue to benefit from the push to make cars lighter. But the combination of market size, diversified demand and long-term supply constraints make copper the pick for our portfolio. (3)
(The above estimates by BHP are their mid case scenario while the high case scenario expects the 2035 EV fleet to be double of the mid case scenario. Different studies have different estimates of the future penetration of EVs in the global fleet. Some being conservative and some being aggressive. What is certain today is the direction of disruption, the speed of disruption is anyone’s guess.)
Thesis is dependent on:
1.) Shift from ICEVs to EVs materializes (Cost of EVs should be below ICEVs for mass adoption)
2.) That Taas (Transport as a Service) does not significantly reduce the number of vehicles needed globally, car ownership shifts from individuals to fleets.
3.) Durability of EVs does not extend the life of a vehicle immensely. (Elon has mentioned a million mile electric drive train, which has no value for an individual owner who drives on average 10k miles per year but will have immense value for a fleet owner providing TaaS.) (4)
4.) Grid Scale and Residential Scale Energy Storage Requirements due to intermittent renewable sources of energy.
5.) Charging Infrastructure Requirements.
How to benefit from the long term Copper Demand Pick Up?
One play would be to directly invest in copper miners, producers, refiners but being a commodity play it is difficult to time the investment for me. A better way in my perspective is to invest in the suppliers of copper miners who are indispensable to the mining industry. Suppliers of mining equipment should benefit but the maximum benefit should be seen by providers of consumables to miners.
Grinding media consumables was a commodity low margin business globally (Forged grinding media is a highly competitive mature industry with little technological barriers to differentiate) until it was disrupted by the likes of HCGM (High Chrome Grinding Media) suppliers such as Magotteaux and AIA Engineering.
How May AIA Engineering Benefit:
The best part about grinding media business is its consumable nature which leads to repeat demand. To sweeten the deal with declining ore grades, the per tonne consumption of grinding media increases over time as more ore needs to be ground to extract the same quantity of refined mineral. With the added tailwind of boost in global copper demand for the next two decades, AIA Engineering should do good business.
The current scenario is that the 9MFY17 volumes were at 156000 tonnes of which 97000 tonnes were from mining, 9MFY16 volumes were at 132000 tonnes of which 72000 tonnes were from mining. Current mining opportunity in grinding media is at 2500000 tonnes per annum of which 15% has been converted to HCGM from FGM (Forged Grinding Media) by the two HCGM suppliers. (From Q3FY17 Investors Conference Call).
Their main targets in the mining industry are copper and gold producers but the company does not track and provide individual breakdown of volumes and revenues from different ores. The management is currently aggressively targeting to make the HCGM the mining industry standard by volume at all cost.
The company has accumulated a war chest of 1100 cr in cash with little debt to help them scale up manufacturing capabilities as and when required.
Long Term Risks:
1.) Threat of substitution of Copper by Aluminium in electrical application.
2.) Revenue from thermal power stations will have diminished by 2030, if the renewable energy revolution plays out.
3.) Any future changes/advances in the grinding media technology, similar to forged GM being replaced by High Chrome GM could disrupt the company.
Disclosures:
1.) Invested.
2.) This is a personal opinion which may contain inherent biases and blind spots that may not be possible to correct from my vantage point. Please do your own research and form your own opinion before investing, this is not a stock recommendation. This information is being shared to facilitate collaboration. Any opposing views that may arise from a different vantage point and thought process are welcome to enhance my understanding.
3.) I refrain from talking about the most important part, the current valuations, as it is difficult to accurately gauge with sufficient margin of safety, that whether the current valuations and the inherent expectations built in the price account for how much of the future growth and business opportunity.
References:
1: https://www.rethinkx.com/transportation/
3: https://www.ft.com/content/84b3fa1c-9ee8-11e6-891e-abe238dee8e2
4: https://www.tesla.com/blog/three-dog-day
4: https://www.rethinkx.com/blog/2017/5/11/is-teslas-lead-bigger-than-we-think
PS: I understand that the future copper demand pickup can be played in many ways other than the ones mentioned above. I would request everyone to keep your responses relevant to the AIA Engineering thread where this is being posted. Any new discussion on other ideas can be started in a new relevant thread on VP.