Investing in Electric-Vehicle Commodities Is Harder Than It Looks

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Nickel might be a good investment given the rise of electric vehicles and the time it takes to bring on new supply. What that means for your portfolio is another question.

Hedge fund Elliott Management wants $456 million from the London Metal Exchange for its cancellation of trades during the spectacular short squeeze that followed Russia’s invasion of Ukraine. The LME’s owner, Hong Kong Exchanges and Clearing, is fighting the lawsuit. Officially, nickel hit a 15-year high of about $48,000 a metric ton on the exchange on March 8, according to FactSet. But that excludes roughly $4 billion worth of canceled trades at much steeper prices.

Whatever the legal merits of the case in question, Elliott’s lost gains highlight the challenge faced by investors that want to buy into the trendy theme of battery metals as electric-vehicle sales take off—or to sell it if they consider it overhyped. Few listed companies offer concentrated exposure. And where there is a financial market for the metals themselves, it bears a complicated relationship with the underlying physical market involving car makers, battery manufacturers, miners and refiners.

March’s short squeeze was triggered by the sanctions on Russia, a key nickel supplier, combined with a huge bearish position by Chinese stainless-steel giant Tsingshan. The company, which also has become one of the world’s largest producers of nickel, had a lot of the metal on its books but couldn’t use it to settle with the LME because little of it was in the highly purified form the exchange requires. Much of it was in a potentially useful form for the battery industry, though—the big growth market for nickel.

The disconnect between the financial market for nickel and the physical one it is supposed to mirror will only grow.

Photo: kirill kudryavtsev/Agence France-Presse/Getty Images

This disconnect between the financial market and the physical one it is supposed to mirror will only grow. Lithium-ion batteries for cars need to be extremely safe (think of General Motorsrecall of the Chevrolet Bolt), powerful, in ready supply and much cheaper—a formidable problem that means manufacturers want long-term supply agreements with suppliers they trust following rigorous qualification procedures. This conflicts with the purpose of an exchange, which is to create a uniform product for buyers to trade, regardless of the seller.

Right now, the car industry is more worried about shortages of lithium than nickel, production of which is expanding massively in Indonesia, albeit with questionable environmental credentials. Even more than nickel products, lithium compounds that go into batteries resemble specialty chemicals rather than traditional commodities. The LME doesn’t offer liquid trading of lithium as it does nickel and cobalt, though it is experimenting with a new futures contract. Investors who want a piece of lithium can buy shares of U.S. miners such as Albemarle and Livent, but they are locked into confidential agreements with buyers that mean their profits might have little to do with the latest spot prices.

The LME’s nickel-market debacle has many lessons. One underlined by Elliott’s experience is that the complex reality of investing in battery metals can struggle to live up to the simple promise.

Lithium prices are rising as demand for the key ingredient in electric car batteries grows, amid a broader push to move away from oil and gas. But extraction of the metal is time consuming and potentially harmful to the environment, and plans to produce more have prompted protests. Photo: STR/Getty Images, Oliver Bunic/AFP/Getty Images

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