Tesla and Tianqi Strike Lithium Deals, Brent Crude Hits $80 per Barrel

in Market Commentary by

Global markets seesawed over the last five days as investors grappled with many of the same headlines, including North Korea, Iran, increasing bond yields and rebounding oil. Virtually all asset classes other than commodities ended the week lower. International markets fared worse as the US dollar continued to strengthen.

Weekly Returns

S&P 500: 2,713 (-0.5%)
FTSE All-World ex-US (VEU): (-1.0%)
US 10 Year Treasury Yield: 3.06% (+0.09%)
Gold: $1,292 (-2.0%)
USD/EUR: $1.177 (-1.4%)

Major Events

  • Monday – The US officially opened its new embassy in Jerusalem, sparking violence and rioting between Palestinian protestors and the Israeli military.
  • Monday – The US Supreme Court struck down a law that prohibited sports betting.
  • Wednesday – North Korea warned that it would cancel upcoming meetings with President Trump if the discussions were solely focused on full denuclearization.
  • Wednesday – US industrial production rose faster than expected in the month of April, reflecting ongoing strength in the economy.
  • Thursday – PayPal agreed to buy European Fintech startup iZettle for $2.2 billion.
  • Thursday – Brent crude crossed $80 a barrel on fears of supply shortages from Iran.
  • Friday – A school shooting in Texas claimed the lives of at least eight people, including both students and staff.

Our Take

Perhaps it’s fitting that as Brent crude crossed $80 a barrel on Thursday, reports surfaced that Tesla and Chinese firm Tianqi both struck new deals to secure lithium supplies, the primary material used in electric car batteries. In the latter deal, Tianqi is paying roughly $4 billion for a 24% stake in Chilean miner Sociedad Quimica y Minera de Chile, which would give the companies control of roughly 70% of global lithium. Many other firms are also jumping into lithium, among other materials, lured by higher prices from years of strong demand.

But is oil’s recent spike the driver behind these lithium deals? Seems unlikely. These moves are more strategic in the longer term migration towards electric vehicles (EVs)—a trend that will likely take decades to play out. Growth is certainly strong, but there are a number of factors that need to happen before EV adoption becomes mainstream. First off, the cost of production needs to drop. With greater R&D and an increasing supply of materials, this is already happening at a fairly rapid clip, but it is currently still cheaper to produce internal combustion engines. A Bloomberg report projects the cost of producing EVs won’t fall below internal combustion engines for another 10 years. On top of this, mileage range clearly needs to increase, as does the number of available charging stations.

So it certainly won’t happen overnight, but the same Bloomberg report referenced above projects EVs will represent more than half of new car sales by 2040. What do you think? Will it take 20 years for most cars on the road to be electric, or do you think it will happen sooner?

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Brendan Erne, CFA
Brendan Erne serves as the Director of Portfolio Implementation at Personal Capital. He has over 15 years of industry experience, spanning almost all levels of the investment process, including several years at Fisher Investments as an equity analyst covering the Technology and Telecommunications sectors. He also co-managed a large cap growth portfolio and co-authored Fisher Investments on Technology, published by John Wiley & Sons. Brendan is a CFA charterholder.

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