The game changer

India's planned transition to electric vehicles will drastically affect the commodities market

Being a cleaner and more efficient mode of transport, electric vehicles (EVs) are growing tremendously in terms of popularity. As per recent figures by the International Energy Agency, the number of electric cars has almost doubled from 1.26 mn in 2015 to 2 mn in 2016. It is estimated that the number will range between 9 mn and 20 mn by 2020 and 40-70 mn by 2025.

In India, Union Minister for Road Transport and Highways Nitin Gadkari recently reiterated the government’s target of having all new vehicle sales of only EVs by 2030.

Among the most important factors propelling the adoption of EVs is the battery cost. In the last nine years, the cost has fallen by over 70 per cent. Production at large scale, increasing energy density of the batteries and government incentives are likely to help further reduce the cost and make EVs economically viable over the next decade.

The transition to EVs is expected to drastically affect the commodities markets. The demand for oil will eventually go down and the need for oil will slowly be displaced with the need for power to charge EVs. Global oil demand could reduce by over 2 million barrels per day by 2025, with the combined electricity demand for power expected to go up to 500 terawatt hours by 2030. But the important question is, Will the electricity come from clean renewable sources or the transition to EVs in quest for a cleaner environment only help reduce pollution in cities and be offset by pollution from coal burning power plants in India and China?

Metals will also have a profound impact because of EVs. These vehicles require four times more copper than conventional combustion engines. As per estimates, copper demand could increase by 50 per cent by 2035. Demand for lithium and cobalt could go up by more than 1,000 per cent and nickel by more than 100 per cent. Across these, the most supply-constrained metal will probably be copper leading to significant price impact. Nearly 95 per cent of copper is imported by India, of which 8-9 per cent is used in transport.

On the other hand, precious metals like platinum and palladium may see some downfall as they are used more extensively in internal combustion engines (ICE) and their demand may fall with the transition to EVs.

Before large-scale adoption of EVs can become a reality, a number of challenges need to be handled, with the major one being setting up vast infrastructure of charging stations. Unlike the West, most Indians don’t have a personal garage. Hence, widespread public charging infrastructure becomes a key policy choice. There is also a need to create an electricity consumer category for EVs, one that includes differential time-of-day pricing. Otherwise, there is a risk of commercial users attempting to charge EVs on subsidised residential power tariffs. The transition can also have an impact on the workforce in the auto sector because of a shift from ICEs to EVs, which require less parts and less manual labour leading to lower requirement for jobs.

Also, the Indian government gets a significant amount of tax revenue from oil sales, and the move to EVs will change that and require a very different fiscal planning approach. Another challenge that a number of firms are focused on is the charging time of an electric vehicle. An EV requires overnight charging for full range unlike the ability to refuel a car at gas stations in a matter of minutes.

EVs definitely hold a bright future and are expected to make commuting cleaner and more efficient, but it is important to have a well-defined and clear vision in terms of issues like policy and infrastructure for this ambitious transition.

A stable policy regime is very important to help provide more certainty for investments in automotive manufacturing, battery production, oil refineries, charging stations etc.

The estimates for EV adoption vary over a wide range and will keep the automotive markets, energy and metals markets on tenterhooks for a few years to come.

The writer is senior director, technology, Sapient Global Markets