There aren’t many FTSE 100 shares directly involved in the electric vehicle revolution. However, while plenty of investors are focused on finding the best automotive businesses, there may be a more lucrative way to play this opportunity.
Running a car-making company is fraught with challenges that most fail to overcome. Just look at what happened in the early 1900s. There were once over 2,000 automakers in the United States. And in the space of two decades, that dwindled down to less than 50.
And it seems this pattern is re-emerging. In the last couple of years, hundreds of new electric vehicle start-ups have materialised. Yet despite many brands gaining popularity, it’s difficult to discern which ones will end up on top.
But by investing in the companies that enable the electric vehicle industry to exist, this high failure risk can be bypassed while still capitalising on the rise of electric vehicles. I’m talking specifically about battery metal producers.
FTSE 100 shares powering electric vehicles
Two of the biggest mining groups in the world are Rio Tinto (LSE:RIO) and Glencore (LSE:GLEN). And both serve a critical role in producing the materials required for lithium-ion batteries.
Rio Tinto has begun ramping up its investments in lithium mining. Meanwhile, Glencore is already the global leader in supplying cobalt, copper, and nickel. And it’s not just the batteries that are resource intensive. Additional components like the motor and other internal electronics also require these increasingly precious materials.
An investigation commission by the International Copper Association found that a standard internal combustion engine vehicle requires an average of 23kg of copper to function. By comparison, a battery-powered electric vehicle needs 83kg – 260% more. And similar trends exist for the other materials as well.
This surge in demand is only exacerbated by the rapidly rising number of companies operating in the EV space. And when slapping on supply chain disruptions courtesy of the pandemic, it’s not surprising to see the price of these materials explode recently.
Since mining is a largely fixed-cost operation, both of these FTSE 100 shares have outperformed their parent index.
Understanding the risk
Surging revenues and profits today are a pleasant sight. But it’s not a guarantee for the future. After all, Rio Tinto and Glencore are hardly the only mining companies out there.
With commodity prices rising, the economic viability of mining projects worldwide is improving. As this encourages additional mining activity, it’s likely that supply will eventually catch up to demand and may even surpass it. When this inevitably happens, the price of battery metals will naturally decline, taking the impressive earnings of these FTSE 100 shares with them.
The cyclicality of the mining industry is well known. And some analysts believe that we’re already near the top of a commodity cycle – a risk that ought to be considered.
However, given the long-term demand for these metals continues to grow today, that’s a risk I feel might be worth taking for my portfolio. While I’m not looking to buy these shares today, I think this is a smarter way to capitalise on the electric vehicle revolution. As such, I’m keeping a close eye on both of these businesses.