Why the electric vehicle supply chain may be poised for growth

Projected growth in electric vehicle (EV) fleets is expected to reduce oil demand growth in the next decade. This anticipated shift is likely to coincide with a considerable rise in oil supply, which would create an imbalance in the oil market, support the electrification of transportation and lead to investment opportunities within the wider EV supply chain.

Here’s how this phenomenon may impact the oil market and bolster opportunities in the sustainable equity investing space:

EV sales blip

EV sales projections have been reduced by 6.7 million through 2026, according to the Bloomberg NEF (BNEF) annual Electric Vehicle Outlook. The report noted that while the demand deceleration isn’t universal across countries¹ — and EVs will be supported slightly by the resurgence of plug-in hybrids — only a few Nordic countries (Norway and Sweden)² and the state of California are on pace to eliminate passenger vehicle fleet emissions by 2050. BNEF analysts noted that some markets are experiencing a “significant slowdown” and many automakers have pushed back their EV targets as a result, with the window for achieving net-zero emissions in road transport “closing quickly.”

However, despite this slowdown in sales, overall, the industry appears to be on track to deliver sustained fleet growth. In fact, six of the 10 largest EV carmakers in the U.S. have seen sales increase between 56% (Hyundai-Kia) to 86% (Ford).³ And General Motors seems poised to lead the surge in EV expansion in the U.S., with the Detroit-based carmaker having pledged to electrify several of its major models.

Helping to fuel such growth, EVs can be more affordable than internal combustion engine (ICE) vehicles over their lifetime due to lower fuel and maintenance costs with fewer engine parts to go wrong.⁴ The different power train of an EV has advantages that can offset higher upfront costs.⁵ A 2018 University of Michigan study found that the average cost to fuel an electric car was $485 a year, compared to $1,117 for a gas-powered vehicle. Additionally, as production volumes increase and battery technologies mature, prices are likely to equalize with ICE vehicles.⁶

Bottom line: Despite the temporary slowdown in EV sales, the global fleet is forecasted to grow sufficiently.

Oil imbalance

The forecast growth in EV sales could reduce oil demand growth by the end of the decade, with the oil market imbalance intensified by a surprising amount of supply growth.

According to the International Energy Agency’s (IEA) annual medium-term outlook, global consumption will “level off” at 105.6 million barrels per day — 4% higher than last year’s level — due to rising EV sales and improved fuel efficiency.⁷ Running parallel to this, oil production capacity continues to climb, with supply rising by a “staggering” eight million barrels per day higher than demand by 2030. This may leave global oil supply with the largest level of spare output since the pandemic lockdowns.

And as the pandemic rebound loses steam, clean energy transitions advance and the structure of China’s economy shifts, growth in global oil demand is slowing down, with rising oil supplies potentially weighing on prices through the end of the decade, according to that same IEA report.

Global oil demand is projected to increase in the short term over the next few years, according to the IEA, with an anticipated growth of approximately 4 million barrels daily by the decade’s end. This rise is attributed to economic growth in countries like India and China, alongside increased consumption by the aviation and petrochemical sectors.

However, in developed nations, the consumption of oil is expected to continue its long-term downward trend, decreasing from last year’s 46 million barrels per day to 43 million by 2030 — marking the lowest consumption level since 1991, according to the IEA. The report also suggests that oil demand in China will level off by the decade’s end, reaching around 18 million barrels daily. Further, a broadening of carbon-related taxes is expected, with emerging market economies, including China, looking to expand their respective national carbon markets.⁸ If carbon prices rise as a result, oil prices could become relatively more expensive over time than electricity per mile travelled.⁹

Bottom line: The growth of the global EV fleet will become a key contributing factor to oil demand growth slowing by the end of the decade. The oil market supply-demand imbalance will likely be exacerbated by oversupply, which could cap the commodity’s price.

Riding the electrification wave

These prevailing and converging trends could offer a supportive narrative for sustainable investing, particularly within the broader EV supply chain, including mining, automotive technology suppliers, battery manufacturers and semiconductors and system solutions providers.

Suppliers are also set to benefit from the increasing electrification of cars in general — i.e., combustion engine cars having more electric technology to make them more fuel efficient. Put simply, as electrification increases, so too does the demand on suppliers’ products.

A significant transition is happening in the realm of EVs, with 31 nations having exceeded a critical threshold: the point at which EVs constitute 5% of new car sales.¹⁰ Crossing this milestone indicates the beginning of widespread acceptance, a phase after which there tends to be a swift shift in technological preferences toward EVs, potentially benefiting automakers and their suppliers, including companies such as TE Connectivity, Aptiv, Texas Instruments and Infineon.

Electrification is a key concept for investors to consider as it is part of a broader investment theme that we call the digitalization, electrification and decarbonization nexus. This theme is in action across all parts of the global economy since we need to electrify and digitize in order to decarbonize.

While Janus Henderson Investors haven’t invested in many EV manufacturers (as we see that market as being quite crowded competitively with many incumbents sitting alongside new entrants), we do see many interesting potential opportunities for investors in the value chain — the companies making the enabling technologies. Here, we see attractive valuations and long-term secular growth trends that mirror those seen within areas of high performance, such as computing and AI. For these reasons, we remain excited about potential investment opportunities in this area of the market.

Bottom line: The oil market imbalance lays the foundation for a strong recovery in EV sales as lower cost models are launched, with the broader supply chain set to benefit from the increasing electrification of cars.

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