FARMINGTON HILLS, Mich. (ResourceInvestor.com) –Readers of Resource Investor require and deserve the best information and analysis of this situation to make informed investment decisions in raw materials needed for personal-vehicle power trains’ electrification. Therefore I’m going to use logic, my natural-resources market knowledge, as well as the agendas being followed by the global automotive OEMs. I’ll provide information to allow you to decide if and how you want to invest in such critical metals.

Today there are two political drivers for vehicle electrification that—at least momentarily—trump market economics. The political reasons are forcing automakers to spend enormous amounts of money. None of them can afford the outlays and the drivers divert economically disastrous numbers of engineers away from improving petroleum-fueled, internal combustion engine efficiency. The political drivers are beliefs that:

1.     Global demand for oil has already grown beyond the ability of the oil producers to meet it. Therefore countries, such as the U.S.—which already imports the bulk of its oil, will continue to do so until they are totally dependent on imported oil. Then they will be unable to influence  the price, or even the availability, of their domestic oil supply;  and

2.     Notwithstanding the importance of the foregoing, ‘greenhouse gases,’ i.e. CO2 emissions from oil-sourced fuels are creating a detrimental, man-made climate change that must be and can be halted and reversed. Elimination of oil products for fuel is the so-called ‘global warming’ agenda.

It does not matter whether the above two drivers are true! It only matters that politicians believe that they are true and act upon them to promote legislative agendas to simultaneously reduce dependence on imported oil and to reduce CO2 emissions. American politicians have bought into both drivers. They have mandated that personal vehicles sold in America operate more efficiently, using less fuel per mile traveled. Simultaneously they’re moving towards zero emissions of CO2.

There are two ways for automotive manufacturers to achieve the goals above simultaneously. One, which I will not discuss today, is to switch to hydrogen as the fuel. This is today far beyond any financial capacity of any car company or even of the entire global car industry. The participation of the richest national governments would be required to create and mandate systems:  firstly, a hydrogen production; and secondly, a distribution system to replace their petroleum-fuel equivalents now in use. The other solution for the OEM automotive industry is to switch the power trains used by personal vehicles. Internal combustion engine operation would be replaced by direct drive of electric motors; power would be supplied by onboard electrical generation or storage systems.

The global automotive industry’s business-models have been fractured by the political demands cited. Now a kind of product nationalism has now confused the situation even more.  One example is in Japan, where car makers either recognized the dominance of politics over economics earlier than any other country’s car makers, or (Toyota) got lucky. This due to GM by getting out of the electrified car manufacturing business (again) at the end of the 20th century. It was Toyota’s opening, which it took even at a very high risk of failure. That move has given Toyota the single-best competitive advantage of all time in the U.S. car market. It’s mass production of the ‘perfect car of the moment’ for the politically dominated U.S. car market: the hybrid Toyota Prius.

In a perfect world. GM CEO, Rick Wagoner—whose word is unquestioned internally—decreed in 2005 that the ultimate goal of the world’s personal vehicle manufacturers is now to build vehicles that produce electricity on board without any generators using moving parts. Further, this electricity is to be supplied directly to electric motors directly driving the vehicle wheels. This ultimate electric car, Wagoner informed his supplicants within GM, would use a fuel cell ‘burning’ hydrogen to produce electricity in place as needed and in the amounts needed by simply  controlling the flow of hydrogen to the fuel cell. Let’s call this the GM goal, because, in fact, that’s what it is.

It’s a fine goal in a perfect world where scientific and engineering advances could be dictated by the mere application of the correct amounts of money. This goal would solve all of the political problems associated with dependence on foreign oil and global warming.

GM’s goal is actually accepted in theory by most of the world’s car makers; but no one today can either achieve that goal or knows how to achieve it. Let’s see then where we are right now on the road to the GM goal; and let’s look at the different paths that the world’s largest car companies are on to achieve the goal. This will tell us, for the near term at least, which raw materials are already critical and which raw materials will continue to be critical and which new ones may join the list.

The following graphic describes the current situation in the global OEM automotive industry:

I just got back from driving Nissan’s (NSANY) much hyped new electric car and hybrid. The press event, held in searing heat at an advanced technology showcase 90 minutes outside Tokyo, was the first chance that reporters have had to check out the Japanese automaker’s new environmental techs.

Most seemed pretty impressed at the electric vehicle, although it’s hard to draw too many conclusions. The version we drove was an electric version of a Nissan Cube, a popular model in Japan. However, the company says its EV, which is scheduled for a 2010 launch in Japan and the U.S., will use the same electric system but look completely different from any of today’s Nissans.

On the test track, the Cube was pretty nimble, quickly reaching 100km/h on a short straight, despite carrying four passengers. One bad point was the bulk of the batteries—at 300kg—under the rear seats. That meant they were raised higher than normal and not comfortable for those in the back. Still, it’s safe to assume the problem will be ironed out by the time the final version appears.
Upbeat About Lithium-Ion Batteries

On a more positive note, Nissan seems very upbeat about its lithium-ion battery technology. While Honda (HMC) and Toyota (TM) are reluctant to use li-ion cells in new hybrids (save a low-volume lease version of the Prius due for 2010), citing safety concerns, Nissan is confident that its batteries, which are half the weight and offer significantly improved performance over the current nickel metal hydride cells, will help it claw back some ground in the hybrid race and make it an EV leader.

Nissan’s new hybrid also raises as many questions as it answers. Due in 2010, it will be Nissan’s first mass-market hybrid other than a gas-electric version of the Altima, which in any case borrows Toyota technology. The new Nissan system we tried was fitted out in an Infiniti G35, but again Nissan says this is just for test purposes. When it first appears in 2010, it will be on a different, new model. Nissan’s engineers said its system, which works best for rear-wheel-drive cars, has more in common with Honda’s Integrated Motor Assist gas-electric technology than the more complex systems found in Toyotas. However, thanks to a dual clutch system, it can drive at low speeds in electric-only mode, which Hondas cannot.

Whether it will be a big hit remains to be seen. One worry is that Nissan CEO Carlos Ghosn seems more interested in EVs. At a recent press conference in Yokohama, Ghosn’s answer to almost every question seemed to mention “emission-free” electric cars. Hybrids, he said, are not as clean. Another issue could be how Nissan uses its system. Yesterday’s test car used its 3.5-liter V6 engine, which by adding the hybrid apparently achieved V8 performance levels. That’s all well and good, but, as Honda found with its now-defunct Accord hybrid, many car buyers seem to prefer gas-electric autos that improve fuel efficiency rather than performance.
More Green Marketing on the Way

What is clear, though, is that anyone who thought all the hype surrounding the Prius was too much should brace for an onslaught of green marketing. Yesterday, as the local hands boarded a bus back to Tokyo, another load of journalists flown in from around the world alighted at the test track.

That’s despite the incompleteness of the new models on show. It was a similar story when Honda recently showed off its FCX Clarity (BusinessWeek.com, 6/16/2008) fuel-cell car, which for all its amazing technology is unlikely to be commercialized until at least 2016. And with General Motors’ (GM) Chevy Volt plug-in due in 2010 and a host of other carmakers, not least the Japanese (BusinessWeek.com, 7/2/2008), all pushing their green agendas, this is just the beginning.