Solar, batteries, electrification… the real winners are somewhere else

In 1848, the first gold vein was discovered in California, kicking off the historically famous California Gold Rush (1848–1855).

People flocked from all over the United States to mine gold, and as this crowd poured in, roads were built, houses went up, and schools were founded in what had been land with virtually no white settlers.

And with that, great fortunes were made.

Did the people who actually dug for gold become rich?

Unfortunately, the answer has to be no. On average, about half of them earned what you might call a “decent” return, but those who arrived in the later stages of the Gold Rush made very little or even lost money.

That’s not so different from members of the MZ generation who, after watching stocks, crypto, and real estate soar in 2020–2021, jumped in late this year with maximum leverage only to start investing at the tail end of the boom, is it…?

What the Gold Rush and the 2022 asset markets both tell us is that if you catch the very last train, you’re too late. I often feel like I hopped on the last train of the startup boom myself. (Shinhan Bank 110-492...)

So who actually got rich?

Scholars who have studied the California Gold Rush confirm that it was not the miners who came to dig for gold, but the merchants, who made far more money.

The richest man in California in the early days of the Gold Rush was Samuel Brannan, famous for relentless self-promotion, owning general stores, and publishing a newspaper. He first opened a store in Sacramento and then set up shops near other gold fields as they were discovered.

As soon as the Gold Rush began, he swept up every piece of equipment he could buy in San Francisco and resold it at huge markups to the out-of-towners who had come to California in search of gold.

Another person who became wealthy was Levi Strauss, who from 1853 sold jeans and other garments made of denim. That was the beginning of the Levi brand we know today.

Beyond that, successful businessmen emerged in a wide range of sectors—retail, transportation, entertainment, lodging, and laundry services—and even the sex trade reportedly boomed.

In the end, the “content” that drew people in was the gold itself, and the entrepreneurs who sold what those crowds needed became truly wealthy.

The California Gold Rush feels very much like crypto in 2021, and it shows that this kind of business model keeps recurring throughout history.

So what should you have done to make money?

Instead of going out to mine gold, you should have been selling shovels and jeans.

According to BloombergNEF, global refined copper demand, which stood at 25 million tons in 2021, is expected to rise to 40 million tons by 2040.

That’s an increase of about 60%, or roughly a 2.64% compound annual growth rate (CAGR).

You might ask, “Wait, it only grows 2.64% a year?” But because mining copper is institutionally difficult, current supply is not even meeting today’s demand.

In a Financial Times article titled Copper bosses warn of supply threat to climate ambitions, Richard Adkerson, CEO of the US mining company Freeport-McMoRan, said:

“Global projects to expand electric vehicle production, build out renewable energy, and extend transmission lines are driving a surge in copper demand, and we are going to see a very serious supply shortfall,” he warned.

Consultancy Wood Mackenzie warned that over the next decade an additional 9.7 million tons of annual supply will be needed from copper mine projects that have yet to be approved, adding that “we have never overcome a supply shortfall of this magnitude before.”

They estimate that pushing new projects forward will require annual investment of 23 billion dollars, about two-thirds higher than the average over the past 30 years.

Copper is not the only mineral in short supply for the energy transition. Lithium is essential for producing lithium-ion batteries, which currently account for the majority of secondary batteries. Here too, supply falls far short of demand, and as major automakers ramp up investment in electric vehicle production, demand is expected to keep surging.

At the end of last year, Tesla (TSLA) even discussed acquiring a 10–20% stake in Glencore, the world’s largest mining company.

Given the image of mining as environmentally harmful, that’s a striking conversation to be having. (Perhaps unsurprisingly, the stake purchase appears not to have gone through in the end.)

Glencore is the world’s largest supplier of cobalt, a rare earth element critical for battery production, and two years ago Tesla signed a supply agreement for cobalt that had yet to be mined.

CEO Elon Musk also said on Twitter that

lamenting that the current battery supply chain cannot keep up with Tesla’s demand.

Since 2018, more than 200 billion dollars has flowed into the EV industry, and 100 billion dollars (about 140 trillion won) has been invested in battery production. By contrast, only 30 billion dollars has gone into raw material production to support these industries.

Infrastructure for electric vehicles, renewable energy, and electrification projects is steadily improving, but the materials that actually need to go into them are in desperately short supply.

You can see this trend in Caterpillar’s (CAT) share price. While the S&P 500 has fallen more than 25% this year, Caterpillar has managed to post a positive return thanks to a sharp recent rally—and behind that rally are its earnings.

Caterpillar manufactures and sells construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. This year, it has beaten earnings expectations every single quarter.

Looking at the company’s reported retail sales data, you can see that Resource Industries (RI) posted the highest growth at 10%. According to the company, the RI segment

which shows that it has very high exposure to the mining industry.

Given how far the share prices of Tesla and other EV makers have fallen this year, it becomes clear that in the “EV rush,” the companies making the real money are in a very different place.