The Smart Investor: Warren Buffett Backs BYD Company Limited. So Should You.

Warren Buffett is confident in the future of electric cars. He’s so confident that his Berkshire Hathaway Inc. (NYSE:BRK.A) has taken a 10% stake in BYD Company Limited (HKSE:1211), a Chinese carmaker designing and building electric cars.

What sets BYD apart from the crowd is its battery technology. The company is already the biggest maker of batteries for mobile phones but its huge market value makes it clear that investors see a lot of room for growth in automobiles.

The question for automobiles remains what kind of batteries they will use. As things stand, a lithium-ion version is the front-runner. But there are potential ingredients that may make batteries work better. One of them is vanadium and, if so, investors can make some money speculating on small caps with vanadium deposits.

First, a little background: The primary and predominant use of vanadium is as an alloy in steel, which it makes harder and stronger. About 93% of American consumption, according to the United States Geological Survey, is some form of iron or steel. Worldwide, the number is 85%.

The vanadium story is pretty attractive on that front. Steel consumption rises quickly in a developing country. Typically, it can reach 1,000 kilograms per capita. China and India are nowhere near that yet. As the world economy slowly recovers, demand for steel and vanadium should increase steadily.

Accelerating that increase are laws in Japan and China mandating stronger rebar steel, likely requiring more vanadium, according to analyst Jon Hykawy at Byron Capital Markets. And while it’s true that niobium can be used instead of vanadium, it’s only a substitute at very high vanadium prices, particularly because the vanadium in a ton of steel is a small part of the cost of that steel.

But the sex appeal of the story lies in the promise of vanadium use in batteries, and not just car batteries. If electric cars are to catch on – and I mean purely electric ones, not hybrids – the auto industry has to solve the battery problem.

Batteries have gotten a lot better but they still have drawbacks. They charge slowly and have limited distance compared to a tank of good, old-fashioned fossil fuel.

Lithium was a technological breakthrough and has worked well in cell-phones and laptops. But it’s not without its shortcomings. Battery makers are experimenting with a number of additives, including vanadium, which theoretically adds power, among other things. It’s more expensive than some alternatives, but the performance appears to compensate for the added cost.

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