ELECTRIC vehicles (EV) are all the rage these days. Today, EVs are closing the gap to become more competitive in performance and cost than traditional internal combustion engine (ICE) vehicles.
The EV supply chain begins with the upstream segment comprising of miners and refiners which supply battery producers with raw materials such as lithium.
Lithium is an essential component needed for EV battery production. The batteries produced are then supplied to downstream original equipment manufacturers (OEMs) who are involved in the manufacturing and assembly of EVs, including cars and buses.
While downstream OEMs such as Tesla and Nio have garnered a lot of attention in recent years, not enough attention is paid to upstream lithium miners and battery producers. Hence, we will be highlighting the opportunities that exist within this space.
Battery manufacturing capacity
With the global appetite for EVs growing, there is a need to ensure that the EV battery supply chain is keeping up.
According to a 2019 McKinsey & Co analysis, the EV battery market was dominated by China, Japan and South Korea with less than 3% of global demand supplied by battery companies based outside those countries.
Europe and the US are now playing catch-up given the strategic importance of EVs as an advanced technology and a means to thwart climate change.
In the US, battery producers are ramping up their production capabilities. LG Energy Solution plans to invest US$4.5 bil to expand its EV battery manufacturing footprint in the US with an additional 70 GWh of capacity starting in 2025.
Panasonic also plans to add a new production line at the Nevada factory it co-owns with Tesla.
Additionally, some car manufacturers are taking battery production into their own hands. For instance, during its Battery Day in September 2020, Tesla announced a goal to generate 100 GWh (enough for 1.4 million vehicles) of battery production by 2022.
Besides Tesla, Volkswagen also has plans to produce its own batteries. The German automaker is committed to building six gigafactories generating 240 GWh (enough for 3.4 million vehicles) of battery production by 2030, to keep pace with the massive EV demand.
Upstream lithium miners
Given that the demand for EV batteries is going to experience an exponential growth over the coming years, the demand for lithium should also follow suit (Figure 2).
Currently, lithium-ion batteries are a key component of today’s EV rechargeable batteries. Lithium has become the gold standard for EVs as they are able to store more power per unit of weight compared to alternatives such as nickel-cadmium.
It is forecasted that the demand for lithium is expected to increase by 233% over the next five years, rising from 300,000 megaton in 2020 to one million megaton by 2025. By 2040, demand should increase by 12.8 times (Figure 2) to reach 3.8 million megaton.
Given that it takes time to bring on additional lithium supply, it is expected that the lithium market is moving to a deficit in 2022 with material shortages emerging from 2025 onwards (Figure 3). By 2025, the swelling lithium demand will most likely outgrow the supply of all known lithium projects.
Given this shortage in supply, Fitch Ratings forecasts that Chinese lithium carbonate prices will rise from an average US$13,450/tonne this year to US$15,025/tonne (a 12% increase) in 2022.
Similarly, Macquarie estimates that lithium prices are expected to continue rising, moving to an incentive price (price in which mining companies are willing to increase supply of the metal) by 2024.
Henceforth, the growing demand for lithium as a raw material for EV battery production, coupled with the supply shortage, translates into higher lithium prices and greater profits for upstream lithium miners. As such, lithium mining companies could turn out to be some of the biggest winners of the EV boom.
Key investment risks
EV adoption may be slower than expected: While the demand for EVs has grown immensely in recent years, there is no guarantee of continuing future demand. The switch to EVs will not be straightforward as there remain obstacles to widespread adoption such as cost considerations and the lack of EV charging infrastructure.
Discovering alternatives to lithium: Seeing that the demand for lithium is expected to outpace its supply in the near future, we are likely to see higher prices for this raw material. But given that battery makers and OEMs will be trying to keep their costs down, they might end up seeking out cheaper alternatives to lithium in future, such as sodium.
For instance, Chinese battery giant Contemporary Amperex Technology (CATL) is developing the first ever sodium-ion batteries, and plans to build a supply chain by 2023 to produce sodium-ion batteries. However, the current performance of sodium-ion batteries is still far behind that of lithium-ion batteries.
Rising growth
The demand for EVs is surging as governments and customers demonstrate a growing interest in this climate change mitigating technology. Major beneficiaries of this EV boom include that of the upstream lithium miners and battery producers. – Sept 26, 2021
iFAST Capital Sdn Bhd provides a comprehensive range of services such as assisting in dealing, investment administration, research support, IT services and backroom functions to financial planners.
The views expressed are solely of the author and do not necessarily reflect those of Focus Malaysia.
