10 months ago • 3 mins
Supercharged by strong EV demand and limited supply, the price of lithium carbonate in China, which serves as a global price benchmark for the essential battery metal, soared more than ten times from early 2021, to hit a record 597,500 yuan ($86,910) last November. But that sharp rally has been turned on its head this year, with prices collapsing by two-thirds (white line). The plunge can be attributed to two key factors: an expected surge in global lithium supply and a slowdown in EV demand in China – the world’s biggest EV market – after the government ended 13 years of subsidies.
Now, as an investor, I’m immediately looking for the part of the EV value chain that’s most likely to benefit from falling lithium prices. At the start of the value chain are lithium miners, and it doesn’t take an MBA degree to conclude that a lower price for their key commodity will translate into reduced earnings. But what about battery manufacturers, who buy lithium and other metals and use them to build the packs that power EVs? To answer that, you can take a look at Chinese firm CATL, the biggest EV battery maker in the world with a dominant market share of 37% – almost triple its next competitors (LG Energy Solution and BYD, both at 13.6%).
The year 2022 was marked by significantly higher lithium prices, and CATL’s gross margin plunged to 20.3%, from 26.3% the year before. That makes sense considering that CATL buys lithium (higher prices = higher costs). But it also makes sense that CATL and other battery manufacturers should benefit this year from lower lithium prices.
There’s one catch though: to stave off growing competition and secure orders, CATL changed its pricing model this year to offer automakers steep discounts. The firm will price its batteries on a lithium-linked basis with 50% of the batteries embedding a lithium carbonate price of 200,000 yuan ($29,068) and the rest embedding the “spot”, or current, market price of lithium carbonate. That latter variable component, combined with the former very low fixed component price, means that CATL is essentially passing on lower lithium prices to its customers, starting a price war that’ll likely lower profits for all battery makers.
That doesn’t mean EV makers like Tesla and BYD will be the ultimate winners now that they can source batteries more cheaply. They’re engaged, after all, in their own price war, initiated by Tesla, which has slashed its prices six times this year. And it made it clear Wednesday during its earnings call that there’ll be more cuts to come as it seeks to protect its lead in the EV market. To help fund those cuts, Tesla will most likely pass on the lower battery costs to its customers.
If you’re looking for winners in all this, I see two with potential. First, consumers, who are going to see big drops in the cost of EVs. Second, the firms that build and operate EV charging stations: as costs come down, EV adoption will accelerate even more, and we’ll need more of these. That may be where the real long-term investment opportunity lies. But you might want to proceed with caution: very few of these firms (like Kempower and Alfen) are currently profitable.
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