Industry Focus – Diving into a segment of The Equity Market – The Battery Segment

CHINA’S CHOKEHOLD ON BATTERY

Batteries are going to be the picks and shovels of the future business that are data driven and electrified. 5 years from now the electrical grid is going to be materially different compared to what we have today and the electrical vehicle business is going to be robust. There is increasing demand for batteries and their primary element the lithium ion. Essentially it uses the element lithium ion, to capture electrical particles and turn them to useable power.

Over the course of the next 5 years the battery segment it is well poised to grow at the rate of 10 to 15 percent sustainably over the next 10 years. In terms of where we are seeing this, different companies are tying up and recognising the importance of batteries – in June 2018 GM and Honda announced a partnership that Honda is going to buy battery modules from GM as they are looking for better performance and longer range. Like how the transportation segment revolved around the “fuel economy”, in the coming years the move is towards the “battery economy”. The better you make a battery, the better you can make an electrical vehicle – and the same is true for anything that has battery at the heart of it – data centres, grid, or even a corporate head quarters (where a lot of data is stored, power is required and the electric generator that is used are powered using advanced batteries). This is all a part of a much bigger movement, to make an effective and efficient use of electricity and how we do business in the future.

Leading up to today we see more demand for smart phones, stationary storage is catching up, but the EV’s are going to be the drivers of demand of battery (Goldman Sachs projects about 55% of the lithium ion battery market will be controlled by EV in 2020). Batteries are going to emerge as a really important part of the economy for both energy production and transportation.

What exactly is a battery?

The simplest definition can be that it is a device that is able to store electrical energy in the form of chemical energy and convert that energy into electricity. There are different chemical substances in the battery, which then exchange electrons across the battery cell which then exchange energy. The main components are the cathode the positive terminal of the battery, the anode the negative terminal of the battery and the electrolyte. The electrons flow from the anode – the negative terminal of the battery, towards the cathode – the positive terminal of the battery creating a closed circuit.

The most popular battery for all application today is the lithium-ion battery. The lithium is the martial which is in the cathode, used to exchange electrons across the system.

The lithium ion battery has become the default go-to for battery manufactures. First of all there is a fair amount of lithium available; it is very light and thin. It can hold its charge, for a substantial amount of time when compared to the lead acid or the classic alkaline battery. When you charge a lithium ion, you can be fairly secure that the charge you put in, most of it is going to stay there. The classic alkaline battery is not rechargeable, and the lead acid battery which is rechargeable, but requires constant recharging as it discharges easily.

The next question that arises is the availability and the production of lithium which can be in 2 ways – from Brian ponds predominantly from South America – Chile & Argentina. The second is from mineral rocks predominantly from China, Australia, Portugal and Zimbabwe.

The lithium is extracted through normal evaporation from Brian pond as it is the cheapest and the simplest way, but it can be time consuming. When mining it from mineral rocks, there is higher concentrated amount of lithium but it is more expensive and has environmental impacts.

CHINA’S CHOKEHOLD ON BATTERY – SUPPLY AND DEMAND

China wants to push toward cleaner energy, due to their air condition and their population. They   have weak supplies of hydro carbons such as oil or natural gas and are depended heavily on Russia and the Middle East for oil, but have a robust lithium reserve, dominating global markets. In home market lithium ion is key for EV, as it vital for them to have large amounts of native production.

China has a huge reserve of lithium; most of it is in the form of mineral rocks, for producing lithium. Several native Chinese companies are using this to their advantage and making their names in the lithium ion business. Tianqi lithium recently paid nearly $4.3 billion, to become the second largest share holder in Chile’s SQM mining company one of the largest lit aggregators and producers of lithium in the world.

China very well positioned, having a controlling stance over lithium by making investments in South America and Australia and get a big bite out the market outside China as well. They have not dived into their own reserve, as they have locked up supplies elsewhere.

Being the largest consumer of lithium as well as the producer, China really controls both the demand side as well as the supply side.

Cobalt is a very important component for a battery; it helps in maintaining the longevity, stability and safety of the battery. If we reduce the level of cobalt in the battery, we need to increase the level of nickel, which increases risks of overheating and fires. It is expensive and expected to increase in demand between 10 and 25 times from current levels by 2030 with over 50% of the demand coming from battery segment. About 2/3 rd of the global supplies comes out of Congo.

Again when it comes to Cobalt, China has a significant position controlling 8 of the 14 largest miners in the Congo. China also accounts for 80% of the production of cobalt related chemicals, the chemical required to take the metal of the ground refine it and make it useable for the battery. China’s position in cobalt and layering it on lithium, locks-in both the supply and the demand side for the lithium ion battery.

As we look at different ways to produce cathode to go with lithium anode there is a strong interest in moving away from the strong holds that China has built up reserves around. Anode is predominantly graphite, which by surprise China had around 65% of the global production in 2017. Of the cathode and anode side, China had a major presence.

In the anode side, there have been explorations, works have been going on to replace graphite with aluminium, as it can hold more lithium, but any of these technologies have not reached commercial scale right now.

Important take away from the macro perspective is that as we look out in the battery market in the next 3-5 years, it’s going to run through China.

The leading EV battery formula that’s being used right now – nickel-manganese-cobalt-oxide cathode, China controls 57 % of their production. When it comes to the significant control of the inputs lithium, cobalt, when it comes to the refining capacity of the cobalt, they have 80 % of that capacity. On top of that, having a majority share of manufacturing of the cathodes that go into the manufacturing  of lithium ion battery and over about 40% EV demand (source: IEA), IEA is projecting for China to control by 2040. When you are controlling all the steps in the value chain, from the rock coming out of the ground, all the way down to an EV driving of the lot, at least in the near term China is going to have a very important role to play.

Indrajith Aditya
Team Member – Equity Research and Valuation
(M.Sc. Finance, NMIMS – Mumbai 2018-20)

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s