- The $100bn opportunity in Lithium Ion Batteries
- Buy White Petroleum
- The Pure Play on Battery Technology
Batteries are becoming as important as semiconductors…
They are vital to our mobile lifestyle… the electrification of road transport…our plans to transition to a renewable energy infrastructure.
Yet we still rely on a lithium-ion battery, developed by Sony in 1991, to power new mobiles and electric vehicles — and it is placing serious constraints on our ability to scale these technologies.
”The issue with existing batteries is that they suck,” says Elon Musk. They are too unstable, too expensive, too likely to catch fire.
So at Tesla’s $5bn Gigafactory, Musk is seeking to develop a new lithium ion battery that can power a fleet of 500,000 new cars by 2020…
And Chinese device makers are further developing a lithium phosphate battery of their own…
There are immediate opportunities for investors. In fact, I think it’s a better than evens bet that end user demand for lithium-ion based products will roughly quadruple the size of the global market to $100 billion year.
In this briefing, I’d like to point to ways you can profit.
Electrochemical Chaos
The immediate issue is to make a battery that is cheap and stable enough to use in a broad spectrum of machines and devices. A non-trivial task. Batteries are utterly unlike silicon chips…
The amount of energy density in a battery — how many free electrons you can pack into a given space — is limited by “parasitic elements” such as the electrolyte.
Apply too much voltage to the electrochemical swirl and the atoms go haywire, the key components such as electrodes, cathodes and anodes flying in different positions.
The first lithium battery, the forerunner of today’s lithium-ion batteries that power our smart phones, tablets and laptops, and as we’ll see Musk’s electric cars and energy storage systems, was invented in an Exxon lab in the 1970s.
But throughout the seventies they couldn’t figure out how to stop the batteries from exploding. Then in 1980 John Goodenough, who’s still operating in the lab well into his nineties and who deserves a Nobel as much as the trio who invented the transistor, invents the lithium-ion battery, which embedded in graphite, actually works and doesn’t light on fire.
Dr Goodenough Explains Battery Technology
Still it has proven difficult to scale up this technology.
During an extraordinary phase, 2008-2013, the climate around batteries become almost as wild as batteries themselves.
In the wake of the 2008 financial crisis government policies in the US, Japan and China in particular focused on winning the race to invent the ‘super-battery’, a battery with a 500 mile range that cost a fifth of the prevailing lithium-ion technology and would run for days on mobiles, and be chargeable in seconds.
By 2013 no superbattery had appeared amid a lot of hype and hucksterism as well as genuine scientific endeavour. A lot of battery companies went bust in the process, many with government money. It made the huge and persistent challenges of dealing with the electrochemical chaos of batteries, evident since Volta invented the battery in 1799, more evident than ever. And nothing’s changed.
The Cost of Batteries Must Fall 30-50%
Elon Musk faces a huge task to reignite investment and interest in lithium ion batteries.
He is preparing the ground for 2018/2019 with his dream of starting mass production of Tesla‘s Model 3, with a production run of 500,000 vehicles. This from an operation that had problems meeting the production of 50,000 cars last year and has always been late in final delivery of its models.
This seemingly insane ‘stretch goal’ is a deliberate ploy to force suppliers and internal systems to up the ante a lot faster than they would otherwise.
The Model 3 is designed to open up the mass market. It promises the Tesla aura and a range of at least 200 miles at a cost of $30,000-$35,000 — the average price Americans currently pay for new cars.
Quite apart from the huge manufacturing challenges Tesla faces, unless it can both improve and bring down by 30-50% the cost of the lithium-ion batteries that will power the cars the dream will become a nightmare.
Batteries account for up to half of the cost of an electric car, and at the current lithium-ion battery cost per kilowatt hour, with 8000-9000 batteries needed to power a Model 3, the buyer will expect the battery pack to cost nearer $20,000 than $10,000, making it uneconomic.
The cost per KWh needs to come down to less than $150, half its current cost. Interesting to note that Korean Battery giant LG Chem has been loss leading and offering GM batteries at well below the market rate at $145 per KWh for the Volt which will go bumper to bumper with the Model 3.
So what is Musk’s base case?
First, to foreclose at least for the next five years on lithium-ion technology on the assumption that no better alternative will appear from the world’s labs which will satisfy the conservative auto industry that it’s auto grade — in other words sufficiently tried and tested outside computer simulations and the real world to be trustworthy. A reasonable gamble.
Second, bring fully on stream next year the world’s biggest battery factory, the Nevada Gigafactory to massively scale up the production of batteries to pack into at least 500,000 battery packs for Tesla cars and for the Powerwalls and Powerpacks it has already started to sell for grid and private energy storage based on renewables.
Gigafactory: The World’s Largest Building by Footprint
Indeed, some acute analysts think that this business could become bigger and more soundly based than the EV business. The Gigafactory is the world’s largest building by footprint. It will double the world’s lithium-ion battery capacity on its own. Meanwhile, the Asian giants, LG Chem, Samsung SDI, SK Innovative, BYD, are adding their legacy capacities, chiefly in China, and Foxconn is joining the fray — all good for lowering battery costs but it leading to short-term, possibly structural overcapacity and lack of pricing power in a power buyers’ market.
Third, engineer inefficiencies and excess costs out of every stage in the battery production process from the best deals on the lithium raw material through to packing and installing and recycling. Musk is confident that he can achieve the price/performance improvement needed to make the Model 3 a viable proposition.
Tesla will not make the battery cells. Under current plans these are to be supplied by Panasonic, which has committed up to $1.6 billion to the Gigafactory, although Tesla has turned to LG Chem, widely considered to be the world’s premier battery company, for its Model X batteries and is also talking to SK and Samsung SDI.
How You Can Invest
Some key starting assumptions…
- The oil price will end the decade at nearer $100 than $20.
- By 2025 an alternative to lithium-ion will not have come to market that satisfies a risk-averse auto industry as to its safety.
- EVs will compete with ICEs on purchase price by 2020 while costing appreciably less to own, fuel, maintain.
- Volume sales of EVs will not be affected short-term by the evolution of an on-demand rather car ownership culture among urban millennials.
- Governments will not reduce subsidies and incentives to buy EVs so as to stall the EV market’s growth short-term.
- The combination of falling battery and solar PV costs will spawn mass purchasing of renewable energy storage batteries at the residential, corporate and grid levels.
- Cars, homes, renewable energy, utilities…the lithium-ion sector could become a $100 billion a year affair if the new markets it enables on top of an expanding market in mobiles and wearables come through, and provided the ‘superbattery’ doesn’t appear out of left field.
Buy White Petroleum
Supplies of lithium –‘white petroleum’– are already looking tight. According to a recent note by Deutsche, global lithium demand was 184 kt in 2015 and it is expected to increase to 534 kt by 2025, with batteries accounting for 70% of global demand.
It is not that the world lacks lithium reserves. There are reckoned to be 40 million tons of reserves, enough to fuel 3 billion Tesla cars with another 1.3 billion tons under the sea. However, short-term, the business of securing supplies during the zero-sum game being played by Tesla and the auto industry, almost as a whole, will be tough. It will almost certainly lead to further price rises in what is currently dubbed the world’s hottest commodity, thanks mainly to Tesla, after its sharp rise in ‘spot’ and futures markets this year, while other commodities continue to languish or worse.
An interesting way to play the lithium market may be via Chile’s biggest producer SQM, which is in the throes of an internecine battle between Chilean interests, in the midst of which China’s CITIC is manoeuvring to acquire a majority stake.
Another way is in leading refiner Albemarle, although its shares have risen 50% in short order. They have limited downside with very tight lithium product supplies at present, and don’t reflect on the upside the prospect of a mid-term bull market in lithium.
Samsung SDI is the Pure Play
Meanwhile, the big Asian battery makers are working on competing technologies of their own. China’s BYD, in which Warren Buffett has a 9% stake, is taking on an added interest as it leads in the lithium-ion phosphate batteries, preferred in China because phosphate is the domestic chemical and because they require less packaging and power management, but cannot match the performance of lithium-ion.
However, they are adequate for the electric bikes and buses which will form a large percentage of the 5 million EVs China aims to have on its roads by 2020. And BYD is the world’s biggest electric bus company, with healthy sales outside China as well.
In order to protect the home battery industry, which it is trying to develop, the authorities have unofficially stopped offering subsidies to buyers of electric buses that use lithium-ion, which may be extended to other vehicles. At the same time BYD is aiming to match the Gigafactory in capacity by 2020, which will include lithium-ion cells. BYD is a State ‘national champion’ which will therefore receive the help it needs to prosper.
Arguably, the best mid-term bet is Samsung SDI for investors looking for the ‘purest play’ way into the future-filled battery sector.
The company has sold its chemical business and stopped the development of fuel cells to focus on batteries for EVs and EV related parts.
It will invest up to $2 billion to up the ante in the global lithium-ion market. Last year it acquired Canadian battery pack company Magna.
Unlike Panasonic, the world’s leading battery company, which derives less than 10% of its revenues from batteries and LG Chem less than 15%, Samsung SDI will be over 80% a battery company. It has a formidable technology base. It showed its 600 kilometer range car battery at this year’s Detroit Auto Show.
It sports BMW AG among its auto industry customers, and a clutch of Chinese EV companies which it will supply from its X’ian plant.
The risk is that global demand for EVs will not live up to expectations leaving Samsung one of a dozen suppliers competing in a low margin power buyers’ market.
And what about Tesla itself as an investment? Musk has set expectations so high, but with so many intricate problems yet to solve in batteries and production, I expect short-term disappointments and nerve wracking share price volatility.
This is a stock for those who buy into Musk’s grand vision and/or love their Teslas and/or get a thrill out of wild switchback rides. Meanwhile, an underlying point. It’s not just cars. Tesla’s renewable energy storage business could become a lot bigger and more robust than cars. One to watch.
Too early to say ‘don’t bet against Musk’ as is being said more and more about Jeff Bezos at Amazon, a fellow entrepreneur who takes epic calculated risks.
Quick Charge Batteries
Don’t expect quick progress in the upgrade of lithium-ion batteries for mobile devices. Smart phone power requirements are growing twice as fast as battery evolution, which could prove a serious issue as and when VR/AR and advanced AI apps run on mobiles.
But, at least there could be better news on the recharging front. Current fast charging options from Asus and Samsung come at the expense of battery capacity and lifespan. But Huawei, Qualcomm and Israeli start-up StoreDot seem to have changed the game. The first two selectively offering 50% recharge in 5 minutes, without damaging the battery, the one through its own batteries using graphite protection
While the battery is charging, and the other through clever algorithms in its upcoming Snapdragon 820 accessory Quick Change 3.0, which should start appearing in Samsung phones next year. StoreDot, using peptides and quantum physics to yield almost instant, supercapacitor-like recharging, needs to sign up with a major mobile service operator to bring its technology to market.
As a departing thought: Anyone who can get silicon to work in a battery without it expanding to cause short circuiting will become richer than Bill Gates. And guess what? Gates is behind several unlisted battery companies.
PS: I have been putting the finishing touches to my report on the rush towards Artificial Intelligence. I believe that AI technology represents the world’s single greatest instrument of industrial change. In fact, battery technology is merely an enabling factor in this far bigger story of a transition towards a society that relies on intelligent machines.
In my AI Gold Rush report, I point to several profit opportunities — not least those who have built a vast computing infrastructure that will allow machine learning algorithms to proliferate across society over the next five years.
I also point to a digital divide — with a number of industries ripe for exploitation. There will almost certainly be stocks in your portfolio that need to be reviewed.
Ultimately, this report will give you some key actionable ideas and tips to protect your portfolio against violent turmoil ahead. I look forward to sending it to you.
Feel free to contact me here if want to discuss in general terms how this might affect your portfolio.