All major vehicle manufacturers are increasingly focusing on e-mobility. Ford and GM to invest $60 billion by 2025 alone. German rivals Volkswagen, BMW and Daimler plan to invest $185 billion by 2030. The battle in the global electric car market is thus likely to gain momentum. This will continue to drive strong demand for an essential component of e-vehicles: The battery. The so-called lithium-ion battery is considered the heart of every e-car.
In the value chain of the electric car, the real bottleneck is the light metal lithium. While various combinations of minerals such as lithium, nickel, graphite, and cobalt are used to build batteries, lithium is the great and undisputed constant. The price of the light metal, also known as “white gold”, is expected to rise is called, shot up nearly 300 percent last year, eclipsing the previous record set in 2018.
The run-up in lithium, which is not traded on an open market, is expected to continue in 2022. Because the supply can not keep up with the increasing demand. Deutsche Bank projects that annual production will triple to nearly 1.5 million metric tons of lithium carbonate – the most important lithium compound – by 2030. However, demand is expected to increase fivefold to 2.4 million tons in the same period due to the e-car revolution. A big supply gap is opening up here.
Excess demand for lithium as an opportunity
It’s not that lithium producers aren’t doing anything to keep up with demand. The problem lies elsewhere: the operation of a new mine needs about seven years lead time. And political headwinds are usually guaranteed due to environmental concerns. Only recently, under pressure from environmental groups, Serbia terminated its support for a lithium mine in which mining group Rio Tinto planned to invest $2.4 billion. Similar problems are observable with other raw materials such as nickel, cobalt and graphite.
For investors, however, the excess demand for lithium offers opportunities. On the buy list here is U.S. specialty chemicals company Albemarle, which uses its own mines to extract lithium salts. Although broadly diversified, the light metal business accounts for 40 percent of sales, which should manifest itself in profit growth in 2022. Over twelve months, analysts see an average upside potential of 28 percent for the share, which has fallen sharply since the beginning of the year.
Albemarle, together with Chile’s Sociedad QuImica y Minera de Chile (SQM), commands nearly two-thirds of the global lithium business. But unlike Albemarle, shares in the Chilean chemical company are showing no weakness even in the current market turmoil, and are up 6.1 percent year-to-date – but the stock is well below last year’s highs in November.
Share price performance of SQM since January 2021 (Source: cash.ch).
SQM’s most important raw material sources are both located in Chile – in the Salar de Atacama and in the Salar del Carmen in the Atacama Desert. The company has a political home advantage in lithium-rich Chile, but is also involved globally in lithium extraction with a large project in Australia. The forward-looking price/earnings ratio (P/E ratio), which takes into account forecast earnings over the next twelve months, is an interesting 15.
For both major chemical companies, rising raw material prices are reflected in disproportionately high profit increases. In theory, this is even more true for pure, smaller mine operators such as Vulcan Energy, Lithium Americas or Piedmont Lithium. Whereas these companies are currently not yet generating sales and the share valuations are based on future profits to be generated by their mining projects. All three stocks have fallen significantly in the current market environment and are only suitable for risk-averse investors.
Panasonic a technological leader
Ultimately, however, battery manufacturers will also benefit from the e-car revolution, as their products hold a key position in the production of electric vehicles. The energy storage system largely determines the price and range of the vehicle. And the demand for batteries is growing relatively faster than that of electric cars. Because customers want more and more range and luxury equipment with numerous gadgets: This further increases the energy demand. The battery market for electric cars is expected to grow 34 percent annually between 2022 and 2030, according to market research firm Market Research Future.
One of the leading battery manufacturers in terms of technology is Panasonic. The Japanese conglomerate is known to supply Tesla and is in pole position thanks to its 4680 battery technology developed specifically for the electric pioneer – a 46 millimeter wide and 80 millimeter high cylindrical battery cell. Morgan Stanley expects the new technology to capture about 50 percent of the battery market by 2025.
Panasonic shares have been trending sideways since early 2021 and are cheap by industry standards with a forward P/E ratio of 12. With an investment in Panasonic, however, one ultimately participates only to a small extent in the e-car boom because of the broad product range – from print cartridges to professional hair clippers.
Panasonic share price performance since January 2021 (source: cash.ch).
The current world market leader is still Contemporary Amperex Technology – better known as CATL – thanks to unrivaled low prices. The Chinese group managed to defend its market share despite increasing competition. And the stock is also doing well: in the past year alone, CATL gained about 67 percent, and it continues to climb by more than 3 percent in the new year as well. Still, the average price target of analysts surveyed by Bloomberg is 24 percent above the current price.
The second-largest battery maker, LG Chem of South Korea, is launching on 27. January its battery and energy division to the main stock exchange Kospi. The majority of the proceeds are to be used to expand production and repay debt. The Chinese company BYD “Build Your Dreams” also belongs on the watch list -, which produces batteries as well as cars.
A definitely more courageous and very speculative bet, on the other hand, is the U.S. company QuantumScape, whose shares have really crashed since their peak in December 2020 – from 132 to just under 16 dollars. The company develops solid-state batteries for electric cars, considered the holy grail in battery technology. However, QuantumScape is not generating any revenue yet and is making losses. The money should not run out so fast due to financially strong investors such as VW, the Kingdom of Qatar or Bill Gates.
Two ETF as an alternative
As an alternative to investing in a battery manufacturer or lithium producer, the “Global X Lithium& Battery Tech ETF (Exchange Traded Funds)” to. This ETF offers investors access to a diversified selection of companies involved in lithium mining, refining and battery production. The costs incurred are 0.75 percent. The price loss since the beginning of the year is 10 percent.
The Amplify Advanced Battery Metals and Materials ETF is a valid alternative. This one doesn’t just focus on lithium, but covers multiple battery metals: Lithium, Cobalt, Nickel, Manganese and Graphite. The ETF charges a total annual cost of 0.59 percent. The ETF is also down 10 percent year-to-date.