Credit Rating Agencies Urge "Pace Control" in the Battery Industry's "Economies of Scale War" Ignited

Raw Material Prices High... Speed Faster Compared to Production Capacity

The scene at the 'InterBattery 2022' exhibition held on the 17th at COEX, Samseong-dong, Gangnam-gu, Seoul, bustling with visitors. Photo by Hyunmin Kim kimhyun81@

[Asia Economy Reporter Moon Chaeseok] Domestic battery companies are aggressively betting on expanding production capacity, but the financial sector is urging them to moderate their pace. Due to raw material supply instability and rising prices, investment burdens are increasing, and the growth rate of production capacity is much faster than the increase in electric vehicle sales, which could lead to a situation where operating rates must be lowered.

According to the report "Analysis of Causes and Effects of the Sharp Rise in Battery Mineral Prices" released by NICE Credit Rating on the 20th, supply instability and price increases of key battery materials such as nickel, cobalt, and lithium are expected to continue. According to the Korea Resources Corporation, nickel prices rose 20.7% from $17,344 per ton at the beginning of last year to $20,925 per ton at the end of last year. During the same period, lithium increased 445.4% from 48.5 yuan per kg to 264.5 yuan, and cobalt jumped 112.7% from $33,000 per ton to $70,195. The sharp price increase is analyzed to be due to the surge in electric vehicle sales and the recovery of mineral demand that had contracted in 2020. In particular, lithium accounts for 80% of electric vehicle battery demand, making its price surge problematic. The expansion speed of production capacity by major lithium producers is predicted to lag behind demand growth. For example, Albemarle, the top lithium producer, plans to expand its production capacity from the current 88,000 tons to 200,000 tons by 2025.

If mineral prices continue to rise, automakers are expected to pass cost burdens onto battery companies, which is also a burden for the battery industry. This is because battery supply contracts are linked to mineral prices. Since electric vehicles are expensive and demand elasticity is low according to price, automakers have secured profitability by raising electric vehicle prices to reflect mineral price increases. However, as electric vehicle demand grows, automakers are likely to change their strategy to reduce costs without raising sales prices. Factors such as automakers internalizing batteries, establishing joint ventures, investing in battery companies, and the growth of new battery companies pose many challenges for the three major battery companies?LG Energy Solution, Samsung SDI, and SK On.

Attention should also be paid to the world's number one battery company, China's CATL, increasing its investment in mineral supply. CATL has reviewed and executed eight investments in nickel, cobalt, and lithium mines over the past three years. In April last year, it announced plans to invest more than 3 trillion won over one year across the entire value chain, including minerals. If CATL enhances its cost competitiveness in minerals, domestic battery companies will also need to consider increasing mineral investments. Since they are already investing trillions of won to expand production capacity, the burden grows accordingly.

Considering all these situations, the report suggests that battery companies need to moderate the speed of their production capacity expansion plans. It forecasts that return on investment (ROI) may decline and the investment recovery period may lengthen. Profitability is not keeping pace with the level of investment expansion. LG Energy Solution turned a profit last year, but this was due to a one-time gain from SK Innovation's settlement, while SK On recorded an operating loss rate exceeding 20%. Meanwhile, the battery production investment costs disclosed by LG Energy Solution and SK On are about 6.3 trillion won and 4 trillion won respectively, and they plan to expand production capacity to 2 to 5 times the current scale by 2025.

There is also analysis that the increase in electric vehicle sales may be slower than the expansion of battery production capacity, potentially leading companies to lower operating rates. The 2025 production capacity expansion plans of LG Energy Solution, SK On, and Samsung SDI total 700 GWh (gigawatt-hours), and including CATL, it reaches 1,300 GWh. This capacity is enough to produce 20 million electric vehicles. The predicted 2025 electric vehicle (BEV, PHEV) sales by major institutions are also around 20 million units. Thus, the production capacity of these four companies alone will already cover the battery capacity needed for global electric vehicle production. Considering the production capacities of other companies such as Panasonic, BYD, and CALB, as well as future automaker battery internalization, there is a high possibility of reduced operating rates. The slower the electric vehicle market growth, the more serious the operating rate issue may become. The report stated, "Considering the increased investment burden due to battery mineral supply instability and price rises, and the need to secure appropriate production line operating rates, the necessity to review battery companies' order strategies and future investment plans is increasing," adding, "It is important to pay attention to companies' response directions regarding whether to moderate the pace of facility expansion or proceed with planned investments as is."

This content was produced with the assistance of AI translation services.