Battery Companies Facing the "Yanggeukjae Boritgogae"... Short-Term Profit Damage Unavoidable

Cathode Material Companies Show Signs of Slowing Growth in Q3
Operating Profit Margin Falls to Around 2%

Cylindrical battery cathode material for electric vehicles. Photo by POSCO Future M

Battery cathode material companies, once filled with rosy prospects, have entered a performance 'lean season.' They are seeing profits shrink as they sell raw materials, which were purchased at high prices, at lower prices.

In the third quarter of this year, the growth in earnings of battery cathode material companies is expected to sharply decline. LG Chem's Advanced Materials division, which includes the cathode material business, is projected to record sales of 1.9851 trillion KRW and an operating profit of 57.5 billion KRW in Q3 this year (according to Hana Securities estimates). LG Chem's profit margin was 8.31% in the previous quarter and reached 16.11% in Q3 last year, but it is expected to fall to 2.9% in Q3 this year. This is due to the decreased profitability of the cathode material business. EcoPro BM also posted an operating profit margin of over 9% last year but recorded an operating profit of 45.9 billion KRW with a 2.54% profit margin in Q3 this year. POSCO Future M is expected to have an operating profit margin of 4.34% in Q3 this year (according to Samsung Securities estimates). The company posted profit margins of 7.76% in Q3 last year and 4.36% in Q2 this year.

Domestic cathode material companies purchase raw materials such as lithium and nickel and process them to produce cathode materials. They sell these cathode materials to battery cell companies, and prices are linked to raw material costs. Cathode material prices are reflected in sales prices with a lag of about 3 to 6 months. Because of this time lag in price reflection, profit margins increase when raw material prices are rising but suffer losses when prices fall. This is because cathode materials made from raw materials bought at high prices are sold at lower prices.

Prices of raw materials such as lithium and nickel continue to decline. Lithium prices, which soared to 581.5 yuan per kilogram (approximately 107,781 KRW) in November last year, dropped by 72.74% to 158.5 yuan (approximately 29,362 KRW) as of the 13th. Byung-hwa Han, a researcher at Eugene Investment & Securities, stated, "Due to the sharp drop in lithium and nickel prices, the downward trend in cathode material prices is likely to continue until the first half of next year."

The issue of price declines linked to battery raw materials is also a problem faced by battery cell companies. However, the three domestic battery cell companies are evaluated to have been less affected by the decline in performance due to raw material price drops, thanks to the operation of their U.S. factories and benefits from the Advanced Manufacturing Production Credit (AMPC). AMPC is a subsidy provision under the U.S. Inflation Reduction Act (IRA), providing battery companies with subsidies of up to $35 per kWh for cells and up to $45 per kWh for modules. LG Energy Solution announced preliminary Q3 results, reporting sales of 8.2235 trillion KRW and an operating profit of 731.2 billion KRW, marking the highest quarterly operating profit ever. Of this, AMPC benefits amounted to 215.5 billion KRW. Although cathode material companies have announced plans to invest in the U.S., they have not yet started operating factories there and thus have not received such benefits. They are in a position to overcome the 'lean season' while hoping for a recovery in electric vehicle demand after the first half of next year.

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