Since early March I’ve written five articles that examine cobalt supply and demand issues and explain why I believe the lithium-ion battery industry is facing a raw materials shortage of epic proportion. Today I’ll drill down into market dynamics within the lithium-ion battery industry and explain why I think lithium-ion batteries for EVs will be the first victims of the cobalt cliff.
I want to begin with a cautionary note that I’ve derived many of the numbers in this article by digitizing graphs from Avicenne Energy’s presentation at AABC 2016 in Mainz, Germany and that process is inherently imprecise. While I believe my estimates are close enough to offer an accurate overview, digitization is dependent on the visual acuity of the human being running the software and like most humans I’m less than perfect on a good day.
Based on a careful analysis of Avicenne’s graphs I’ve determined that in 2015, the lithium-ion battery industry manufactured cells with 61,500 MWh of capacity and generated $17.2 billion in revenue, which works out to an industry-wide average of $280 per kWh at the cell level. Total cell capacity sold to EV and PHEV manufacturers was roughly 15,000 MWh and total revenue from those sales was roughly $5.4 billion, which works out to an average of $360 per kWh.
In 2014, total lithium-ion cell production was 50,000 MWh and sales to EV and PHEV manufacturers were roughly 10,000 MWh. So while the lithium-ion battery industry grew at an overall rate of 23%, demand from EV and PHEV manufacturers grew by 50%.
While Avicenne’s most recent presentation did not include a detailed breakdown by end-user sector for 2015, it used this graph to summarize sales by end-user sector for 2014.
In my first article on the cobalt supply chain, I explained that all high-energy lithium-ion cells use cobalt as an essential raw material in their cathode formulations. I also estimated that cells with LCO chemistry use roughly 1.44 kg of cobalt per kWh of capacity while cells based on NCM and NCA chemistries only use 0.36 and 0.22 kg, respectively. That leads to an easy conclusion that a significant cobalt shortage will make LCO less desirable over time while making NMC and NCA more desirable. In my mind, the key unanswerable questions are “When will the inevitable transition away from LCO occur?” and “How long will the transition take?”
At the outset, it’s important to understand that even major changes in the market price of cobalt will only have a modest impact on cell prices. At the current price of $10.21 for a pound for cobalt, LCO batteries need $32.40 of cobalt per kWh of capacity while NCM and NCA need $8.10 and $4.95 of cobalt, respectively. So while cobalt represents about 12% of end-user cell cost for LCO, it’s in the 1% to 2% range for NCM and NCA. While a return to the $50 per pound cobalt prices we saw in late 2007 and early 2008 would increase the cost of LCO cells by about 46%, the cell cost impact for NCM and NCA chemistries would be in the 6% to 9% range. These flow through cell cost impacts simply aren’t big enough to significantly increase product prices or dampen end-user demand.
While I don’t expect the looming cobalt shortage to have a substantial direct impact on lithium-ion cell prices, I think the shortage may very well give cell manufacturers with secure supply chains an advantage they haven’t enjoyed for the better part of a decade pricing power.
The most disturbing number in Avicenne’s AABC presentation is that lithium-ion battery manufacturers struggle to get by with average gross margins of less than 10% while their customers routinely target gross margins of 25% or more. It’s not a healthy market dynamic when finished goods manufacturers earn rich profits while component suppliers struggle. Unless everybody in a value chain earns a reasonable profit, the value chain is inherently unstable.
The biggest reason for horrible battery industry margins is that the industry over-built capacity in the last decade and that capacity glut gave battery buyers tremendous negotiating power. When global cobalt supplies plummet, the dynamic will abruptly reverse itself and cell manufacturers that have reliable supply chains will find themselves holding all the cards. Instead of negotiating bargain basement prices to keep their factories working at reasonable utilization rates, cell manufacturers will be able to say, “We can’t manufacture more than XXX MWh of cells per year because our supply chain can’t support larger volumes. If you want priority for our limited output, you’ll have to pay a price that allows us to recover our losses and earn a reasonable margin instead of fighting to survive.” Heck, we might even see some cell manufacturers engage in a little price gouging to recover from a decade of losses.
I can’t begin to predict what will happen when the battery industry begins to regain some pricing power, but I will invite you to engage in a thought exercise. Assume for the moment that battery manufacturers find themselves with effectively unlimited pricing power and decide to charge $1 per wh for their products instead of the current industry average of $0.28 per wh. Outfits like Apple that need 10 wh of battery capacity for a smartphone or 50 wh of battery capacity for a portable computer should be able to comfortably absorb the battery cost increase or pass it along to customers. When you step into the EV world where 24,000 wh packs are “so yesterday” and 60,000 to 90,000 wh packs are the “new normal” the impact could be devastating. This example is extreme bordering on the ridiculous, but it highlights the inescapable reality that manufacturers of high-value products that only need a little battery capacity will be better positioned to survive the cobalt cliff than manufacturers of price-sensitive products that need a lot of battery capacity they don’t want to pay for.
It’s going to be fun to watch this trainwreck unfold.