The only word to describe the battery market in 2012 is mixed.
A look at a chart of the most recognizable names in the biz — China BAK, Exide, Johnson Controls, Maxwell Technologies, etc. — illustrates this perfectly:
Stocks in the battery sector turned in performances ranging from negative 60% to up 40%.
Indeed, the NASDAQ OMX Energy Storage Index (NASDAQ: ^GRNSTOR) was down 11% by December 2012, which perfectly reflects the middle ground between the extremes.
And the main topic of battery conversation this year wasn't a positive one...
A123 Systems, which was awarded a $249 million grant as part of the stimulus, was forced into bankruptcy. Instead of being the jolt to the industry many thought it would be, it ended up being the Solyndra of the sector.
The excitement around this MIT spin-off was fervent when it launched in late 2009 with a share price over $25.00... Today it trades for $0.02.
The same thing happened to battery maker Ener1. It had approval for $118.5 million in government grants. It received only half of them before it filed for bankruptcy and was delisted from the stock exchange.
But these negatives are only part of the story...
Like is happening in solar, the growth of any industry means some competitors will fail.
Across the cleantech space, international conglomerates are merging and acquiring their way into the space. And as I see it, that means two things...
It's a long word, but a simple concept.
In the early days of any industry, there are many competitors. And it's human nature to try to pick who the winner will be. But as the industry matures, products become more and more similar until there are few discernible differences — that is, the product becomes a commodity.
In many cases, it's not the product's but the manufacturer's ability to cut costs and increase profits that determines who the winner will be.
Computers and televisions are the prime examples of this phenomenon: The product becoming a commodity is why Chinese-owned Lenovo now makes ThinkPads instead of IBM. It's the same reason South Korea's LG now owns Zenith, which pioneered remote controls and HDTV.
Now the same thing is happening in batteries. A123 may now be bankrupt, but it's not because the lithium battery market is slowing down...
Instead, it's because it had to recall defective batteries made for Fisker and could not generate sufficient profits to pay off debts.
The lithium battery market is expected to grow almost 300% by 2020, from $11 billion in annual sales to $43 billion.
And has this happens, the selling price is falling. And that's what is hurting companies.
Selling prices for lithium ion batteries today are in the $500-$600 per kilowatt-hour range. That's expected to fall to $200 per kilowatt-hour in the next eight years.
Those who can't stay profitable as prices fall will fail. This is what happened to Solyndra in the solar industry, and what just happened to A123.
Like happened with IBM's ThinkPad, A123 batteries will carry on under a new Chinese name...
Though Johnson Controls (NYSE: JCI) bid to acquire its assets, Chinese firm Wanxiang ultimately bought them for $256.6 million.
#2 The Resource
While the battery manufacturing sector as a whole was down 11% in 2012, the same isn't true for the miners and processors of the materials necessary to make lithium batteries.
Two of the three top holdings in the Global X Lithium (NYSE: LIT) ETF — FMC Corp. (NYSE: FMC) and Rockwood Holdings (NYSE: ROC) — were each up more than 20% on the year in 2013.
In the past, only about 23% of produced lithium went to making batteries. With the increased lithium battery market slated to grow at over 18% annually, it could put a strain on lithium supply and send prices higher.
Between 2011 and 2013 alone, lithium demand grew 25%. It's expected to double by 2020.
And lithium prices are rising, too. Lithium carbonate hovered around $2,000 per tonne from 2000 to 2004, but then started rising with demand. By 2009 they were at $5,000 per tonne — and are expected to keep on rising.
These companies are increasingly signing lithium offtake agreements directly with major international conglomerates.
Canada Lithium (TSX: CLQ), for example, has signed a five-year lithium supply agreement with Tianjin Products and Energy Resources Development Co. for 12,000 tonnes per year.
Toyota has gone right to the source as well, partnering up with Orocrobre (TSX: ORL) to build the first large-scale brine-based lithium project in 20 years. It's expected to produce 17,500 tonnes per year.
And we can't avoid news about the Gigafactory and its thirst for lithium supply. Already several companies have signed agreements to supply Tesla (NASDAQ: TSLA) with supplies from the U.S., Argentina, and more.
As the lithium battery market continues to mature — which will include continued consolidation — it seems the smartest way to play it is through the international manufacturers and miners with access to the best resources, rather than take on unnecessary risk betting on unproven entrants.