A look at a chart of the most recognizable names in the biz — Panasonic, LG Chem, Johnson Controls, Samsung, etc. — illustrates this perfectly:
(Click Image to Enlarge)
Since the beginning of 2015, stocks in the battery sector have turned in performances ranging from negative 25% to positive 25%, in the least symmetrical way possible.
Indeed, the NASDAQ OMX Energy Storage Index (NASDAQ: GRNSTOR) was up 11% by June 2016, leaning more to the up-side of the market than the middle ground.
And the main topic of battery conversation this year was wildly positive, despite the drawbacks from some of the major producers...
Of course the biggest name in the game has been Tesla Motors, with its Japanese partner Panasonic. Together, the two funded and are constructing the world's first Gigafactory. The $5 billion factory will manufacture lithium batteries for Tesla's line of electric vehicles and Powerwall systems.
This has sparked a new round of interest in electric vehicles. Most — if not all — of the world's major car-makers are planning to roll out one or more EV's in coming years. Most are due to be on the road by 2020.
Oddly enough, it's not front-running Tesla that's getting the biggest boon out of this. South Korean LG Chem, which already manufactures lithium batteries for a number of hybrid cars, is being flooded with new business.
One of the biggest deals in the sector is between LG Chem and General Motors' Chevrolet. The Chevy Volt is already one of the most popular choices in hybrid cars, and the upcoming Chevy Bolt may well take the EV spotlight from Tesla.
The car is slated to come out around the same time as Tesla's Model 3, will have a similar battery capacity and price.
But not matter who wins, there's no denying the amazing growth of the EV market, and consequently of the lithium battery market.
But these positives are only part of the story...
As is happening with 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. And that can sometimes be a matter of who can make the most in the cheapest way possible.
Tesla's may be the biggest factory around, but many companies produce from megafactories whose capacity is booming with demand:
Inevitably, only the best companies will survive the next wave of acquisitions and mergers.
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 LG Chem now owns Zenith, which pioneered remote controls and HDTV.
Now the same thing is happening in batteries. And it's not in the least because business is bad.
The lithium battery market is expected to grow monumentally. Navigant Research estimates that the automotive battery market will grow from just $7.8 billion in 2015 to $30.6 billion by 2024! Utility scale energy storage will add another $8.44 billion annually.
And that's not even counting the usual suspects: mobile phones, tablets, laptops, and other rechargeable household devices.
As this happens, the selling price is falling. And that's what is hurting companies.
Selling prices for lithium ion batteries today range from $350 to below $200 per kilowatt-hour, down from the average of $500-$600/kWh just a few years ago. That's expected to fall below $100/kWh within the next six years.
Those who can't stay profitable as prices fall will fail. Take, for example, the story of Seeo.
The startup was founded in 2007, and aimed to improve upon a nano-structured battery design originally developed at Lawrence Berkeley National Laboratory.
But Seeo quickly found out how competitive and costly the lithium battery industry really is. High cash burn and low success rate made it ripe for buying.
Bosch bought the company out in late 2015. And it wasn't because Seeo's ideas were bad; in fact, its solid-state battery design was an extremely valuable one.
The startup just couldn't afford to keep it up alone. And now its research — and its profits — fly under the banner of Robert Bosch LLC.
#2 Resource Scarcity
The M&A action isn't just going on in the battery production segment: miners of the most important ingredient are in the game as well.
Two of the top holdings in the Global X Lithium (NYSE: LIT) ETF — FMC Corp. (NYSE: FMC) and Sociedad Quimica y Minera De Chile S.A., better known as SQM (NYSE: SQM) — are each up more than 22% on the year.
Currently, about 35% of produced lithium goes to making batteries. With the lithium battery market slated to grow at over 22.8% annually, it will begin to put a strain on lithium supply, and send prices higher.
In fact, prices are already rising. In 2009, lithium carbonate hit $5,000 per tonne; today, it can be sold for as much as $15,000/tonne.
Companies with high production and high-quality product are winning out here. Lithium mining has quickly become the place to be, with even oil majors buying up-and-coming lithium players.
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. Don't get caught betting on an unproven entrant into this highly competitive market!