Special Report: Special Report: Investing in Lithium Batteries

The only word to describe the lithium battery market today is mixed.

A look at a chart of the most recognizable names in the biz — Panasonic, LG Chem, Johnson Controls, Samsung, etc. — illustrates this perfectly:

Lithium Update SM

(Click Image to Enlarge)

Since the beginning of 2016, stocks in the battery sector have turned in performances ranging from negative 27% to positive 37%, and everywhere in between.

Indeed, the NASDAQ OMX Energy Storage Index (NASDAQ: GRNSTOR) was up 5.8% by February, 2017, 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, with its Japanese partner Panasonic. Together, the two constructed and have brought online 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 (NASDAQ: TSLA) that's getting the biggest boon out of this, but its partner, Panasonic. For three years running, the company has been the biggest supplier of EV batteries worldwide, a title it's not likely to lose any time soon.

But one of the biggest deals in the sector was between LG Chem and General Motors' Chevrolet, who teamed up to work on the car-marker's first all-electric vehicle. 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 Bolt and the Tesla Model 3 are both expected to be out in late 2017, and will have a similar battery capacities 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...

#1 Commoditization

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:

lithium 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 $250 to below $190 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 40% on the year.

Lithium by End Use 2017

Currently, about 39% 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 over $20,000/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!

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