WR1 General Discussion, page-32757

You are looking at this at a totally one dimensional and isolated part of a broader battery / EV supply chain.

What is really happening is the likes of CATL and BYD they are the ones owning the so called African , China spod mines - they can take the "loss" to get the spod whilst they make their money downstream in the final battery end product and/or EV -

Since the Western markets started closing up their mines to Chinese companies, that was the only alternative they had.
Had the West not closed off and become protectionist , the chinese battery makers would be making deals to own stakes of Western lithium mines .

As for the incumbent Western mines operators like PLS, Greenbushes, South American mines they are still selling to China, at say USD750/ton and average this out with African or Chinese "loss" making spod costing even at USD1000/ton , the dollar cost averaging is only USD875/ton - and all these incumbent producers are capable of swamping the markets even if the spod prices rises - and the market again will go back into oversupply imbalance and prices will head back down.

https://kr-asia.com/battery-giant-catl-turns-conservative-to-sustain-profits-amid-price-war

In an industry scrambling to cut costs, Contemporary Amperex Technology (CATL) continues to boast substantial profits.

On the evening of July 26, CATL released its first-half 2024 results, revealing that in the first half of this year, the company achieved total revenue of RMB 166.77 billion (USD 23.03 billion), a year-on-year decrease of 11.88%. However, its net profit attributable to shareholders reached RMB 22.87 billion (USD 3.16 billion), a year-on-year increase of 10.37%.

Since the beginning of this year, BYD’s claim that “electric is cheaper than oil” has triggered a price war, which escalated with the launch of the fifth-generation DM. This price war inevitably affected the battery segment, leading to unavoidable price cuts for CATL, which has passed on much of the cost pressure to upstream suppliers.

Due to its large procurement volume, CATL can secure lower procurement prices. According to 36Kr, CATL’s purchase price for lithium iron phosphate (LFP) materials is about 10% lower than the industry average.

The cost pressure on battery companies has significantly reduced profits along the supply chain. In the first quarter of this year, the profit margin of separator, electrolyte, anode, and cathode companies have dropped to 10%, 5%, 0%, and -6%, respectively.

Anomalies in material costs have also emerged. Industry insiders told 36Kr that the most resilient price is that of copper foil, which used to account for about 8% of battery costs but now accounts for nearly 20%, the highest after cathode materials. Copper prices are said to not follow the price trends of the battery supply chain.

Although the power battery market is still in a growth phase, the competition is so fierce that low prices have become the norm, leading companies to cut back on investments in innovation and new technologies struggling to gain market acceptance.

Reflecting this in its financial report, CATL’s R&D investment in the first half of the year was RMB 8.59 billion (USD 1.19 billion), down from RMB 9.85 billion (USD 1.36 billion) in the same period last year. The number of R&D personnel also decreased by 846 people.

CATL’s profit strategy: Reduce upstream costs and expenses

CATL’s industry dominance lets it navigate price fluctuations with ease, maintaining its profit margins. When lithium carbonate prices soared in the first half of 2022, CATL quickly adjusted prices for automakers, sparking claims that “car manufacturers are working for CATL.” Now, amid an automaker price war, the pressure to cut costs on power batteries—the most expensive component—has intensified, prompting CATL to shift these costs upstream.

In the first half of the year, CATL’s battery product prices fell, leading to increased shipments but only RMB 166.77 billion in revenue, a year-on-year decrease of 11.88%. However, costs fell more sharply, with operating costs dropping to RMB 122.518 billion (USD 16.92 billion), a year-on-year decrease of 17.39%. As a result, net profit reached RMB 22.87 billion, a year-on-year increase of 10.37%.

In the first half of the year, CATL’s gross profit margin for power battery systems was 26.90%, and for energy storage battery systems, it was 28.87%, both well above the industry average.

CATL’s business also includes battery materials and recycling, and battery mineral resources. Similar to BYD’s vertically integrated supply chain, Guangdong Brunp, focused on recycling, has become one of CATL’s main suppliers of cathode materials. Upstream, CATL’s lithium mining operations span North America, Australia, Africa, and South America, and it holds stakes in nickel mines in Indonesia and copper-cobalt mines in Africa.

The benefits of vertical integration are not only in self-supply but also in understanding the cost structure of the supply chain, enhancing bargaining power upstream. This bargaining power is especially evident now, with the entire supply chain under pressure to cut costs.

CATL stated in its earnings call that the company’s unit profitability remained stable in the second quarter. With the prices of resources and raw materials like lithium carbonate falling, this linked to a decrease in the unit sales price of products, thereby increasing the gross profit margin.

Of course, CATL’s profits come not only from reduced raw material costs but also from reduced expenses. During a business upswing, leading companies usually hide profits and lower market expectations, but once the business stabilizes, they release profits.

BYD, with its rapidly increasing car sales, represents the former, with revenues exceeding RMB 600 billion (USD 82.85 billion) in 2023 but a net profit of only RMB 30 billion (USD 4.14 billion), hiring many new employees and investing RMB 39.9 billion (USD 5.51 billion) in R&D.

In contrast, CATL’s battery business has stabilized, ensuring profitability despite declining revenues. Amid the price war, CATL has started to cut expenses and release profits to stabilize its stock market price.

In the first half of this year, CATL’s R&D expenses were RMB 8.59 billion, down from RMB 9.85 billion in the same period last year. As of the end of the reporting period, the company had 19,758 R&D personnel, down from 20,604 at the end of 2023, a reduction of 846 people.

Overall, CATL has entered a stable period. Even amid intense price wars, it can still ensure its profitability.

Developing the overseas market will be CATL’s next growth point, but the future holds many uncertainties.