1/ Too Much of a Good Thing: Production capacity for li-ion type batteries will reach 1.5 Terawatt Hours in 2024, an increase of 42% year on year… The problem is, we don’t need that many batteries yet! Factory utilisation rates will fall from 80% to 74%, but they’ll still be a huge surplus. This means cheap and plentiful batteries, mostly LFP-type from China, will be widely available. These cells aren’t typically suitable for Electric Vehicles (EVs) as they don’t have the required warranties to go into a vehicle. Home battery anyone? They’ll be very cheap! Indeed, there’s about 300 GWh of battery cell production capacity that won’t have a home. Almost all of it’s in China. Outside of China most batteries are already sold under long-term contract. Companies like NorthVolt, LG Chem and Panasonic have order books years and years out for EV batteries and will be largely shielded from the mammoth oversupply.
2/ China’s in Trouble: China can deploy entire industries at an unprecedented speed, that’s why it controls 70-90% of many manufacturing parts of the battery supply chain (see Chart). The flip side, this is done without caution or long-term planning, the sector is massively overheated and over-invested in China. For example, the amount of cathode capacity announced in China in 2023 is 2-3 times what’s needed. It won’t all happen, but that side of the supply chain will remain in excess capacity for years to come. What does this mean for Chinese industry? Well, it will need to export its way out of overcapacity. Batteries in (excellent) Chinese EVs, batteries in electronics, batteries for grid storage… The total vehicle market won’t go up 42% in a year however, nor the number of laptops, phones and drills we buy. The Energy Storage System (ESS) grid storage market will see a HUGE surge of cells to compliment solar and wind storage. Furthermore, ESS markets do not face protectionist trade barriers (largely because ex-China there isn’t really an ESS battery production industry yet). Incidentally, this a nice win for the Energy Transition!
3/ What About LFP? Lithium Iron Phosphate was the story of 2023, but surprisingly Nickel Cobalt Manganese (NCM) is still holding its own. In Europe and North America most EVs want real world range of ~300 miles for intercity trips, and that’s still NCM territory, and that’s still what’s being built and deployed in Europe and the US. Lower nickel prices have also meant high nickel batteries can go into much cheaper EV’s than a year ago. Interestingly, cobalt is almost immaterial in terms of NCM battery costs these days... The Design to Cost and Design to Performance sides of the market are both seeing stella growth, and there will not be one winning technology in EVs and batteries. It’s important to remember in forecasting battery types that the automotive sector isn’t really a rational market. We shouldn’t have a billion vehicles sat depreciating on private driveways, we shouldn’t have sports cars and limousines, but we do.
4/ Legacy Auto Figures It Out: The NCM/ LFP split also fits well with what legacy automotive companies are coming to realise. They can not win in all sectors of the market. Stick to the big bucks, long-range, premium, all-look-the-same SUV type EVs. It’s sad, but here we are. Battery tech is changing so quickly that EV’s battery packs need a refresh every 2-3 years, not the 7-8 year cycles of old. That’s hard, and it’s expensive. The solution. Market entry models from legacy automotive will mostly use purchased cells from CATL and other Chinese suppliers if they don’t want to lose too much market share. Often these suppliers will deploy factories in Europe. The US has effectively blocked Chinese investment by ring-fencing subsidies to non-Chinese players. A win for European OEMs they might not have realised yet!
5/ The Energy Transition Will Be Politicized: Politics have been more important than is often given credit for in the li-ion battery sector. It’s politics that has pushed automotive companies to switch to electric so quickly. Those billions of dollars invested have reduced costs and allowed not just EV’s but also the ESS industry to thrive. There’s also a LOT of ignorance when it comes to EVs, batteries and battery supply chains, coupled with some of the laziest journalism around. The problem is, where there is ignorance, there’s an opportunity. An opportunity to create and exploit a division in society. Expect EVs and the wider Energy Transition to be increasingly politicised. This could lead to walk backs on policies and subsidies such as the Inflation Reduction Act, and policies to end internal combustion sales. This is especially the case as (again, excellent) Chinese EV’s begin finding homes outside of that country.
