Earlier this month, the Royal Swedish Academy of Sciences awarded the Nobel Prize in chemistry to three men who were one after the other pivotal for the development of lithium-ion batteries, the lightweight, rechargeable batteries that are at the heart of modern life, powering everything from mobile phones to laptops and electrical cars.
“These men have laid the foundation of a wireless, fossil-fuel-free society, and are of the greatest benefit to humankind,” the Academy declared.
The three elderly men, John B Goodenough, M. Stanley Whittingham and Akira Yoshino, playfully testing new materials more than 30 years ago, helped make batteries lighter, more powerful and more efficiently chargeable. It is their personal triumph that so far no better way has been found to store energy in a meaningful way.
Yet it is worrying too. In a world determined to avoid climatic Armageddon by switching to renewable power and battery-driven transport, exponential growth of battery production may lead to a scramble for raw materials, a race for production capacity and a growing burden of new environmental hazards.
While the three men were driven not by private gain but by scientific curiosity, collaborating from continent to continent, we face now a world increasingly driven by national rivalry and disregard for cooperation. The odds are stacked against another breakthrough in battery technology, and if it happened it will not be shared with the world.
On the basis of worldwide CO2 reduction goals as outlined by the Paris Agreement 2015, considering governmental regulations imposed on car manufacturers and the current growth rates for electric vehicles, consultants McKinsey assume that by the mid-2020s more than half of all private cars, vans, trucks and busses will be powered by electricity, and more than 70 per cent by 2040.
This would demand a ramp-up of battery production for European vehicles alone to 1.2 Terawatt – or 2,000 times more than Enemalta’s total generating capacity. Currently neither car manufacturers nor governments spend much thought on how this should come about, as we still tend to see the world governed by reliable supply chains and rule-based trade links.
Yet the US and China, the world’s two biggest economies, do not view each other as partners for global solutions anymore. They are both engaged in a standoff which is now not about trade impediments, the protection of intellectual property or fair play anymore. They both aim at ‘decoupling’, the untangling of supply chains with the long-term aim of national independence.
This is a strategy that does not look too promising in the long term, when thinking about the autarky attempts of the former Soviet Union, for instance. It is tempting to put all the blame on the current US government, which seems hell-bent to undo the post-war order America has so successfully helped to establish. But China has shuffled the cards much earlier, putting the might of the autocratic regime behind the technologies of the future.
Over the years, China has managed to secure the supply of essential raw materials by buying into mines, deposits and refining in other countries, from Congo to Australia, often in loans-for-assets schemes that proved irresistible for developing countries or governments with budgetary needs. It has secured transport routes and ports under its ever expanding One Belt, One Road initiative and fostered national champions with limitless credit and political support.
This is nowhere more obvious than in China’s battery production. Today, seven out of the world’s 10 biggest battery manufacturers are Chinese, including CATL, which alone represents 19 per cent of world production. The other countries leading the field are Korea and Japan. Together these three countries represent 97 per cent of the market, with factories all over the world.
The EU, with a production share of one per cent, is a sad minnow, which is alarming when one thinks how dependent Europe’s car manufacturers are to a ready supply of batteries, let alone to further research and development in a field which is of such paramount industrial importance.
The argument for governmental and corporate investment in battery production is convincing
Ironically, the few European actors prefer to invest in China, where knowhow, supply chains and skills can be found more concentrated, while China has an increasing foothold in Europe, at the doorstep of VW, PSA, FIAT and Daimler Benz. It seems car manufacturers cannot be bothered with developing their own batteries. Reaching for electric salvation could prove costly for all of them.
In a world without trade restrictions, embargoes or misrepresentations of trade relationships it wouldn’t matter who produces what as long as there is enough competition to keep prices down. It would be foolish as such to bemoan China’s important role in battery production.
As trade becomes increasingly the victim of populist politics though, and is viewed in terms of conflict, supplies of goods and services become a strategic weapon. Goods and ideas cannot flow unhampered. They are withheld, or admitted. The EU therefore needs to be concerned.
The argument for governmental and corporate investment in battery production is convincing, not only for car manufacturers. Putting money in research, development and manufacturing of battery systems or other e-storage solutions like hydrogen fuel would be a promising mitigation strategy for Big Oil too, which is increasingly pressed to consider the environmental impact of its customers.
With the right pricing policies and tax incentives, future European e-car fleets could form large buffer storage for renewables, from wind farms to photovoltaic installations, which already have to give away electricity for free at peak generation and necessitating the preservation of environmentally harmful, fossil-fuel power plants as a backup.
Sadly, most Green parties in Europe, so successful in Germany and Austria in recent elections, have deep-rooted anti-market instincts and are therefore loath to team up with big corporations in the search for market-based solutions.
Now how can retail investors like us profit from a predictable rise of the battery market? Or from the rising need of essential raw materials like lithium and cobalt?
Lithium is one of the core ingredients for battery production and would therefore be expected to profit from a booming production. Yet the shares of the world’s biggest producers of lithium outside China have fared badly over the last years – despite an exponential growth in demand.
Albemarle Corporation, a €6.7 billion company, has more than halved in value over the last two years, and Livent, its smaller US rival, has lost 62 per cent of its share price. Both are comparably cheap, with a P/E of 11 and 9 respectively. Their peer, Sociedad Quimica y Minera de Chile has performed equally badly since 2017, and with a P/E of 20.11 seems unreasonably expensive too.
The world’s biggest cobalt producer, Glencore, is not a good bet on cobalt, as the Swiss mining and trading giant is a world leader in coal, oil and copper too. But its share price has suffered, despite its oversized role in cobalt.
Battery producers, if anything, have fared even worse. CATL, the €20 billion, Chinese behemoth, has lost 25 per cent value in 12 months. Korea’s LG Chem (seven per cent market share) dropped 69 per cent in the last two years. It is worth approximately €18 billion today, less than CATL. And Panasonic, the world’s second-biggest battery manufacturer (16 per cent market share) and partner of Tesla, the technology leader in EVs, has also halved in value since 2017. It is cheaper than its competitors (P/E 7.25) and pays a hefty dividend (3.48 per cent) when compared to Japanese government bonds. Its market capitalisation of 2.11 trillion yen (€21 billion) is today not much more than the total value of its assets (price to book value 1.09).
None of these companies fulfil the hopes kindled by the narrative of a bright, irresistible future for batteries. Each of these companies strays from their investment storyline differently. Glencore, for instance, is out of favour because of its coal investments, and because of large-scale bribery accusations. Lithium suffers from abundance. Others have trade issues with China, or governance problems, or bad debt. All suffer when stock markets hesitate or start to worsen.
This does not prove the good story wrong. It just proves that a good story should never be the rationale for an investment decision. A company is more than the parts told, sadly.
Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance. The purpose of his column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.
andreas.weitzer@timesofmalta.com