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Analyst sees '10 years of chaos' for battery-makers amid rapid growth

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Tesla, which supplied this 100-MW battery system at a wind farm in South Australia in 2017, is eyeing projects roughly 10 times larger.

Source: Tesla Inc.

Manufacturers of lithium-ion batteries face a bumpy ride as they race to expand their factories tenfold over the next decade to meet surging global demand for electric vehicles and energy storage systems, an industry analyst said.

"In effect, we are going through 10 years of chaos to create a new blueprint [that] will underpin the way we use renewable energy and the push for electric vehicles," Simon Moores, managing director of Benchmark Mineral Intelligence, said in a recent interview. The firm, which examines raw materials used in energy storage systems, believes battery makers will experience "short-term bottlenecks" for critical materials such as lithium, cobalt and nickel, causing potential manufacturing delays for some of the roughly 40 lithium-ion "megafactories" planned through 2023, Moores said. "Everything is going to be quite volatile."

Already signs of turbulence are appearing. In the first quarter of 2018, lithium-ion battery producers Samsung SDI Co. Ltd., LG Chem Ltd. and Panasonic Corp. (which makes cells independently and in a joint venture with Tesla Inc.), boosted their combined revenues to $3.53 billion, nearly 37% higher than a year ago, on strong demand from EV and energy storage developers.

But supply chain pressures and manufacturing delays shaved a few points off that growth rate. Tesla's delays in ramping up production of its mass-market Model 3 sedan, for instance, cost Panasonic approximately ¥30 billion in its 2018 fiscal year, which ended March 31, CFO Hirokazu Umeda told analysts on a May 9 earnings call. "It may be difficult to make a very fast catch-up, but eventually, we will make a catch-up," he said. The company's rechargeable battery business posted a ¥1.8 billion operating loss for the fiscal year on ¥422.1 billion in sales, which were up nearly 60% from a year earlier.

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Growing pains

Moores expects the Tesla-Panasonic partnership to grab a quarter of an estimated 870 GWh of global lithium-ion battery manufacturing capacity by 2028, while facing increasing competition from Chinese producers Contemporary Amperex Technology Co. Ltd. and Warren Buffett-backed BYD Co. Ltd. The two companies are making a strong push for market share reminiscent of China's rise as the dominant producer of solar panels. In April, Chinese regulators approved Contemporary Amperex Technology's roughly $2 billion initial public offering in Shenzhen, according to Reuters, to drive its expansion. The company in March secured part of a €20 billion battery order from Volkswagen AG as one of several recent deals with Western and Japanese EV manufacturers.

Growth in China, which has become the largest market for electric vehicles, will likely add to the pressure on supplies of key battery metals. Benchmark sees the need to boost raw lithium availability by six or seven times by 2026 to feed demand for the metal from global battery factories. Bloomberg New Energy Finance, in a report issued May 21, said it does not expect a supply shortage in the next five to seven years, pointing to "significant increases in investment in new capacity" fueled by high lithium prices in recent years. As demand surges in the second half of the 2020s, however, further investments into lithium mining will be needed.

For now, cobalt is the bigger concern. Used in battery cathodes, the metal is highly concentrated in the politically volatile Democratic Republic of the Congo, which recently adopted mining reforms that could limit production. The geopolitical uncertainties, including upcoming elections, have exacerbated an already steep increase in cobalt prices. Since the beginning of 2017, cobalt prices have nearly tripled on the London Metal Exchange. "We view cobalt supply as one of the largest potential risks to EV sales over the next five to seven years," Bloomberg New Energy Finance said in its report.

Despite the raw materials challenges, battery cell prices have declined about 16% per year since 2014 and are on pace to drop under $130/kWh in 2018, Benchmark estimates. "The question is whether high raw material prices can maintain this or whether [battery cell] prices will start to come back up," Moores said.

Bearish on demand

Moores thinks forecasts have been too bearish in projecting battery demand from energy storage. "Storage is going about five times quicker than we anticipated two years ago," he said.

The scale of energy storage projects is growing. Tesla, for instance, which last year completed a 100-MW/129-MWh energy storage project at a wind farm in South Australia, plans to announce a project "at the gigawatt-hour scale within a matter of months," CEO Elon Musk said during a May 3 earnings call.

Canadian Solar Inc. subsidiary Recurrent Energy LLC is developing the 350-MW RE Crimson Solar Project (Sonoran West), with 350 MW of energy storage, in California, while a subsidiary of NextEra Energy Inc. is developing a 200-MW solar project with 200 MW of storage in Nevada. Grid operator interconnection queues in California and Arizona show developers are assessing numerous battery-based storage projects sized at 100 MW or above, even as large as 2,000 MW. As a whole, the U.S. energy storage industry is targeting 35,000 MW of additional storage by 2025.

Eventually, the industry is likely to overcome its growing pains. "Geologically and commercially, the reality is the minerals are there and the expertise is there, so they are not really bottlenecks in the long term," Moores said.

In the next 10 years, though, limited supplies of raw materials could temper the pace of the industry's growth.

As of May 21, US$1 was equivalent to ¥111.14.