European Battery Plant Expansion And Their Implied Lithium Demands

BYDDF, FCAU, LGCLF

Summary

Investment Thesis

Through a combination of emission regulations, growth in renewable energy initiatives, buyer incentives and pure economics, EV penetration in Europe is imminent. OEMs are planning ahead, no more so that Volkswagen (OTCPK:VWAGY) (OTCPK:VLKAF). Europe has correctly identified risks along the supply chain and the need for regional integration of the production process. VW has publicly stated its medium-term goal is to support lithium projects in Central and Southern Europe. There are very few economically viable projects in the region, leaving investors with a short list of listed equities to choose from.

Overview

The stringent new 2020 EU CO2 emission standards (95g per kilometre) are paving the way for the meteoric rise of electric vehicles (EVs) in the future. To meet the new standards, European OEMs will likely need to incorporate EV models in the form of full electric or hybrids. To incentivize this switch, many EU governments subsidize the purchase of energy efficient vehicles. News articles suggest that Germany is considering doubling subsidies for lower cost (EUR30,000 or less) EVs and raising subsidies for the balance (up to EUR60,000) to EUR2,500, up from EUR2,000. Potential fines for breaching the EU emission standards are severe, so much so that Fiat Chrysler (FCAU) plans to pool its fleet with Tesla (TSLA) to avoid fines as high as US$2.2bn in 2021 and 2022.

The transition to EV platforms isn't cheap for OEMs, and whilst battery pack prices are falling, Bloomberg NEF suggests upfront price parity for large vehicles will only be reached in Europe around 2022. In anticipation of future consumer demand, OEMs are having to commit capital upfront to adjust to the changes in the supply chain and car assembly. Typical OEM new model redesign cycles are 4-6 years, sometimes longer, meaning the shift to EVs needs to be carefully planned. Mercedes-Benz is looking to make its entire fleet carbon neutral by 2039 and mentions this is less than 3 cycles away.

Outsourcing cathode/battery cell/battery pack production for EVs to 3rd parties has been the preferred OEM strategy to date given the low capital outlay associated with that route. However, those suppliers have limitations on their rate of expansion and, more importantly, on determining the availability of raw materials for feedstock in the future. In recognizing these risks, VW released a "manifesto" acknowledging lithium as the "irreplaceable element in the electric era". In reaction to this acknowledgement, VW has signed an MOU for a 10-year offtake agreement with Ganfeng Lithium (1772 HK) for hydroxide. Additionally, VW has announced plans to partner with Northvolt to build a battery cell plant in Salzgitter, Germany. This will initially secure VW about 10% of its requirements and should it expand further, 20%. More OEMs are likely to recognize the merit in VW's logic and will follow suit and hedge more of their supply chain risks in time. For now, they are locking in battery supply from external parties, mostly Asian battery manufacturers, an example is Volvo (OTCPK:VOLVY), which recently signed 10-year deals with CATL and LG Chemical (OTCPK:LGCLF). Ideally, battery manufacturers should be located close to OEM car plants as this cuts delivery times and reduces the cost of transporting heavy battery cells.

New, existing and expansion plans for battery plants in Europe:

Source: Infinity Lithium

CATL: As auto manufacturer queries for batteries increases, CATL is revising its battery production plans. Originally, the company was planning 14 GWh by 2021, now, based on increased demand, the assumption is for 100 GWh by 2025.

Northvolt: The company has just secured a EUR350m loan from the EIB to build a plant planned to produce a total of 32 GWh, by 2023 in Sweden. This is the start of efforts by the EU to create local battery suppliers to compete with the established Asian players like CATL and LG Chem.

LG Chem: Announced an expansion plan for LG Chem Wroclaw Energy to triple its battery production from 4 GWh to approximately 12 GWh, enough to power roughly 300,000 EVs (assuming an average battery size of 40 kWh). The expansion is due to be completed by April 2021. Note the expansion is receiving a European Commission subsidy of EUR36m. LG Chem has an agreement to supply VW with battery cells for its ID.3 models.

SK Innovation (OTC:SKOVF): Is planning to invest US$859m in a new plant (7.5 GWh) in Hungary on top of the existing 7.5 GWh facility under construction in Komarom, Hungary. Mass production will commence at the start of 2022 once product certification is complete.

Samsung (OTC:SSNLF): Completed a US$358m plant in Hungary during 2018 capable of supplying battery packs for 50,000 EVs (estimated 3 GWh).

Farasis: Is planning to invest EUR600m to build a plant in Germany capable of producing 6 GWh to start, ramping to 10 GWh over time. The plant will produce cells, modules and potentially packs from 2022.

VW: As mentioned above, VW recently announced plans to partner with Northvolt to build battery cells in Salzgitter, Germany. The initial capacity will be 12 GWh with potential to grow to 30 GWh over time. VW's interim target is to produce 3m EVs per year by 2025, assuming an average battery size of 60 kWh, the plant would cover 20% of the company's needs. However, as VW is targeting the production of a total of 22m EVs by 2028, their annual output is likely to be ~5m-7m EVs by 2028 needing 300 GWh of batteries or more.

TerraE: BMZ has promised EUR300m of investment for the first phase to produce 4 GWh of cells. In the medium term, TerraE plans to expand output to 8 GWh.

Other potential investments into Europe could come from BYD (OTCPK:BYDDF), GSR Capital, Tesla and Blackstone Resources.

What is the implied lithium demand from all these battery plants?

The answer to that question depends on the effective capacity utilization of the plants once fully operational and the estimated lithium intensity per kWh of battery. Whilst intensity varies across cathode chemistries, the range is limited. Based on market feedback and discussions with Rho Motion, the most likely chemistries going forward to 2025 are NCM 622, NCM 811 and NCA. NCM will account for approximately 80%+ by 2025. Customer demand for a longer driving range and faster charging would translate into demand for higher nickel cathodes; however, as EV models are designed to retain their initial battery layout, the rise of NCM 811 adoption will take some time even though it's the preferred chemistry. Market consensus for intensity ranges between 0.8kgs/kWh - 1kg/kWh. For this analysis, I have used 0.9kgs/kWh. NCM 811 and NCA cathodes can only use hydroxide. NCM 622 is lithium agnostic and can use either carbonate or hydroxide.

Assuming an average effective capacity of 70% across all the planned factories and a total capacity of 210 GWh by 2023/2024, this equates to a lithium demand of 147 GWh x 0.9 = 132,300T, a high percentage of that demand will be hydroxide (~70% = 92,610T). Readers should take note that the entire lithium hydroxide market in 2018 was ~60,000T. Adjusting that estimate into segments, the supply of battery grade hydroxide, suitable for high spec lithium-ion batteries for EVs, was considerably lower. Production of hydroxide is forecast to rise substantially in the future; however, the majority of that growth is attributable to greenfield spodumene concentrate projects and greenfield chemical conversion plants. History suggests production ramp-ups at these new converters and product qualification by OEMs (or cathode producers) will be slower than forecast.

Globally, the anticipated battery cell capacity by 2023 will be 800 GWh or more. Assuming 80% effective capacity, that equates to 640 GWh and lithium demand of 576,000T. Even if we generously assume that demand for energy storage solutions is included in that estimate, the total lithium supply is estimated at slightly below 700,000T for 2023, with hydroxide at 297,500T. Industrial and electronic demand will be approximately 200,000T, that leaves less than 500,000T of available supply for energy storage. Based on these estimates, there will be a ~80,000T supply shortfall. Clearly, there could be delays in the construction of battery factories until more lithium supply is available. Longer term, post-2025, when battery demand increases substantially as EV penetration is anticipated to explode, supply issues will be unavoidable. Expect further MOUs and firm lithium offtake agreements to be announced as battery plants look to secure feedstock before construction.

European lithium junior companies that could benefit from the pending supply shortfall: VW stated in its manifesto that in the mid-term, the company had set the goal of promoting lithium production in Europe citing that there were relevant deposits in Central and Southern Europe. Ultimately, VW would like as many of the supply chain steps to be implemented in Europe, consistent with its "sustainability" objective.

The most notable projects located in Europe are:

Source: Infinity Lithium presentation

Conclusion:

Europe and in particular the EU has recognized the need to secure future battery supplies for EV production. The current reliance on Asian suppliers has been identified as a concern. Importantly, the EU has a coordinated strategy - offering incentives to buyers, strict CO2 emission standards and offering subsidies to battery companies to locate their plants within the union. Based on estimates for global battery capacity to 2023, there is a potential lithium shortage of ~80,000T. VW has stated that it would like all of the supply chain steps to be implemented in Europe. This includes lithium mining and chemical processing. With this in mind, there are a number of junior projects located in Europe that could be developed - standouts include European Metals Holdings Limited [ASX: EMH] (OTC:ERPNF), Infinity Lithium [ASX: INF] and Savannah Resources [ASX: SAV].

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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