An emergent class of vehicles being produced could very well change the future of the automobile industry. Commonly known as Zero Emissions Vehicles (ZEV and PZEV), almost every major automobile manufacturer is strategizing and poised to cater to the emergent demand for these higher fuel efficiency and less polluting vehicles. The underlying and differentiating technological component that makes this class of vehicles a viable, sustainable, and successful alternative to the solely gasoline powered internal combustion engine [ICE] automobile of yesteryear is the lithium-ion (li-ion) battery pack. The unique chemical properties of lithium, mainly its low atomic weight and its ability to ionize or lose electrons (i.e., electronegativity) make it possible to produce li-ion battery packs that are high in energy density, power, and spatial compactness relative to older generation lead acid, nickel cadmium, and nickel metal hydride based battery systems.
The global market for li-ion batteries has been increasing by more than 20% per year in the past few years (Ober / USGS, 2007). According to the USGS, li-ion and lithium-polymer batteries appear to have the greatest potential for growth. The world market for these rechargeable batteries was estimated to be $4 billion in 2005. Recently, Tesla Motors (Tesla Motors, 2008) started commercial production and delivery of their first ZEV, a solely battery powered roadster.
I believe that with the re-advent of the Battery Electric Vehicle [BEV] and Plug-in Hybrid Electric Vehicles [PHEV] slated for commerical delivery in 2010 (autobloggreen.com, 2008), the demand for lithium and lithium compounds is expected to soar exponentially from, what I believe, present near saturated production levels thereby straining domestic capacity. This hypothesis is based on consumption and prices of lithium and lithium based compounds for use in existing applications such as laptop and cell phone batteries remaining firm for the foreseeable future, and finding emergent uses in BEV / PHEV production.
Relative Future Demand
I would like to walk you through a simple exercise that will make you feel the potential demand for lithium based materials needed to make batteries to power the next generation of automobiles. The li-ion battery packs designed for ZEV / PZEV are complex systems that weigh between 400 - 1,000 pounds. Exactly how much lithium material is there in these li-ion battery packs is probably proprietary information, and it may be difficult to gauge that amount. Lets begin with something we do understand; a 15" Macbook Pro made by Apple Computer (NASDAQ:AAPL). This sleek laptop is equipped with a 60-watt-hour lithium-polymer battery pack capable of producing 85 Watts (18.5 Volts dc X 4.6 Amps) of power to run the laptop for approximately 5 hours. The li-ion battery system in the Tesla roadster on the other hand contains 6,831 li-ion cells and is designed to produce 200 kW of peak output power, but due to heat, drag, and friction efficiency losses, peak output is actually 189 kW at 8,000 rpm (teslamotors.com, 2008).
To produce 200 kW of peak power, the 375 volt li-ion battery system (Berdichevsky et al, 2006) will therefore need to draw on (200 kW X1,000 W/kW / 375 V) or 533 Amps of current. A simple ratio of the quantity of maximum or peak current required to power the roadster (533 Amps) and the laptop (4.6 Amps) tells me that the amount of lithium ion needed in the vehicle is (533 Amps / 4.6 Amps) or 116 X the amount of lithium in the laptop (here X is the simplistic magnification of the amount of lithium based compounds in rechargeable li-ion batteries). Compound ~100 by an annual production of 10,000 or even 100,000 vehicles, then multipy the result by 10 major automobile manufacturers worldwide, and we are looking at an additional demand of millions of units of lithium based materials.
Similarly, the Chevy Volt to be mass produced by General Motors (NYSE:GM) contains a more modest 16 kWhr (58 MJ) li-ion battery system (wikipedia.org, 2008). This is because, unlike the Tesla BEV, the Chevy Volt is a PHEV, and has a small gasoline powered ICE that generates power to recharge the li-ion battery system which in turn powers the electric drivetrain. The car can run on the li-ion battery system alone for a range of 40 miles. The vehicle is propelled by an electrical motor designed for a peak electrical output of 130 - 140 kW or a peak mechanical output of 120 kW (autobloggreen.com, 2008).
Technical specifications for the vehicle provided at the website rate the voltage for the battery pack to be 320 - 350 Volts, implying a maximum current draw of (140 kW X 1,000 W/kW / 320 Volts) or 438 Amps. So this answer should tell you the relative amount of lithium compounds necessary to produce the li-ion battery system for one car (compared to the amount required for the laptop), right?
Domestic Lithium Producers
Two companies that mine, refine, and produce commercial grade lithium and lithium based compounds in the United States are FMC Corporation (NYSE:FMC), and Chemetall GmbH, a German company that was acquired by US based Rockwood Holdings (NYSE:ROC) in 2004. Both FMC and ROC are well diversified with their product offerings and portfolios, but do derive significant revenues from their respective lithium divisions. Together, both companies have a virtual lock on domestic lithium production.
On May 1, 2008, FMC announced that they have elected Robert C. Pallash to their Board of Directors. What I find interesting about the appointment is that Mr. Pallash is a veteran of the auto industry and brings with him management experience having worked for auto part makers such as Visteon and TRW Automotive. I believe he may be the right individual to lead FMC into emergent automobile battery markets.
In the near term, I expect both FMC and Chemetall to announce lithium production and refining capacity expansions, or make significant investments in either new production, or add to lithium production assets by making overseas acquisitions. I don't believe competition in lithium markets will hurt margins for any company due to the potential for exponential demand growth of lithium based compounds.
Company Financial Analyses
On Friday, May 9, 2008, FMC closed above $67, a nice move from $58 when I first wrote the story on FMC at Seeking Alpha (The-Future of Battery Technology). According to Yahoo! Finance, the company trades at a very reasonable forward P/E (F P/E) ratio of 15. Analyst earnings per share [EPS] consensus estimates for FY08 are $3.97, up 28% from FY07 earnings. Revenue too, is expected to post double digit gains in FY08. ROC, the parent company of Chemetall GmbH, closed at $34.55. The company trades at a F P/E of 14. Analyst EPS consensus estimates for FY08 are $2.18, up from $1.87 earned a year ago. With the pricing strength in the materials and commodity sectors we have witnessed recently, I expect the company to continue to post good results.
Key statistics from ROC financial statements indicate that ROC has a high debt / equity ratio of 1.57 indicating that the company is highly levered but with assets in capital intensive plant, property, and equipment. Additionally, the current ratio of 2.32 indicates a very healthy ability to pay short term obligations. Operating margins for ROC is in the low double digits.
FMC and ROC both trade at reasonable valuations and offer investors a diversified and well hedged way to play the impending boom in lithium demand. I believe we are witnessing an unprecedented, but this time sustainable revolution in automobile production, thanks to the progress in battery systems, high gasoline prices, and an ever-conscious consumer demanding higher fuel efficient and less polluting vehicles.