Rechargeable Battery Market Update - Oct 8

[dan_s]

I am bullish on the rechargeable battery market. More specific: I am bullish on the companies that make the materials that go into rechargeable batteries. This is why I added Ero Copper (NYSE: ERO) to our Small-Cal Growth Portfolio and why I highly recommend that you register for our October 12th webinar. It is being hosted by Nouveau Monde Graphite (NYSE: NMG), which will soon be a major supplier of graphite for companies that make the batteries for electric vehicles.

BofA Equity Research update on the battery market 10/8/2021

We update the indicator with the latest EV battery industry data. Our latest reading of the
indicator shows all-time high at 106%, from 103% in August 2021. The indicator tracks the
trend in electric vehicle (EV)-battery-related revenues of 26 major value chain names, with a
focus on identifying the turning points.

Indicator suggests battery revenue growth will accelerate
We remain bullish on the EV battery value chain companies. The current reading of our
indicator shows a continuation of the uptrend that began in early 2020, suggesting
accelerating revenues in the coming quarters. Our positive view on the global EV/EV
battery sector is based on our expectations of (1) the proliferation of US EV market
(reshoring) and potential beneficiaries among Korea EV battery producers (SK Innovation,
etc); and (2) secular growth in EV battery materials firms, driven by another round of capex
cycle kicking in the EV battery industry in the coming decades, due to potential sold-out
situation in 2025.

The BofA Global EV Battery Value Chain Indicator is a proprietary tool that tracks the EV battery
revenues of major value chain companies globally. The 26 companies selected are the major
listed producers of cathode, anode, separator, binder, lithium, cobalt and EV battery cell, with an
average revenue exposure of 65% to EV-battery-related businesses as of 2Q21.

The steps taken to construct the indicator are briefly laid out below.
Inputs. Given the EV battery industry is still in the nascent stage, it is relatively less
impacted by macro factors, leading us to focus on industry-specific factors only. We
started out with an exhaustive list (100+) and filtered down to 20 leading components
that have historically influenced EV battery revenues. These components can be broadly
categorized into three groups: (1) EV sales and battery shipment volume, (2) raw
materials consumption volume and pricing, and (3) chemical components pricing.

Special attention was paid to the timing aspect of input variables, selecting only those
data series that are leading in nature taking into account their release times as well – e.g.,
if a data series leads the target variable by one month but is released with a delay of two
months, it would not be considered as a leading indicator.

Construction. The indicator is constructed using an equal-weighted average of the YoY
growth in the input variables in standardized form. Our preference for a simplistic
approach over more sophisticated approaches stems from the fact that the increased
complexity does not justify the marginal increase in accuracy, while helping to avoid
over-fitting issues at the same time.

It is to be noted that not all variables are available from the starting date of the analysis
– data for 14 variables were available at the start of our analysis in 2017, with full
availability starting only in November 2018. We believe the period since 2017 is
comprehensive enough to support the robustness of the indicator.

Current reading. Since bottoming out in December 2019, the indicator has been in a
consistent uptrend, with the latest reading suggesting accelerated revenue growth of EV
battery businesses of our selected companies in 2Q21.

EV battery to post CAGR 57%; US$354bn TAM by 2030E
We estimate global xEV (pure EV or plug-in hybrid vehicle [PHV]) to post 36% CAGR in
2020-25, with penetration rising to 23%/67% in 2025/40, vs. 6.2%/9.6% in 2020/21. We
expect global xEV battery demand to rise to 1,556GWh in 2025 (CAGR 57%) from
162GWh in 2020, with total addressable market (TAM) of US$354bn in 2030 (up nearly
17x vs. 2020). Key drivers include: (1) continued regulatory push prompting higher EV
sales by auto original equipment manufacturers (OEMs)to meet the strict CO2 emission
targets (95g/85g CO2/km in 2021E/25E from 122.5g CO2/km in 2018), and the Dual
Credit Scheme in China; and (2) greater willingness by customers to shift to xEVs,
prompted by subsidies expansion and tax incentives. We project battery capacity for
battery electric vehicle (BEV) to rise to 128KWh by 2030 from 54KWh in 2021 on
average.

Steady decline in battery cost; next-gen batteries in store
We expect high-nickel batteries (NCMA/NCA, 80%+ nickel content) to exhibit the highest
growth (CAGR 71%/37%, vs. 34% average), with their market shares rising to 35%/23%
in 2030, from 2%/18% in 2019, given their high energy density. Meanwhile, we see
market share of lithium iron phosphate (LFP) battery staying at 21% in 2030, on par
with current levels, given its continued demand growth in China (including E-Bus) for
blade cell and cell-to-pack (CTP) due to cost advantage but at a lower CAGR (33%) than
that of high-nickel batteries.

Cost likely to fall to US$104/KWh by 2025E
In our view, EV battery pack cost appears set to decline to US$104/KWh in 2025 from
current US$175/KWh (around CAGR 10%), mainly driven by technological breakthroughs
in major components (higher nickel cathode, silicon anode, thinner separator, and
improved manufacturing process). We continue to expect that high-lithium, nickel cobalt
and manganese (NCM) battery will remain a mainstay to 2030, while we see
opportunities emerging in next-generation batteries such as lithium sulfur and all solid
state batteries in the latter part of the decade.

During next Tuesday's webinar Eric Desaulniers, President & CEO of Nouveau Monde Graphite (NYSE: NMG) will update us on the graphite supply that underpins all lithium-ion batteries powering the electric vehicle and renewable energy storage revolution. As the top choice of manufacturers, natural graphite is set to face EXPONENTIAL GROWTH IN DEMAND. You can register for the webinar from the EPG Home Page or send an email to Sabrina at energyprospectus@gmail.com

If you'd like to get the full BofA report mentioned above (11 pages with lots of charts and a list of the companies in their EV Battery tracking database) send me an email and I will forward it to you dmsteffens@comcast.net