'Raw Material Price Collapse' Contrarian Opportunity... Electric Vehicle Battery Companies Stockpiling Inventory

[Asia Economy Reporters Soyeon Park, Yoonju Hwang] The prices of nickel, cobalt, and manganese (NCM), the main raw materials for cathode materials in electric vehicle batteries, have plummeted, significantly reducing the cost burden for domestic battery companies. While major global companies are cutting production due to the shock caused by the novel coronavirus (COVID-19), Korean electric vehicle battery companies, which had been struggling with cost pressures, are instead considering a contrarian strategy of stockpiling raw materials and increasing production.

According to the Korea Resource Information Service on the 1st, the price of nickel, a raw material for electric vehicle batteries, fell 19.42% from $14,000 per ton at the end of last year to $11,280 per ton as of the 30th of last month. Nickel is an essential raw material for making high-capacity batteries, and increasing the nickel content in cathode materials helps extend the driving range per charge of electric vehicles, leading to a surge in demand. The industry expects an additional annual demand of 900,000 tons of nickel in the battery sector by 2030. The price of cobalt, also used as a battery raw material, dropped 9.2% from $32,500 to $29,500 per ton during the same period. Manganese prices fell 6% from $1,165 to $1,095.

Domestic battery companies such as LG Chem, Samsung SDI, and SK Innovation had closely responded to market conditions as NCM prices surged until early this year. Cost management directly affects battery profitability and production volume. LG Chem signed a supply contract with Umicore, the world's leading cathode material company based in Belgium, to receive a total of 125,000 tons of cathode materials starting from 2020. Under a contract with POSCO Chemical, LG Chem will receive cathode materials worth 1.85 trillion won from 2020 to 2022. Samsung SDI produces cathode materials at its Ulsan plant through its subsidiaries and procures shortages from multiple partners such as EcoPro, with direct supply contracts for cathode raw materials. SK Innovation also signed purchase agreements for cobalt sulfate and nickel sulfate, cathode material components, with Australian mining company Australian Mines.

In line with the recent downward trend in NCM prices, domestic battery companies are considering increasing inventory levels while boosting battery production. Of course, this contrarian strategy is not without risks. If the US and European markets do not recover quickly amid the global economic downturn caused by COVID-19, inventories could simply accumulate.

The current situation is not bad. Despite the spread of COVID-19, LG Chem, Samsung SDI, and SK Innovation's combined global electric vehicle battery market share surpassed 40% for the first time ever. This is attributed to the sharp decline in market share of CATL, the leading battery company in China, due to the Chinese market slump. According to energy market research firm SNE Research, LG Chem's battery market share in February was 29.6%, up 6.7 percentage points from 22.9% in January. Samsung SDI (6.5%) and SK Innovation (5.9%) also increased their shares by 1.4 and 3.1 percentage points respectively compared to the previous month. The combined share of the three domestic companies rose to 42.0%, more than double the 20.9% recorded in February last year. Meanwhile, China's CATL experienced a 46.8% year-on-year decline in usage in February, with its market share dropping significantly from 20.7% to 9.4%. This is due to the continued slump in the Chinese market caused by domestic and external factors including COVID-19.

A battery industry official said, "While demand for electric vehicle batteries remains strong and prices have not fallen significantly, the sharp drop in raw material prices such as NCM is expected to help restore profitability. We are managing inventory and production mainly at domestic production lines and operational plants in China to respond accordingly."