[Bojo, Battery] Realized Contraction and Speed Adjustment... This Year's Reliance Is on Lagging

LG Energy Solution Posts Losses Without AMPC
SK On Records Contraction Early in the Year
Raw Material Prices Rebound... Lagging Effect Is the Only Hope

Editor's Note'Bojo, Battery' is a series that takes a closer look at the battery industry, which has emerged as the center of next-generation advanced industries. It examines the agile movements, strategies, and conflicts among governments and companies worldwide vying to dominate the battery manufacturing ecosystem. We will also cover the technological competition to create safer and longer-lasting batteries. We aim to serve as an 'assistant' to readers and investors by enhancing and supporting their understanding of the battery industry. We will share battery stories that are easy to approach.

The feared contraction and slowdown in the electric vehicle (EV) and battery markets are becoming a reality. This is due to the global economic downturn continuing since last year and the oversupply issues originating from China. Recently, the battery industry has raised concerns that even battery cells might experience 'negative growth' as exports of the key raw material, cathode active materials, sharply decelerate.

According to market research firm SNE Research on the 10th, SK On recorded a growth rate of -7.1% (4.2GWh) in battery usage for electric vehicles (EV, PHEV, HEV) in the global market excluding China during January and February this year, indicating negative growth. SK On was significantly affected by sluggish sales of Hyundai Motor's Ioniq 5 and Kia's EV6, but with the global expansion of EV9 sales, a turnaround to growth is expected in the future.

At the 2024 INTER BATTERY held last month at COEX in Gangnam-gu, Seoul, after the opening ceremony, Kang Kyung-sung, the 1st Vice Minister of the Ministry of Trade, Industry and Energy, Kim Dong-myung, CEO of LG Energy Solution and Chairman of the Korea Battery Industry Association, Lee Seok-hee, President of SK On, Choi Yoon-ho, CEO of Samsung SDI, and other battery company representatives visited the SK On booth to listen to explanations from the staff.
[Image source=Yonhap News]

American automakers Ford and GM have announced delays in electric vehicle model mass production one after another. Volkswagen also indefinitely postponed the battery factory planned for Eastern Europe last November. Mercedes-Benz announced in February that it would delay its electrification goals by five years. Hyundai Motor Group has also announced plans to delay its electrification targets from the original schedule.

The weakening front-end demand is immediately impacting the performance of domestic battery companies. LG Energy Solution disclosed on the 5th that its consolidated operating profit for the first quarter of this year was 157.3 billion KRW, a 75.2% decrease compared to the same period last year. Excluding a tax credit of 188.9 billion KRW from the Advanced Manufacturing Production Tax Credit (AMPC) under the U.S. Inflation Reduction Act (IRA), the company recorded an operating loss of 31.6 billion KRW for the quarter. Sales also dropped 29.9% year-on-year to 6.1287 trillion KRW. Although Samsung SDI and SK On have not yet announced preliminary results, evaluations suggest that their first-quarter performance this year is also clouded by uncertainties.

No Retreat for Batteries Despite Electric Vehicle Setbacks... This Year's Hope Lies in Lagging

Despite this situation, battery companies’ factory construction and mass production plans remain firm. This is based on the judgment that electric vehicles are a 'path that must be taken anyway.' Even if electric vehicle mass production plans are delayed by one to two years, it takes a similar amount of time to improve the yield (good product rate) of battery factories, so preparations will continue for the time when electric vehicles regain popularity.

LG Energy Solution officially started operations of the second Ultium Cells plant in Tennessee, U.S., a joint venture with General Motors (GM), on the 2nd, and on the 4th announced the groundbreaking of a standalone plant in Arizona, U.S., to produce cylindrical 46-series batteries and lithium iron phosphate (LFP) batteries for energy storage systems (ESS).

Michael Adams, CEO of BlueOval SK, a battery joint venture between SK On and Ford, explained, "Ford’s announcement of some electric vehicle production delays does not affect the timing of BlueOval SK plant mass production." He added, "The Tennessee plant and Kentucky Plant 1 are scheduled to begin mass production in 2025 as planned, and construction of Kentucky Plant 2 is also ongoing." An industry insider said, "Batteries can be produced and stockpiled before being installed in electric vehicles, and the ramp-up process (expansion of production capacity) is also necessary, so the battery mass production schedule is unlikely to change significantly."

There is one positive factor for the battery industry experiencing a 'Kazoom' (temporary stagnation in a growth industry). Raw material prices are showing signs of a rebound. Raw material prices continuously declined last year due to weakened front-end demand and increased supply. The price of lithium carbonate exceeded 580,000 yuan (about 108.5 million KRW) in November 2022 but fell to around 86,000 yuan (about 16.08 million KRW) by December last year. However, as mining and refining companies announced production cuts due to the price decline, the market is evaluating that raw material prices have bottomed out.

Rising raw material prices positively affect cathode active material and battery cell prices. Cathode material companies sign contracts linking mineral prices such as lithium and nickel to product prices. The product price is based on the mineral price at the time of selling the final product, not when purchasing the minerals. When mineral prices fall, companies buy high and sell low, but when prices rise, they buy low and sell high. The increase in product prices leading to higher margins when products are actually sold is called the 'Lagging Effect.' Battery companies are placing hopes on profitability improvements this year due to the lagging effect.