[Bojo, Battery] Survival Strategies of Cathode Material Companies in the Era of Low-Cost Minerals

Declining Mineral Prices and Diversification of Procurement Methods
Increasing Subcontracting Structures and Strengthening Purchasing Capabilities
Direct Mining and Recycling Also Emerging as Alternatives

The survival strategies of battery cathode material companies are changing amid the decline in raw material prices. They are moving away from the traditional method of purchasing directly from mineral companies and adopting approaches such as consignment purchasing, adjusting purchase timing, recycling, and direct mining to reduce risks caused by the sharp fluctuations in raw material prices.

Cathode Material Companies Spent 13 Trillion KRW on Raw Material Purchases Last Year

Cathode active material is a key component that serves as the energy source of lithium-ion batteries and has the greatest impact on the battery's performance, safety, and cost.
[Photo by LG Chem]

On the 17th, the combined raw material purchase costs of the three cathode material companies?LG Chem (Advanced Materials Division), EcoPro BM, and POSCO Future M?reached 13.4759 trillion KRW last year. This figure is about three times higher compared to 4.6073 trillion KRW in 2021. Considering that the combined sales of the three companies were around 19 trillion KRW last year, cathode material companies spent more than 70% of their sales revenue solely on raw material purchases.

Cathode materials are mass-produced through processes such as mixing, baking, and coating raw materials like lithium, nickel, cobalt, and manganese. While the quality and price of cathode materials vary depending on the baking temperature and mixing methods, the raw material price has the greatest impact on the selling price. Price-linked contracts are mainly established, where cathode material and battery prices fluctuate in accordance with mineral price changes.

When mineral prices continuously rise, purchasing as much raw material as possible to manufacture products allows companies to apply higher selling prices reflecting the increased raw material costs at the time of sale. In this case, rising mineral prices actually reduce manufacturers' cost ratios and increase profit margins. However, when mineral prices fall and selling prices drop, inventory produced when minerals were expensive deteriorates profitability. Although price-linked contracts have the advantage of preserving profitability, they can also cause losses during periods of high mineral price volatility.

With the rapid increase in demand due to the popularization of electric vehicles, raw material prices, which soared significantly in 2021 and 2022, have been steadily declining since early last year. Cathode material companies have been incurring losses due to the 'reverse lagging' effect, where profits decrease because of the time lag in raw material input. In fact, since the second half of last year, the operating profits of cathode material companies have been on a downward trend. The prevailing forecast is that the first quarter of this year will record results around the break-even point (BEP). Recently, mineral prices have shown a slight rebound and stabilized. Cathode material companies must accept the downward stabilization of major mineral prices such as lithium and nickel as the new norm. While they have mainly procured directly from mineral mining and refining companies, their survival strategies are also changing.

Expansion of Consignment Purchasing Focused on Manufacturing... Strengthening Purchasing Capabilities, Direct Mining, and Recycling as Alternatives

Consignment contracts are increasing. Consignment purchasing refers to a structure where the parent company or customer purchases raw materials in bulk and supplies them to partner companies. Using this method allows cathode materials to be produced at a lower cost than purchasing raw materials at market prices. Thanks to the high proportion of consignment purchasing, where raw materials are procured in bulk from customers. In the past, cathode material companies procured raw materials directly from the market, but as raw material prices rose, the consignment purchasing method has gradually been adopted.

Joint ventures under construction in the United States generally follow this consignment structure. GM and LG Chem, GM and POSCO Future M, SK On and Ford with EcoPro BM produce cathode materials locally under this consignment structure. Finished vehicle manufacturers or battery cell companies procure raw materials such as lithium and nickel, while cathode material companies focus on production. Consignment contracts allow companies to maintain a certain level of profit even without separately procuring minerals, enabling stable business operations amid declining raw material prices. However, when mineral prices rise, the increased costs are not reflected, and only the added value from cathode material manufacturing remains as profit.

Direct procurement from mineral companies is also being refined. As contract types and purchase timing can significantly impact profits and losses, there is a trend toward strengthening purchasing capabilities. An industry insider explained, "From 2021 to 2022, despite high raw material prices, cathode material shipments increased, so we had to purchase raw materials reluctantly. Recently, as raw material prices have stabilized downward, we are strengthening purchasing capabilities to strategically decide purchase timing and volume."

The LG Chem Cheongju plant producing single-particle cathode materials in mass. Photo by LG Chem

The number of companies directly mining and refining minerals has also increased. This is a way to secure major minerals such as lithium and nickel at stable prices. POSCO Group will begin full-scale lithium production this year at the Ombre Muerto salt lake in Australia and Argentina. The three battery companies?LG Energy Solution, SK On, and Samsung SDI?are diversifying their mineral procurement channels by partnering with mineral companies in Australia, Canada, and the United States to secure lithium, cobalt, and other minerals.

Recycling is also expected to become a means of stable mineral supply. As the number of electric vehicles increases, the amount of end-of-life used batteries is also expected to rise. The global used battery recycling market is projected to reach 60 trillion KRW by 2030. EcoPro Group plans to recycle scrap and used batteries from BlueOvalSK (a battery joint venture between SK On and Ford) in the United States into precursors (materials for cathode materials) and other raw materials. EcoPro Group is conducting similar business operations at LG Energy Solution's plant in Poland.