When Mines Are Hedges, Cars Get Cheaper

the be Enough mobile app, and the Bloomberg terminal. As part of this, I do a lot of client interviews. In these interviews, I often ask the question what data set do you need most? Well, the answers vary, but the first answer is almost always p p A prices or prices for power purchase agreements, but a close second is battery prices. Batteries for stationary storage are a compliment to wind and solar power, and of course they're critical

for electric vehicles. To make recommendations on anything having to do with these areas, strategists need to know price now and what it's expected to be in the future. Today we'll talk with James Frith, who leads our coverage of the battery supply chain about our latest annual battery price survey and report titled nineteen Lithium Iron Battery Price Survey. Being if users can find this report on BNF dot com,

the BENF mobile app, and the Bloomberg terminal. As a reminder, Being does not provide investmentis strategy advice, and you can hear a full disclaimer at the end of the show. I'm Mark Taylor here with Dana Perkins, and you're listening to Switch It on the BENF podcast. Hey James, Hey Mark, Hey Dana, thanks for coming in. Can you start us off with a bit about why we started doing the battery price survey, how we do it and what clients

are you using it for? Yeah, definitely, I mean I think the battery price survey is key to a lot of the work that we do at Bloomberg any F. If you look at, for example, electric vehicles, right, what people always want to know is when can I get in the EVA? It's too expensive at the moment. One of the underlying you know, factors about the cost competitiveness of electric vehicles is how much does the battery cost? And so what's the price of the battery in that e V and so that's kind of one of the

main drivers for doing the battery price survey. On top of that, you then have things like stationary storage, which you know, I don't go home and talk to my family about staciary storage. They don't ask me about that part of the job. But again, lots of our clients are super interested in that stationary storage will enable the next kind of build out of renewable energy generation, will help to avoid curtailment. And again one of the key factors there is what's the cost or the price of

batteries going into those systems. How about consumer electronics, I mean, consumer electronics have been really important for getting to where we are today. It's in actually that electric vehicles overtook consumer electronics is the largest demand area for lifting mind batteries. Before that, it was always consumer electronics. But there's a slight difference between what you see in the EV market

and what you see in the consumer electronics market. Right for evs, as I said, at the moment, it's really about reducing that price, whereas for a consumer electronics the price isn't as important. Your iPhone probably costs thousand pounds more than that. Nowadays, the battery is a small proportion of that. If they go for a slightly more expensive battery, you're not necessarily gonna notice that. But with e v

S it's the opposite. They're trying to get battery prices down as far as possible to make the cost of the v better. So the price of the batteries the press of the car. Yes, I mean, like I mean, the biggest factor in that, exactly. Okay, So let's talk about the survey just a little bit, some basics around it. The units for the price of the battery is dollars

per megawatt hour. Can you explain why that is? Yeah, definitely, And I guess a lot of the listeners on this who are used to working with renewables will be thinking in dollars per megawatt or if they hear kind of dollars per killer what our megawat our will think of l c oes. But it's slightly different for a battery, right, if you have wind or solar, you're talking about the maximum amount of power that you can generate at any one time, So that's your megawat's For batteries, it's more

about how much energy you can store. So it's a mega what hours how long can you store that megawat for? If you have one with more mega what hours in there, it's essentially a greater driving range. And so it's really about how much you're bringing down the cost of storing that energy rather than the cost of kind of producing that power. There are some applications where that is slightly different.

So for hybrid electric vehicles, not ones where you have a plug, you know, just your tyre to preer type of thing. Actually, they're a lot of people think of in dollars per killer what but for battery electric vehicles, for stationary storage, for plug in hyrod electric vehicles, it's dollars per kilar what hour that everyone's interested in. And that's the kind of key metrics go with For sell manufacturers, a lot of money goes into this innovation. It's a

pretty competitive space. How much money do they spend on this and how much work really goes into it. Yeah, So I mean if you look at the big manufacturers working on this, it ends up being about seven per cent of their spending each year. Right, They're putting massive amounts of money into this, and there's a number of different kind of areas that they're focusing on. As I've mentioned,

kind of price or cost is key thing. They're trying to reduce that cost of manufacturing that battery and reduce the kind of price that you're selling it out. But there's also lots of kind of performance characteristics that are becoming increasingly important. Right, So the number of cycles that your battery can do is one of the key ones

as well. You want to have a cheap battery, but if it can only last three years and then your new EVS dead, that's not going to work, right, So it has to have a long cycle life as well, it has to have high safety, and increasingly, as the pricey batteries come down and we reach price parity between electric vehicles and internal question engines, we expect that manufacturers

will start optimizing for some of these other metrics. So one of the key ones that we've already seen announcements around is Daimler their next range of EVS EQ range. They want to have carbon neutral batteries. Now that's potentially going to cost a bit more money than just a normal battery, but because they're kind of vehicles are slightly higher end, they're reaching price parity earlier, they can start optimizing the other metric. How does that work? What is

a carbon neutral battery? That's a good question. So they haven't come out and explained how they're going to do that yet. I imagine for the actual manufacturing of the batteries themselves, you'll be looking at renewable energy p p a s as you mentioned earlier, but they will also have to be some carbon offsetting. If you're shipping in lithium from South America or Australia at the moment, you can't get electric shipping green shipping, so you're gonna have

to offset some CEO two somehow. We did an episode a while back with you and Logan Goldie Scout where we already explored the concept of low emissions evs that they are actually lower emissions than the internal combustion engine vehicles even if plugged into a cold red exactly. So if anybody out there wants to go listen to that, you can find it where if you listen to our podcast.

Can we go back to the price itself? So you've mentioned lat year in the survey that it went down right down to what was the number last year six dollars pecular in twenty nineteen, okay, and then before that it was an eighteen percent drap, and the year before that it was a twenty six percent trap. So that seems to be less and less every year. Are we reaching a floor? Is there a floor? Has it work? Yeah? So it's an interesting question again, and it's not that

there's a floor, it's that it's an ascent type. So what we're seeing the way we look at battery prices is we use what we call an experience model experience curve to model the price declines um and that tells us that every time the cumulative volume of batteries deployed into the market doubles prices for by eighteen percent, So we have what we call an eighteen percent learning rate. And what you're seeing year on year is that actually to double the number of batteries on the market becomes

that little bit harder. So actually, although our learning rate is still eighteen percent, year on year, decreases might not be as high because you know, rather than doubling the number of batteries deployed, actually you're only increasing it by one point eight times or one point six times, etcetera. And when you do your survey. It's target to people, right, you're asking people at their prices. Are you finding that the numbers they give you match your learning rate? Yes?

So another good question, and this is one that we always get challenged on. Well, firstly, do we trust the answers that we're being that we're being given you? And yeah, we do. So. One of the things that we do is we're not just talking to the automakers asking them how much they're buying batteries for. We're also talking to the cell manufacturers or the pack manufacturers as well, asking

them how much they're setting for. And thankfully, both of these numbers tend to match up each year, which is good. But yeah, so the kind of answers that they're giving us and what we've seen in over the last three or four years does match up with that eighteen percent learning rate. Some years it's slightly higher, some years it's a little bit lower, but in general it is sticking to that. So, you're a battery manufacturer, what does it take to be successful in this space and to be competitive?

Because you can pour all the R and D that you want in there, but you've got to know what you're looking for. And trying to optimize. Yeah. I mean, there's a couple of things that I think are kind of key to being successful. One is having a name that people trust. And this is something that we've seen a couple of times. You know, in the stationary storage industry.

For example, if you go and talk to developers and you asked them, you give them a list of battery manufacturers and you know, say the top twenty manufacturers based on capacity, and you asked them how many of them are viewed as being bankable. Actually you come away with kind of four or five top tier ones where people say, actually, all of these are bankable. And then as you go down the list, you know, that starts to waiver with some people saying I'm not sure about this manufacturer. So

that trust presumably is built up over time. But this is reasonably new technology. So how do they earn that trust? I guess. Yeah, there's definitely some first move advantage in their right and working with these companies getting in their early securing orders from them, providing those batteries, and showing that actually, over the you know, the last ten years, their batteries have performed as they've said they would, and that is really key, and there's a number of companies

that are there that are trustworthy. We published are tier list for battery manufacturers last year, and you have companies up there that are you know, at the top, like c at L from China, LG Chem from South Korea. You also have Samsung, sdi sk Innovation from Korea, as well as companies like you know, Tesla Panasonic obviously, who

are one of the largest manufacturers out there. One of the things in the note that really struck me was a line you had about automakers skipping the middleman for now these trusted manufacturers you just mentioned and going straight to commodity suppliers and securing supply of these battery materials, and then they go back to the manufacturer and asking to make the batteries with those materials. Is that right? Yeah, So that's right. So we I say, we got ourselves

into a situation. The industry got itself into this situation two or three years ago where commodity prices suddenly hiked,

you know, particularly lithium and cobalt. And back then what was happening was your battery manufacturer, your c at L, your LG CHM, they would buy the materials from the miners and they would build the batteries, but they would have agreed a price with the automaker, but suddenly they found that actually the material prices were skyrocketing, so they had to pass that price onto the automaker, and the automaker suddenly found that their battery cells were much more

expensive than they were originally told. So now to try and um provide themselves with a bit more transparency on what's going to happen to material prices. Automakers are going directly to the miners, signing contracts with them that are generally reviewed every six months and adjusted based on spot prices.

But by doing that, by securing that material, it means that the automakers can um hedge for material price changes, right, so they're not at risk of kind of suddenly prices Hikings, you're saying, it's not just transparency on their balance sheet, but it's actually are they getting better prices than the battery manufacturers themselves were getting. I wouldn't say that they're

necessarily getting better prices. You know, there certainly could be an advantage if you're a company like VW and suddenly you're buying material for your entire product line. Well, they've got a big order, but the battery manufacturers are going to have an even bigger order, right because they're going to have all those from the w and then all of the other man there are the other companies that they're buying for. So I would think that that would

add some economic benefit. But you're saying, actually the automakers want to go direct. I mean, there probably is some economic benefit, as you say, you know you've got these massive orders, but there's also some uncertainty there as well

for the battery manufacturer. Right, So if I'm a big automaker and I go to the battery cell manufacturing, I say, next year, I'm gonna sell a million a million e vis um, And then next year comes around and actually I'm decided that I'm going to slash that output because the market is not there yet. But the battery manufacturer has already gone and ordered all that raw material. Suddenly he's left with the stockpile of stuff that he can't

get rid of. So actually for the battery manufacturer themselves as well, it makes sense for them to then shift that onto the auto maker. So we've seen the commodities are an important part of the consideration in terms of what goes into the cost. But there are a lot of things to think about. So when we're looking at pack prices, and this is something that actually comes up.

We have a battery cost model which your teammate, and in there it says that you know, we can theoretically extrapolate out what the actual prices at the end if you take into consideration a couple of things. Could you go into detail what those different components are that ultimately come up with the final price that you the vehicle

manufacturer end up seeing. Yeah, definitely. So if we look at the pack itself, so that's the pack prices what I mentioned earlier, that hundred and fifty six dollars per killer one hour, that's what it's being sold for. What you then have to consider if you're a battery manufacturer, you then have to take off the kind of soft costs associated with that, so your sales and marketing, your R and D expenditure, um your margin as well. And that's kind of I think has been a hotly debated

topic over the last couple of years. But maybe we'll come after that in a minute. Um, So if you take off those kind of soft costs. What you're left with is the material and the manufacturing costs, right, and that can be split into the materials and manufacturing costs of producing your the pack, and that accounts for about the total cost roughly um And then within that or kind of beneath that, you have the cell costs, and the cell accounts for about the total cost of a

battery pack. And then again linking back to the commodities, actually within that cell, about overt of those costs are down to the materials going into that. So that's not necessarily just the cathode active materials. There's other materials like the current collectors, the cell housing, the connecting wires, etcetera. But materials are a big, big cost input for battery cells and packs. Okay, I've got to know why our margins hardly debated. These companies are all in business to

make money. Yeah, they're in business to make money. And the question is are they making money? And that's the question that we always get, um you know, particular when people see how low battery prices are and how they can keep declining. We always get that question, how companies making money? Here? And there's a couple of you know, there's a couple of different areas to touch on here.

One is that actually using our bottom up cost model that you mentioned earlier, when we do that calculation, we find that depending on the level of R and D investment that manufacturers are putting in their sales and marketing expenditure, etcetera, they can be making up to about fifteen cent margin on the battery packs that they're setting into the market. So that's one consideration the can be margins are made there depending what your investment is in your R and

D expenditure, etcetera. But the other one is that they're not just selling batteries into the battery electric vehicle market. There are lots of other industries out there. There's a commercial electric vehicle market, there's a stationary storage market, which we mentioned earlier. There's even things like commercial shipping market

right adding batteries to ships crossing Fiords in Norway. And in a lot of these other areas you know, particularly commercial and stationary store ridge, the cost of battery packs or racks going into those are much higher than they are for battery electric vehicles, and in those markets there's more of an ability for manufacturers to play with those margins.

The reason they can do that is because the orders tend to be slightly smaller in those markets, so the person buying the battery racks doesn't have the same negotiating power is say a large automaker who's ordering kind of multiple giggle, what hours the batteries each year. So as the activity you're seeing in the sector translating the type of margins and falling battery prices, is that translating to

expansion or consolidation in the sectory? Yeah, another really interesting one, and I think it's a bit of both at the moment. So we definitely have Um, we're seeing a lot of expansion from lots of different companies. Um. You know, so we're seeing Chinese battery manufacturers leaving China for the first

time building plants here in Europe. We have the South Korean companies who have been active in the US for a while building plants in Europe now have been for the last couple of years, so we're asking that expansion. There's also a huge number of companies within China who are would be considered kind of tier two manufacturers, and they've managed to really blossom thanks to the EV subsidies. In China. That being said, subsidies have been stepped down in um. They were meant to end in but they're

being slightly delayed, I believe now. And what that means though in general, as those subsidies are step down, we expect there will be consolidation because suddenly a lot of those companies in China won't be able to support themselves. But that will be the Tier two manufacturers rather than the big players like c at l um Fact. Pharisis is another one who's building a plant in Europe and

has contracts with Diamler et cetera. So in preparing for today's podcast, we had a lot of material to pull from. We've got some models, we've got some research notes. What's the name of the model? Will you tell everybody? So we recently updates that bottom up cost model. And I was sitting there trying to think of what's a nice acronym to to use for that, and I was thinking, Okay, it's battery manufacturing, and it came to me like that,

the Batman model lightning lightning. So any b NF users out there listening, if you want to find the model on BNF dot com, you just search it Batman model, which you'll get that man right there you go, James, thank you so much for joining us today, Mark Dana, thanks for having me. Bloomberg an E app is a

service provided by Bloomberg Finance LP and its affiliates. This recording does not constitute, nor it should it be construed, as investment advice, investment recommendations, or a recommendation as to an investment or other strategy. Bloomberg an E should not be considered as information sufficient upon which to base an

investment decision. Neither Bloomberg Finance LP nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the information contained in this recording, and any liability as a result of this recording is expressly discribed h