Lithium stocks cratered on Friday. Then, the reason was a mystery. Now, investors know why: The world’s largest electric-vehicle battery maker, Contemporary Amperex Technology Co., or CATL, changed its pricing strategy.
The move by CATL (300750.China) is significant, but investors jumped to the wrong conclusion. The bigger risks from the decision are to battery and EV makers such as Tesla (TSLA).
On Friday, shares of lithium miners Albemarle (ALB), SQM (SQM), Livent (LTHM), Piedmont Lithium (PLL), and Lithium Americas (LAC) fell 9.7% on average, wiping out about $6.6 billion in market value. The S&P 500 dropped 0.3%. The Dow Jones Industrial Average rose 0.4%.
The losses couldn’t be pinned on any sector upgrades or downgrades from Wall Street or any big changes in commodity prices because there simply weren’t any.
No, those billions of dollars that went up like smoke can be blamed on CATL‘s pricing strategy. CATL didn’t respond to a request for comment.
The battery maker, according to J.P. Morgan and Citi research, will price its batteries on a lithium price-linked basis, with 50% of the batteries embedding a price of 200,000 yuan per metric ton, or about $30,000, for lithium carbonate, the benchmark price for lithium products. The rest of the batteries will embed the spot market price of lithium carbonate.
Spot prices right now amount to 428,000 yuan per metric ton, or $64,000, and are up about ninefold over the past few years as the growth in EV demand has stressed the global lithium supply chain.
CATL’s move amounts to a big discount for batteries. One reason that the company can effectively discount is because it mines some of its own lithium. Essentially, CATL is accepting lower earnings from its mining operations to sell more batteries. CATL mines less than 10% of the world’s lithium supplies.
Yes, the discount will eat into profit margins but it also should give CATL an advantage against other battery makers, wrote Citi analyst Jack Shang in a Sunday report. He rates CATL shares Buy.
Shang believes CATL might be discounting to protect market share, which is already about 68% of Chinese EV batteries excluding BYD (1211.Hong Kong). BYD makes its own batteries.
The discounting might work, but Shang expects other battery makers to follow suit.
A price war means lower profits for all battery makers. Coming into Tuesday trading, shares of battery makers including CATL, LG Energy Solution, Panasonic,SK Innovations, Samsung SDI were down 4% since the CATL pricing plan was reported.
Lithium shares have moved less. The CATL move could put pressure on lithium suppliers to lower prices, but that isn’t certain to happen.
“While noisy, we think this should not become an industrywide practice, and lithium prices should ultimately be a function of Lithium supply and demand dynamics, which we still see in a deficit for the next three years,” wrote J.P. Morgan analyst Lucas Ferreira. He covers SQM stock and rates shares Buy.
Deficit and surplus is how mining analysts talk about supply and demand for most materials. When demand growth exceeds supply growth they call it a deficit. Then that happens, investors can expect prices to rise, or stay high, so supply and demand can balance.
Along with winning share, CATL is trying to fix two problems in the Chinese EV industry, according to Citi analyst Jeff Chung. First, he sees more EV model growth in 2023 than retail demand can soak up. The second problem is expensive batteries.
The CATL move addresses cost, but prices won’t fall enough to soak up all the increasing EV retail supply, wrote Chung. Higher lithium prices have added a few hundred dollars to the average cost of an EV.
The pricing strategy seems to be destined to hurt battery profits and help the profits of car maker, a little—although oversupply in the Chinese EV industry might mean lower battery costs get fully passed on to consumers.
Oversupply in the Chinese EV industry matters for Tesla, Li Auto (LI), NIO (NIO), and XPeng (XPEV). It could mean lower margins. Tesla already lowered Chinese car prices at the start of the year to give demand a boost. Investors know competition is heating up. As for Chung, he sees BYD, Li, and Tesla suppliers in good positions. He doesn’t cover Tesla stock.
What isn’t clear is whether CATL’s pricing strategy will hurt lithium miners. The 200,000 yuan ($30,000) per-metric-ton pricing level is $10,000 more per ton than Albemarle suggested in January is needed to guarantee supply of lithium to the auto industry in the long run.
CATL’s move, by that standard, looks bullish for lithium miners. Investors might come to that conclusion down the road.
Lithium stocks fell again on Tuesday, along with the rest of the market. Albemarle shares were dropped 6.2%. SQM and Livent shares fell 2.5% and 3.4%, respectively. The S&P 500 and Nasdaq Composite dropped 2% and 2.5%.
CATL shares fell 1.3% in overseas trading. They are off about 6% since the pricing strategy was reported on. The Shanghai Composite Index is up about 2% over the same span.
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