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Goldman Sachs Predicts Oversupply in Battery Parts Market for Electric Vehicles
The Commodity of Cathodes
Goldman Sachs has projected an oversupply of battery parts for electric vehicles, specifically cathodes, which attract positive charge. Due to the vast number of companies producing similar cathode types, there is an expected overabundance in the market. As such, companies may have to lower their prices to remain competitive, potentially eating into their profits.
The Negative Impacts for POSCO Future M and EcoPro BM
Based on Goldman Sachs' projections, two major Korean cathode producers, POSCO Future M and EcoPro BM are anticipated to be negatively affected by this oversupply. The investment bank's analysts expect that shares of POSCO will decrease by 41% from the current level to 220,000 South Korean won ($170), while EcoPro BM's stocks will drop by 52% to 262,000 won.
Winners: LG Chem and Samsung SDI
While cathode manufacturers are expected to face margin compression risks, Korean battery cell makers, LG Chem and Samsung SDI, are predicted to be in a more favored position. The barrier of entry for assembling battery cells is higher than producing cathodes, making it a less crowded market. New entrants typically face significant upfront investment in research and development and initial capital expenditure to break into the battery cell making industry. Due to the limited number of companies producing cells, the contracts that they secure typically last longer, thereby benefiting their profit margins.
Projected Stock Increase for LG Chem and Samsung SDI
According to the Goldman Sachs report, the investment bank expects an increase of 32% and 19% in Samsung SDI and LG Chem shares, respectively, over the next 12 months. SmartETFs Sustainable Energy II, Franklin FTSE South Korea, and EWY iShares MSCI South Korea ETFs allow investors the opportunity to access these stocks.
Successful Long-Term Contract Secured by Battery Cell Manufacturers
Because of the limited number of companies producing cells, they typically secure longer-term contracts, thereby offering better protection for their profit margins. While cathode manufacturers often secure contracts between 2-3 years, battery cell manufacturers like LG Chem and Samsung SDI secure deals with electric vehicle makers that last 6-7 years, according to the Goldman report.
The oversupply of battery parts for electric vehicles, particularly cathodes, is expected to have major implications for the industry. With lower prices dominating the market, it is essential that new businesses in the industry keep this in mind while building their business models. While it may be tempting to try and target the market by offering lower-priced cathodes, competition would make it difficult to turn any serious profit over the long run. Instead, new businesses could do well to explore the battery cell-making industry, which is expected to experience less of a decline. Given significant upfront investments required in research and development, an entrepreneur moving into this industry would need to exercise caution in ensuring that their business is equipped to face challenges and competition. Nonetheless, with the sector expected to continue to grow, there may be significant opportunities for the brave and determined entrepreneur looking to enter the market. It is worth considering the success stories of LG Chem and Samsung SDI, two major battery cell manufacturers that are currently well-positioned to benefit from the predicted oversupply of cathodes.
