Lithium Stocks Crashed. Now We Know Why. What It Means for Tesla, EV Battery Stocks.

Lithium stocks cratered on Friday. The reason was a mystery. Now investors have an answer—it was down to the world’s largest electric-vehicle battery maker, Contemporary Amperex Technology 300750 –1.30% Co., or CATL.

A move by CATL (300750.China) is significant, but investors may have drawn the wrong conclusion. The bigger risks from the decision might be to battery and EV makers such as Tesla (TSLA).

On Friday, shares of lithium miners Albemarle ALB –9.67% (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 500SPX –0.28% dropped 0.3%. The Dow Jones Industrial AverageDJIA +0.39% rose 0.4%.

There were no sector upgrades or downgrades from Wall Street on which to pin losses and no big changes in commodity prices. Instead, a CATL pricing strategy unnerved investors.

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 for lithium carbonate, the benchmark price for lithium products, of 200,000 yuan per metric ton, or about $30,000. The rest of the batteries will embed the spot market price of lithium carbonate.

Spot prices today amount to about 428,000 yuan per metric ton, about $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.

CATL didn’t respond to a request for comment about its pricing strategy. But one reason it 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.

While eating into profit margins, it would 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.) It might work, but Shang expects other battery makers to follow suit.

A price war means lower battery profits for all battery makers. Shares of battery makers including CATL, LG Energy Solution , Panasonic , SK Innovations, Samsung SDI are down 4% since the CATL pricing plan was reported.

That’s less than the lithium shares have moved. 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. In that situation, 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, writes 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 TSLA +3.10% , Li Auto (LI), NIO (NIO) and XPeng (XPEV). It could mean lower margins. Tesla already lowered Chinese car prices at the start of 2023 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. What’s more, 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.

Source: finance.yahoo.com