The lithium battery industry is experiencing a mixed situation due to tight supply and overcapacity of power batteries

Smart electric vehicles are developing at an unstoppable pace. Accordingly, upstream and downstream companies in the power battery industry chain have also seen an increase in performance and investment since the second half of 2020.

"Starting from 2021, the global lithium battery market demand has increased significantly, but at present, the production capacity supply of the entire industry chain is relatively slow, and the effective supply is insufficient." Zeng Yuqun, chairman of CATL, believes that the demand for power batteries is growing explosively, and the production capacity supply of the entire supply chain will face challenges.

In this context, several mainstream lithium battery listed companies are accelerating their pace of capacity layout. However, related problems are also becoming increasingly prominent - overheated speculation on power batteries, structural overcapacity, and insufficient capacity utilization have already emerged.

Fang Jianhua, partner and president of the New Energy Vehicle Venture Capital Sub-Fund of the National Science and Technology Achievement Transformation Fund, told the Securities Daily reporter that currently, there is a coexistence of tight supply and overcapacity of power batteries. On the one hand, there is insufficient supply of high-end and high-quality production capacity, and on the other hand, there is insufficient ordering of low-end product production capacity. From the supply side, the leading battery companies are accelerating capacity expansion in order to increase the supply of high-end production capacity.

Lithium battery industry companies are increasing capital and expanding production

2021 is the year for major power battery companies to expand their production capacity, and establishing new companies has become a common choice for many lithium battery listed companies.

On April 28, CATL announced that it plans to jointly invest with ATL to establish two joint ventures to engage in the research and development, production, sales and after-sales service of medium-sized batteries for applications in home energy storage, electric two-wheelers and other fields. One of them is a battery cell joint venture, in which CATL will contribute 70%, and the other is a battery pack joint venture, in which CATL will contribute 30%.

On July 6, Tianqi Lithium announced that the capital increase and share expansion signed with Australian listed company IGO has been completed. According to the company's previous announcement, the funds raised from this capital increase are intended to be mainly used to repay the amount owed to the company's wholly-owned subsidiaries due to internal restructuring, as well as to supplement funds for the operation and commissioning of its Quinana lithium hydroxide plant.

On July 9, Yiwei Lithium Energy issued an announcement stating that it plans to acquire 28.125% of Jinkunlun’s equity and cooperate with Jinkunlun to establish a joint venture in Qinghai Province. It will invest no more than 1.8 billion yuan in phases to build a project with an annual output of 30,000 tons of lithium carbonate and lithium hydroxide. The first phase will build a project with an annual output of 10,000 tons of lithium carbonate and lithium hydroxide. Yiwei Lithium Energy will hold 80% of the equity of the joint venture.

In addition, there are a number of lithium battery-related listed companies that have increased their lithium battery business through capital increase and rights issue. The reporter of Securities Daily noted that Guoxuan High-tech issued an announcement on March 16 that the company's wholly-owned subsidiaries Hefei Guoxuan and Liuzhou Investment respectively increased capital in Liuzhou Guoxuan in cash to provide financial support for the construction of Liuzhou Guoxuan lithium battery production base, accelerate the layout of Liuzhou new energy power battery market, and expand market space.

Ganfeng Lithium also placed 48.04 million new shares in the H-share market on June 10, and plans to use the total net proceeds of the placement, estimated at HK$4.855 billion, for capacity expansion construction, potential investments, replenishment of operating capital and general corporate purposes. The capacity expansion construction mainly involves overseas lithium resource projects, and potential investments may include ores, brines, lithium clay, etc.

In just over half a year, major domestic lithium battery listed companies have announced plans to increase capital, which shows how hot the lithium battery industry is. At the same time, under the dual guidance of carbon neutrality and lithium battery recycling, many companies have also begun to deploy lithium battery recycling businesses.

Product structural overcapacity Power battery safety issues are prominent

According to the Securities Daily reporter, one of the important reasons why lithium battery listed companies increase capital and expand production through various means is that the current power battery is facing a shortage of supply. "Everyone is frantically expanding production, but the production capacity is not enough. The next five years will be a period of rapid expansion." Yang Hongxin, chairman and CEO of Honeycomb Energy, once said that at one point this year, Honeycomb Energy's orders reached 8GWh, but at that time it could only produce 5GWh at most.

However, while lithium battery companies are frantically expanding production, their capacity utilization is under question. Take CATL as an example. According to the company's financial report, the company's capacity utilization rate was 89.17% in 2019, while it was only 52.50% in the first half of 2020.

"The contradiction is that the market is not simply short of batteries, but short of high-end batteries." Lin Shi, a columnist for Sina Finance, said that there is no overcapacity in the production of products that can truly meet the performance requirements and market demand of vehicle manufacturers. In recent years, the wild and speculative battery products seem to have a high output, but vehicle manufacturers will not use them easily.

However, the reporter noticed that in the face of growing car orders, many car companies have chosen to use low-end batteries with relatively poor performance on some low-end models to meet the power battery gap. But this has also caused another problem in the current power battery industry - frequent battery safety issues. Recently, a large number of recall incidents have once again led the industry to discuss the safety of lithium batteries.

On July 16, Great Wall Motors recalled 16,200 Ora IQ vehicles due to matching differences between the consistency of some power batteries and the BMS software control strategy, which may cause thermal runaway of the power batteries in extreme cases. On July 23, Chery Automobile recalled 1,407 Arrizo 5e electric vehicles due to possible consistency fluctuations in the assembly of some parts in the power batteries.

As for joint venture car companies, on July 23, General Motors announced that it would recall nearly 69,000 Chevrolet Bolt electric vehicles worldwide due to defects in the battery modules that posed a risk of fire. On the same day, Toyota Motor announced that because the idle start-stop function of Alphard was imperfect and the battery's thermal insulation performance was insufficient, rear-end collisions could occur in extreme cases, and the company would recall 12,955 imported Alphards.

In the next stage, the concentration of the lithium battery market will increase, and the industry reshuffle will continue. Fang Jianhua believes that 2021 will still be a favorable year for the development of the lithium battery industry, but not all companies will usher in good news. "In the early stages of industrial development, everyone will rush in, but in the end, the companies that can withstand the test of the market must be those that continue to develop core competitiveness."

In terms of technology, in the field of power battery materials in 2021, some new technologies will be introduced or even achieve breakthroughs in high-nickel positive electrodes, silicon-carbon negative electrode materials, new composite current collector materials and conductive materials. Fang Jianhua said, "Early power batteries excessively pursued energy density and weakened other aspects of performance. Now the above new technologies will play a very critical role in improving the performance of power batteries."

From the perspective of the capital market, "positive electrode materials such as lithium hydroxide and lithium carbonate, negative electrode materials such as lithium hexafluorophosphate, diaphragms, copper foil for motor accessories, and lithium battery testing equipment are all within the hype route of the lithium battery concept." Sina Finance columnist Lin Shi said that for lithium battery stocks that are currently at a historical high, investors need to be wary of the impact of variables such as the long working cycle of lithium mine "exploration to mining" and tight market raw material procurement. Some fund managers even said that for stocks in the overheated lithium battery track, there is a psychological expectation of a 15%-20% drop.