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Speaker 1: Hi everyone. A lot of PNIF clients are strategists. They

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Speaker 1: wear many hats, but put simply, they are responsible for

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Speaker 1: understanding current and future market conditions to help guide the

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Speaker 1: direction of their companies in the near and long term.

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Speaker 1: They do analysis, they make recommendations, and to do this

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Speaker 1: they need data. So a bit of context. As I

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Speaker 1: mentioned before, I run the product for BNF, So what

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Speaker 1: that means is my team and I look after the

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Speaker 1: delivery of enough content, data and tools across PF dot com,

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Speaker 1: the be Enough mobile app, and the Bloomberg terminal. As

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Speaker 1: part of this, I do a lot of client interviews.

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Speaker 1: In these interviews, I often ask the question what data

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Speaker 1: set do you need most? Well, the answers vary, but

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Speaker 1: the first answer is almost always p p A prices

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Speaker 1: or prices for power purchase agreements, but a close second

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Speaker 1: is battery prices. Batteries for stationary storage are a compliment

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Speaker 1: to wind and solar power, and of course they're critical

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Speaker 1: for electric vehicles. To make recommendations on anything having to

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Speaker 1: do with these areas, strategists need to know price now

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Speaker 1: and what it's expected to be in the future. Today

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Speaker 1: we'll talk with James Frith, who leads our coverage of

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Speaker 1: the battery supply chain about our latest annual battery price

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Speaker 1: survey and report titled nineteen Lithium Iron Battery Price Survey.

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Speaker 1: Being if users can find this report on BNF dot com,

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Speaker 1: the BENF mobile app, and the Bloomberg terminal. As a reminder,

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Speaker 1: Being does not provide investmentis strategy advice, and you can

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Speaker 1: hear a full disclaimer at the end of the show.

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Speaker 1: I'm Mark Taylor here with Dana Perkins, and you're listening

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Speaker 1: to Switch It on the BENF podcast. Hey James, Hey Mark,

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Speaker 1: Hey Dana, thanks for coming in. Can you start us

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Speaker 1: off with a bit about why we started doing the

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Speaker 1: battery price survey, how we do it and what clients

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Speaker 1: are you using it for? Yeah, definitely, I mean I

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Speaker 1: think the battery price survey is key to a lot

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Speaker 1: of the work that we do at Bloomberg any F.

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Speaker 1: If you look at, for example, electric vehicles, right, what

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Speaker 1: people always want to know is when can I get

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Speaker 1: in the EVA? It's too expensive at the moment. One

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Speaker 1: of the underlying you know, factors about the cost competitiveness

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Speaker 1: of electric vehicles is how much does the battery cost?

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Speaker 1: And so what's the price of the battery in that

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Speaker 1: e V and so that's kind of one of the

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Speaker 1: main drivers for doing the battery price survey. On top

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Speaker 1: of that, you then have things like stationary storage, which

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Speaker 1: you know, I don't go home and talk to my

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Speaker 1: family about staciary storage. They don't ask me about that

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Speaker 1: part of the job. But again, lots of our clients

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Speaker 1: are super interested in that stationary storage will enable the

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Speaker 1: next kind of build out of renewable energy generation, will

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Speaker 1: help to avoid curtailment. And again one of the key

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Speaker 1: factors there is what's the cost or the price of

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Speaker 1: batteries going into those systems. How about consumer electronics, I mean,

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Speaker 1: consumer electronics have been really important for getting to where

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Speaker 1: we are today. It's in actually that electric vehicles overtook

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Speaker 1: consumer electronics is the largest demand area for lifting mind batteries.

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Speaker 1: Before that, it was always consumer electronics. But there's a

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Speaker 1: slight difference between what you see in the EV market

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Speaker 1: and what you see in the consumer electronics market. Right

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Speaker 1: for evs, as I said, at the moment, it's really

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Speaker 1: about reducing that price, whereas for a consumer electronics the

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Speaker 1: price isn't as important. Your iPhone probably costs thousand pounds

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Speaker 1: more than that. Nowadays, the battery is a small proportion

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Speaker 1: of that. If they go for a slightly more expensive battery,

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Speaker 1: you're not necessarily gonna notice that. But with e v

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Speaker 1: S it's the opposite. They're trying to get battery prices

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Speaker 1: down as far as possible to make the cost of

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Speaker 1: the v better. So the price of the batteries the

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Speaker 1: press of the car. Yes, I mean, like I mean,

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Speaker 1: the biggest factor in that, exactly. Okay, So let's talk

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Speaker 1: about the survey just a little bit, some basics around it.

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Speaker 1: The units for the price of the battery is dollars

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Speaker 1: per megawatt hour. Can you explain why that is? Yeah, definitely,

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Speaker 1: And I guess a lot of the listeners on this

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Speaker 1: who are used to working with renewables will be thinking

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Speaker 1: in dollars per megawatt or if they hear kind of

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Speaker 1: dollars per killer what our megawat our will think of

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Speaker 1: l c oes. But it's slightly different for a battery, right,

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Speaker 1: if you have wind or solar, you're talking about the

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Speaker 1: maximum amount of power that you can generate at any

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Speaker 1: one time, So that's your megawat's For batteries, it's more

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Speaker 1: about how much energy you can store. So it's a

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Speaker 1: mega what hours how long can you store that megawat for?

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Speaker 1: If you have one with more mega what hours in there,

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Speaker 1: it's essentially a greater driving range. And so it's really

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Speaker 1: about how much you're bringing down the cost of storing

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Speaker 1: that energy rather than the cost of kind of producing

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Speaker 1: that power. There are some applications where that is slightly different.

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Speaker 1: So for hybrid electric vehicles, not ones where you have

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Speaker 1: a plug, you know, just your tyre to preer type

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Speaker 1: of thing. Actually, they're a lot of people think of

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Speaker 1: in dollars per killer what but for battery electric vehicles,

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Speaker 1: for stationary storage, for plug in hyrod electric vehicles, it's

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Speaker 1: dollars per kilar what hour that everyone's interested in. And

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Speaker 1: that's the kind of key metrics go with For sell manufacturers,

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Speaker 1: a lot of money goes into this innovation. It's a

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Speaker 1: pretty competitive space. How much money do they spend on

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Speaker 1: this and how much work really goes into it. Yeah,

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Speaker 1: So I mean if you look at the big manufacturers

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Speaker 1: working on this, it ends up being about seven per

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Speaker 1: cent of their spending each year. Right, They're putting massive

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Speaker 1: amounts of money into this, and there's a number of

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Speaker 1: different kind of areas that they're focusing on. As I've mentioned,

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Speaker 1: kind of price or cost is key thing. They're trying

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Speaker 1: to reduce that cost of manufacturing that battery and reduce

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Speaker 1: the kind of price that you're selling it out. But

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Speaker 1: there's also lots of kind of performance characteristics that are

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Speaker 1: becoming increasingly important. Right, So the number of cycles that

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Speaker 1: your battery can do is one of the key ones

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Speaker 1: as well. You want to have a cheap battery, but

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Speaker 1: if it can only last three years and then your

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Speaker 1: new EVS dead, that's not going to work, right, So

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Speaker 1: it has to have a long cycle life as well,

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Speaker 1: it has to have high safety, and increasingly, as the

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Speaker 1: pricey batteries come down and we reach price parity between

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Speaker 1: electric vehicles and internal question engines, we expect that manufacturers

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Speaker 1: will start optimizing for some of these other metrics. So

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Speaker 1: one of the key ones that we've already seen announcements

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Speaker 1: around is Daimler their next range of EVS EQ range.

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Speaker 1: They want to have carbon neutral batteries. Now that's potentially

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Speaker 1: going to cost a bit more money than just a

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Speaker 1: normal battery, but because they're kind of vehicles are slightly

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Speaker 1: higher end, they're reaching price parity earlier, they can start

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Speaker 1: optimizing the other metric. How does that work? What is

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Speaker 1: a carbon neutral battery? That's a good question. So they

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Speaker 1: haven't come out and explained how they're going to do

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Speaker 1: that yet. I imagine for the actual manufacturing of the

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Speaker 1: batteries themselves, you'll be looking at renewable energy p p

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Speaker 1: a s as you mentioned earlier, but they will also

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Speaker 1: have to be some carbon offsetting. If you're shipping in

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Speaker 1: lithium from South America or Australia at the moment, you

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Speaker 1: can't get electric shipping green shipping, so you're gonna have

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Speaker 1: to offset some CEO two somehow. We did an episode

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Speaker 1: a while back with you and Logan Goldie Scout where

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Speaker 1: we already explored the concept of low emissions evs that

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Speaker 1: they are actually lower emissions than the internal combustion engine

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Speaker 1: vehicles even if plugged into a cold red exactly. So

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Speaker 1: if anybody out there wants to go listen to that,

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Speaker 1: you can find it where if you listen to our podcast.

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Speaker 1: Can we go back to the price itself? So you've

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Speaker 1: mentioned lat year in the survey that it went down

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Speaker 1: right down to what was the number last year six

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Speaker 1: dollars pecular in twenty nineteen, okay, and then before that

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Speaker 1: it was an eighteen percent drap, and the year before

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Speaker 1: that it was a twenty six percent trap. So that

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Speaker 1: seems to be less and less every year. Are we

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Speaker 1: reaching a floor? Is there a floor? Has it work? Yeah?

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Speaker 1: So it's an interesting question again, and it's not that

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Speaker 1: there's a floor, it's that it's an ascent type. So

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Speaker 1: what we're seeing the way we look at battery prices

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Speaker 1: is we use what we call an experience model experience

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Speaker 1: curve to model the price declines um and that tells

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Speaker 1: us that every time the cumulative volume of batteries deployed

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Speaker 1: into the market doubles prices for by eighteen percent, So

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Speaker 1: we have what we call an eighteen percent learning rate.

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Speaker 1: And what you're seeing year on year is that actually

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Speaker 1: to double the number of batteries on the market becomes

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Speaker 1: that little bit harder. So actually, although our learning rate

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Speaker 1: is still eighteen percent, year on year, decreases might not

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Speaker 1: be as high because you know, rather than doubling the

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Speaker 1: number of batteries deployed, actually you're only increasing it by

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Speaker 1: one point eight times or one point six times, etcetera.

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Speaker 1: And when you do your survey. It's target to people, right,

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Speaker 1: you're asking people at their prices. Are you finding that

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Speaker 1: the numbers they give you match your learning rate? Yes?

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Speaker 1: So another good question, and this is one that we

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Speaker 1: always get challenged on. Well, firstly, do we trust the

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Speaker 1: answers that we're being that we're being given you? And yeah,

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Speaker 1: we do. So. One of the things that we do

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Speaker 1: is we're not just talking to the automakers asking them

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Speaker 1: how much they're buying batteries for. We're also talking to

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Speaker 1: the cell manufacturers or the pack manufacturers as well, asking

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Speaker 1: them how much they're setting for. And thankfully, both of

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Speaker 1: these numbers tend to match up each year, which is good.

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Speaker 1: But yeah, so the kind of answers that they're giving

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Speaker 1: us and what we've seen in over the last three

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Speaker 1: or four years does match up with that eighteen percent

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Speaker 1: learning rate. Some years it's slightly higher, some years it's

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Speaker 1: a little bit lower, but in general it is sticking

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Speaker 1: to that. So, you're a battery manufacturer, what does it

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Speaker 1: take to be successful in this space and to be competitive?

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Speaker 1: Because you can pour all the R and D that

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Speaker 1: you want in there, but you've got to know what

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Speaker 1: you're looking for. And trying to optimize. Yeah. I mean,

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Speaker 1: there's a couple of things that I think are kind

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Speaker 1: of key to being successful. One is having a name

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Speaker 1: that people trust. And this is something that we've seen

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Speaker 1: a couple of times. You know, in the stationary storage industry.

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Speaker 1: For example, if you go and talk to developers and

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Speaker 1: you asked them, you give them a list of battery

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Speaker 1: manufacturers and you know, say the top twenty manufacturers based

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Speaker 1: on capacity, and you asked them how many of them

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Speaker 1: are viewed as being bankable. Actually you come away with

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Speaker 1: kind of four or five top tier ones where people say, actually,

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Speaker 1: all of these are bankable. And then as you go

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Speaker 1: down the list, you know, that starts to waiver with

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Speaker 1: some people saying I'm not sure about this manufacturer. So

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Speaker 1: that trust presumably is built up over time. But this

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Speaker 1: is reasonably new technology. So how do they earn that trust?

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Speaker 1: I guess. Yeah, there's definitely some first move advantage in

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Speaker 1: their right and working with these companies getting in their

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Speaker 1: early securing orders from them, providing those batteries, and showing

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Speaker 1: that actually, over the you know, the last ten years,

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Speaker 1: their batteries have performed as they've said they would, and

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Speaker 1: that is really key, and there's a number of companies

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Speaker 1: that are there that are trustworthy. We published are tier

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Speaker 1: list for battery manufacturers last year, and you have companies

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Speaker 1: up there that are you know, at the top, like

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Speaker 1: c at L from China, LG Chem from South Korea.

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Speaker 1: You also have Samsung, sdi sk Innovation from Korea, as

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Speaker 1: well as companies like you know, Tesla Panasonic obviously, who

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Speaker 1: are one of the largest manufacturers out there. One of

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Speaker 1: the things in the note that really struck me was

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Speaker 1: a line you had about automakers skipping the middleman for

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Speaker 1: now these trusted manufacturers you just mentioned and going straight

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Speaker 1: to commodity suppliers and securing supply of these battery materials,

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Speaker 1: and then they go back to the manufacturer and asking

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Speaker 1: to make the batteries with those materials. Is that right? Yeah,

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Speaker 1: So that's right. So we I say, we got ourselves

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Speaker 1: into a situation. The industry got itself into this situation

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Speaker 1: two or three years ago where commodity prices suddenly hiked,

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Speaker 1: you know, particularly lithium and cobalt. And back then what

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Speaker 1: was happening was your battery manufacturer, your c at L,

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Speaker 1: your LG CHM, they would buy the materials from the

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Speaker 1: miners and they would build the batteries, but they would

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Speaker 1: have agreed a price with the automaker, but suddenly they

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Speaker 1: found that actually the material prices were skyrocketing, so they

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Speaker 1: had to pass that price onto the automaker, and the

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Speaker 1: automaker suddenly found that their battery cells were much more

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Speaker 1: expensive than they were originally told. So now to try

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Speaker 1: and um provide themselves with a bit more transparency on

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Speaker 1: what's going to happen to material prices. Automakers are going

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Speaker 1: directly to the miners, signing contracts with them that are

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Speaker 1: generally reviewed every six months and adjusted based on spot prices.

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Speaker 1: But by doing that, by securing that material, it means

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Speaker 1: that the automakers can um hedge for material price changes, right,

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Speaker 1: so they're not at risk of kind of suddenly prices Hikings,

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Speaker 1: you're saying, it's not just transparency on their balance sheet,

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Speaker 1: but it's actually are they getting better prices than the

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Speaker 1: battery manufacturers themselves were getting. I wouldn't say that they're

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Speaker 1: necessarily getting better prices. You know, there certainly could be

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Speaker 1: an advantage if you're a company like VW and suddenly

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Speaker 1: you're buying material for your entire product line. Well, they've

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Speaker 1: got a big order, but the battery manufacturers are going

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Speaker 1: to have an even bigger order, right because they're going

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Speaker 1: to have all those from the w and then all

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Speaker 1: of the other man there are the other companies that

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Speaker 1: they're buying for. So I would think that that would

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Speaker 1: add some economic benefit. But you're saying, actually the automakers

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Speaker 1: want to go direct. I mean, there probably is some

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Speaker 1: economic benefit, as you say, you know you've got these

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Speaker 1: massive orders, but there's also some uncertainty there as well

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Speaker 1: for the battery manufacturer. Right, So if I'm a big

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Speaker 1: automaker and I go to the battery cell manufacturing, I say,

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Speaker 1: next year, I'm gonna sell a million a million e

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Speaker 1: vis um, And then next year comes around and actually

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Speaker 1: I'm decided that I'm going to slash that output because

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Speaker 1: the market is not there yet. But the battery manufacturer

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Speaker 1: has already gone and ordered all that raw material. Suddenly

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Speaker 1: he's left with the stockpile of stuff that he can't

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Speaker 1: get rid of. So actually for the battery manufacturer themselves

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Speaker 1: as well, it makes sense for them to then shift

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Speaker 1: that onto the auto maker. So we've seen the commodities

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Speaker 1: are an important part of the consideration in terms of

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Speaker 1: what goes into the cost. But there are a lot

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Speaker 1: of things to think about. So when we're looking at

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Speaker 1: pack prices, and this is something that actually comes up.

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Speaker 1: We have a battery cost model which your teammate, and

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Speaker 1: in there it says that you know, we can theoretically

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Speaker 1: extrapolate out what the actual prices at the end if

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Speaker 1: you take into consideration a couple of things. Could you

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Speaker 1: go into detail what those different components are that ultimately

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Speaker 1: come up with the final price that you the vehicle

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Speaker 1: manufacturer end up seeing. Yeah, definitely. So if we look

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Speaker 1: at the pack itself, so that's the pack prices what

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Speaker 1: I mentioned earlier, that hundred and fifty six dollars per

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Speaker 1: killer one hour, that's what it's being sold for. What

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Speaker 1: you then have to consider if you're a battery manufacturer,

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Speaker 1: you then have to take off the kind of soft

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Speaker 1: costs associated with that, so your sales and marketing, your

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Speaker 1: R and D expenditure, um your margin as well. And

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Speaker 1: that's kind of I think has been a hotly debated

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Speaker 1: topic over the last couple of years. But maybe we'll

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Speaker 1: come after that in a minute. Um, So if you

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Speaker 1: take off those kind of soft costs. What you're left

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Speaker 1: with is the material and the manufacturing costs, right, and

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Speaker 1: that can be split into the materials and manufacturing costs

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Speaker 1: of producing your the pack, and that accounts for about

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Speaker 1: the total cost roughly um And then within that or

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Speaker 1: kind of beneath that, you have the cell costs, and

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Speaker 1: the cell accounts for about the total cost of a

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Speaker 1: battery pack. And then again linking back to the commodities,

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Speaker 1: actually within that cell, about overt of those costs are

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Speaker 1: down to the materials going into that. So that's not

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Speaker 1: necessarily just the cathode active materials. There's other materials like

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Speaker 1: the current collectors, the cell housing, the connecting wires, etcetera.

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Speaker 1: But materials are a big, big cost input for battery

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Speaker 1: cells and packs. Okay, I've got to know why our

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Speaker 1: margins hardly debated. These companies are all in business to

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Speaker 1: make money. Yeah, they're in business to make money. And

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Speaker 1: the question is are they making money? And that's the

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Speaker 1: question that we always get, um you know, particular when

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Speaker 1: people see how low battery prices are and how they

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Speaker 1: can keep declining. We always get that question, how companies

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Speaker 1: making money? Here? And there's a couple of you know,

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Speaker 1: there's a couple of different areas to touch on here.

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Speaker 1: One is that actually using our bottom up cost model

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Speaker 1: that you mentioned earlier, when we do that calculation, we

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Speaker 1: find that depending on the level of R and D

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Speaker 1: investment that manufacturers are putting in their sales and marketing expenditure, etcetera,

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Speaker 1: they can be making up to about fifteen cent margin

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Speaker 1: on the battery packs that they're setting into the market.

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Speaker 1: So that's one consideration the can be margins are made

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Speaker 1: there depending what your investment is in your R and

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Speaker 1: D expenditure, etcetera. But the other one is that they're

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Speaker 1: not just selling batteries into the battery electric vehicle market.

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Speaker 1: There are lots of other industries out there. There's a

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Speaker 1: commercial electric vehicle market, there's a stationary storage market, which

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Speaker 1: we mentioned earlier. There's even things like commercial shipping market

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Speaker 1: right adding batteries to ships crossing Fiords in Norway. And

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Speaker 1: in a lot of these other areas you know, particularly

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Speaker 1: commercial and stationary store ridge, the cost of battery packs

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Speaker 1: or racks going into those are much higher than they

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Speaker 1: are for battery electric vehicles, and in those markets there's

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Speaker 1: more of an ability for manufacturers to play with those margins.

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Speaker 1: The reason they can do that is because the orders

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Speaker 1: tend to be slightly smaller in those markets, so the

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Speaker 1: person buying the battery racks doesn't have the same negotiating

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Speaker 1: power is say a large automaker who's ordering kind of

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Speaker 1: multiple giggle, what hours the batteries each year. So as

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Speaker 1: the activity you're seeing in the sector translating the type

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Speaker 1: of margins and falling battery prices, is that translating to

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Speaker 1: expansion or consolidation in the sectory? Yeah, another really interesting one,

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Speaker 1: and I think it's a bit of both at the moment.

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Speaker 1: So we definitely have Um, we're seeing a lot of

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Speaker 1: expansion from lots of different companies. Um. You know, so

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Speaker 1: we're seeing Chinese battery manufacturers leaving China for the first

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Speaker 1: time building plants here in Europe. We have the South

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Speaker 1: Korean companies who have been active in the US for

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Speaker 1: a while building plants in Europe now have been for

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Speaker 1: the last couple of years, so we're asking that expansion.

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Speaker 1: There's also a huge number of companies within China who

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Speaker 1: are would be considered kind of tier two manufacturers, and

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Speaker 1: they've managed to really blossom thanks to the EV subsidies.

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Speaker 1: In China. That being said, subsidies have been stepped down

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Speaker 1: in um. They were meant to end in but they're

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Speaker 1: being slightly delayed, I believe now. And what that means

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Speaker 1: though in general, as those subsidies are step down, we

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Speaker 1: expect there will be consolidation because suddenly a lot of

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Speaker 1: those companies in China won't be able to support themselves.

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Speaker 1: But that will be the Tier two manufacturers rather than

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Speaker 1: the big players like c at l um Fact. Pharisis

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Speaker 1: is another one who's building a plant in Europe and

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Speaker 1: has contracts with Diamler et cetera. So in preparing for

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Speaker 1: today's podcast, we had a lot of material to pull from.

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Speaker 1: We've got some models, we've got some research notes. What's

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Speaker 1: the name of the model? Will you tell everybody? So

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Speaker 1: we recently updates that bottom up cost model. And I

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Speaker 1: was sitting there trying to think of what's a nice

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Speaker 1: acronym to to use for that, and I was thinking, Okay,

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Speaker 1: it's battery manufacturing, and it came to me like that,

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Speaker 1: the Batman model lightning lightning. So any b NF users

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Speaker 1: out there listening, if you want to find the model

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Speaker 1: on BNF dot com, you just search it Batman model,

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Speaker 1: which you'll get that man right there you go, James,

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Speaker 1: thank you so much for joining us today, Mark Dana,

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Speaker 1: thanks for having me. Bloomberg an E app is a

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Speaker 1: service provided by Bloomberg Finance LP and its affiliates. This

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Speaker 1: recording does not constitute, nor it should it be construed,

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Speaker 1: as investment advice, investment recommendations, or a recommendation as to

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Speaker 1: an investment or other strategy. Bloomberg an E should not

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Speaker 1: be considered as information sufficient upon which to base an

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Speaker 1: investment decision. Neither Bloomberg Finance LP nor any of its

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Speaker 1: affiliates makes any representation or warranty as to the accuracy

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Speaker 1: or completeness of the information contained in this recording, and

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Speaker 1: any liability as a result of this recording is expressly

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Speaker 1: discribed h