Investors perhaps have not noticed, but within the EV supply chain industry—now worth over $1 Trillion (on Tesla alone!) there has been a huge debate about which EV battery would be dominant in the world.

The winner will be worth many tens of billions more than the loser.

And while Lithium-Iron-Phosphate (LFP) batteries have been The Ugly Duckling of the electric vehicle (EV) world, they look like they will beat out the longer range NCM (Nickel Cobalt Manganese) batteries.

The EV sector is growing so fast that this does not mean the end of nickel or cobalt—but is sure good news for lithium.

Investors see this in the buyouts that are happening of the lithium junior explorers, like Millenial Lithium (ML-TSXv) and NeoLithium (NLC-TSXv)—those two total close to CAD$1.5 billion in buyouts. (And by the way, I think ARENA MINERALS AN-TSXv) will be the next one.)

How many junior nickel companies have got bought out lately? ZERO.

The knock on LFP technology is range. LFP is not a sexy long-range battery – a nickel-based battery or the new kid on the block – a solid state battery.

But they’re cheaper than NCM, and as all the traditional automakers want to make a very inexpensive EV, they have to use LFP technology.

The only problem is now—there is basically no LFP production outside of China. And it’s Chinese companies wanting to buy up the lithium juniors to secure supply. 

A year ago, the western EV supply chain didn’t care about ex-China LFP production. But now that Tesla said (on Oct 22) that it will be using LFP for all but their premium brands–and VW said the same thing–and now the Market is DESPERATE for ex-China supply.

Electric Vehicles are part of the sustainable economy and having NO ex-China supply is not sustainable.

LFP batteries have been around for 40 years. This is a very mature technology. In fact, LFP battery technology is up against its theoretical limit for density – about 170 watt-hours per kilogram, or Wh/kg. 

That puts LFP battery at a ceiling that is far less energy dense (which translates into a lower range) than its cousins.

Source: McKinsey and Co.

 

More to Life than Density

 

Morgan Stanley put together a great visual comparing where NCM and LFP batteries shine:

Source: Morgan Stanley

LFP batteries are cheap. They are safe. And they last a long time.

An LFP based EV is going to appeal to any market concerned about cost. Morgan Stanley estimates that LFP batteries “cost 70-80% of NCM batteries”. 

The cathode cost per kWh is even less when compared to common NCM battery types:

Source: Morgan Stanley

Even Tesla uses LFP batteries in its standard-range Model 3 that are sold in China.

 

Push from China

 

No surprise that China is the hub for LFP batteries. According to MetalBulletin, “a total of 22.52 gigawatt hours of LFP batteries were installed in EVs in China during the first six months of the year, accounting for 42% of total installed batteries.”

The acceleration of LFP adoption in China coincided when the Chinese Community Party (CCP) turned off the taps on high nickel content batteries two years ago.

In other words, the guys in charge have given the thumbs up to LFP.

In fact, the adoption of LFP batteries in China seems to be accelerating. Credit Suisse pegged LFP battery installations at over 60% of all batteries in September.

Credit Suisse points out that:

LFP has seen market share gain through 2021 YTD thanks to its cost advantages to NCM batteries. We expect this trend to continue, given NCM batteries’ costs are unlikely to ease anytime soon. As a result, value chain companies (cathode, anode, etc.) with higher exposure to LFP batteries would benefit from LFP battery’s market share gain.

In many ways the LFP battery is far more robust battery than the competition. Applications where cycling is an issue – where the battery is being charged and discharged many, many times, (think: heavy duty-type applications, like electric buses or fleet vehicles, or some renewable energy storage applications) is far better suited for LFP.

 

Innovation is Still Taking Place

 

Second, while LFP cell density may have reached its limit, improvements to the overall battery design have led to incremental improvements in the density of the package.

China has been at the forefront. About the same time the Chinese government was limiting high nickel content batteries, BYD (BYDDF – PNK) developed a new “blade” battery design for LFP.

Source: Pushevs.com

The blade looks like a downhill ski without the lip. Its long, narrow form creates its own structural integrity, meaning you do not have to add metal to the battery pack just for strength.

The result is a far lighter LFP battery pack even if the density of materials had not changed.

This sort of design could only be done with an LFP battery. An NMC battery would heat up too much if you did a blade design with it. While the density of the LFP has not changed, the pack density has gone up a lot.

The BYD Blade battery is proprietary. But undoubtably other companies are already working on tweaks to the architecture to squeeze a bit more weight out of their own LFP designs. Already CATL – another leading battery manufacturer out of China – has managed their own, denser LFP battery as well.

The LFP market outside of China is just starting to gain traction.

The Korean company SK Innovation’s standalone battery unit SK recently said that they are looking into LFP battery development for lower-priced vehicles.

The CEO of Ford (F – NYSE), Jim Farley, said Ford would use LFP batteries on some of their commercial vehicles.

When Volkswagen (VWAGY – PNK) held their Power Day in March they said that LFP would be used in some VW entry-level EVs.

 

Consequences of Adoption

 

The composition of LFP batteries has other knock-on effects.

LFP batteries are unique. They take no nickel, no cobalt, and no manganese. The more LFP’s take share, the less incremental demand for these metals.

On the other hand, LFP batteries use more copper and more graphite than other battery types.

Source: Bernstein

 

Leveling the Playing Field

 

LFP batteries are not going to be “the game-changer” for electric vehicles. They are more like the field leveler.

As Morgan Stanley describes (my highlights):

EVs do not require extreme range, they need low cost and higher manufacturing volume. These may be reasons for LFP becoming the choice for mass market models – it is by far the cheapest and most scalable (in production volume) EV battery chemistry that exists today,at least 20% cheaper ($/kWh) at the pack level than nickel-cobalt battery packs.

While the headlines continue to go to the newest and longest-lived batteries, LFP keeps chugging along out of the spotlight. It truly is the underdog – the tortoise – in this race.

And we all know how that turned out.

Any company providing a big assist to a western-based LFP supply chain will be worth a lot of money. But how do investors play it?