Goldman Sachs names the winners and losers of an expected glut in EV battery parts
Goldman Sachs expects an oversupply in the global market of battery parts for electric vehicles to have major implications for four major companies. The investment bank said cathodes, a part of a battery that attracts positive charge, are increasingly being seen as a commodity. This means that many companies are producing similar kinds of cathodes, which could lead to an overabundance. Such oversupply typically means companies lower prices to stay competitive which can potentially eat into profits. Potential losers The bank’s analysts expect POSCO Future M and EcoPro BM, two major Korean cathode producers, to be negatively impacted by this surplus. The First Trust Asia Pacific Ex-Japan ETF holds both stocks. Goldman Sachs expects shares of POSCO to decline by 41% from the current level to 220,000 South Korean won ($170 ), and EcoPro BM’s stock to fall by 52% to 262,000 won. “We see limited room for further volume expansion from recent capacity announcements and expect surplus to lead to significant margin compression risk. We thus initiate at Sell on Posco Future M and Ecopro BM,” said Goldman Sachs analysts led by Nikhil Bhandari in a note on June 12. And winners While Korean cathode manufacturers are expected to face potential margin compression, Korean battery cell makers LG Chem and Samsung SDI are deemed to be in a more favorable position. According to Goldman Sachs, the entry barrier for assembling battery cells is higher than for producing cathodes, making it a less crowded market. In other words, it is harder for new companies to break into the battery cell-making industry because it requires significant upfront investment in research and development and initial capital expenditure. This is unlike cathode production, which many firms are now capable of doing, leading to increased competition. The investment bank’s analysts expect Samsung SDI and LG Chem shares to rise by 32% and 19% over the next 12 months, respectively. Investors have access to these stocks through SmartETFs Sustainable Energy II , Franklin FTSE South Korea and EWY iShares MSCI South Korea ETFs. Around 7%-8% of these funds are allocated to both stocks. Due to the limited number of companies producing cells, the contracts they secure are typically longer-term and may offer better protection for their profit margins. For instance, while cathode makers like Posco Future M and Ecopro BM usually sign contracts for 2-3 years, battery cell manufacturers like LG Chem and Samsung SDI typically secure deals with electric vehicle makers that last 6-7 years, according to Goldman.
