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1 March 2023

CATL takes lithium cost hit in search of customer exclusivity

CATL has entered into strategic agreements with some of its customers to supply them with batteries guaranteeing to price lithium carbonate at 200,000 yuan ($29,100), around half its current price and just a third of its highs from last November. Lithium carbonate spot prices have continued to fall following the news, ironically making the terms of this deal slightly worse as a result.

What CATL wants in exchange is near exclusivity for the duration of the contract – 3 years – for its customers to buy a significant proportion of their battery demands from CATL at these low prices. This is CATL’s way of cementing its dominance in the Chinese battery ecosystem through its past efforts in vertically integrating itself into the lithium mining industry.

CATL can do this because it acquires significant amounts of its lithium carbonate from its own operations, last April it spent $130 million acquiring rights to a lithium mine in Southern China and has stakes in other projects that include priority access to supplies. The lithium used within these batteries is expected to be sourced from multiple domestic and foreign mines and will be manufactured inside China.

The decision comes alongside weak Chinese demand for EVs following the further winding down of subsidies in the new year and the effects of removing covid-19 restrictions and the ensuing fall in demand. According to sources close to those involved some companies have been hesitant to accept these terms due to expectations surrounding lithium supply and maintained lower costs.

This offer from CATL to require long-term exclusivity implies an expectation that other companies will be looking to compete on similar terms with it in the near future, and that CATL wants to get ahead of this before they become genuine competitors. The decision is yet to draw ire from any competitive watchdogs as an attempt to drive competitors out of business, but it hasn’t been very long since details of the plans have come to light so that remains a possibility. However CATL still plans to sell lithium carbonate at above the costs to produce it, which currently costs around $7,500 per ton to produce, or just over 51,000 yuan as of the time of writing. This still leaves nearly 300% arbitrage for CATL and so it can’t really be considered dumping so much as it is the benefits of vertical integration.

From what we can tell, this offer only extends to companies within China, namely Zeekr’s Geely unit and NIO and a few others, and doesn’t include big names such as Tesla and Xpeng, two of CATL’s biggest customers. This is partly going to be down to supply, even if CATL is the largest battery manufacturer in the world with 37% of global production, it can’t be the sole provider of EV batteries to the entire Chinese battery manufacturing ecosystem, no matter how much it wants to be.

The effect this deal could have on the competitiveness of Chinese vehicles is massive, lithium remains one of the most expensive components of batteries, LFP batteries are particularly exposed to the cost of lithium carbonate as it is the primary feedstock. This deal will reduce battery cell prices within China even further relative to its European and North American counterparts, while this won’t hurt the US because of the protection afforded to it from the IRA, it will be particularly bad for Europe due to its more even trading relationships.

If this deal highlights anything, it should be the importance of vertical integration within battery supply chains, as in a time of high commodity prices, CATL can use its size to its advantage to secure long-term supply contracts at favorable rates.