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When I started this newsletter, I just wanted to share what I have learned about batteries during my time in university, paying attention to the markets, and the world at large. My interests have really transcended merely battery technology itself (not to undermine its draw) into the energy industry as a whole. That being said I didn’t think when I began I would be discussing ramifications of a war on batteries. It saddens me that it is going on and there will be many consequences of this conflict, many of which will be unpredictable even to the most astute experts. I do not claim to be one of them, but I will share with you this week some of the consequences that I see effecting the battery industry.
Prices
Holy cow nickel is a mess right now, and no I don’t mean the coins. In You’re putting that in my phone!?, I discuss exactly what materials are used to make Li-ion/Na-ion/solid-state batteries and why material selection where they come from is really important. The very next week in Are You Going to Pay for That?, I discussed as many factors as I could think of that effect the price of batteries. One of the main costs is raw materials themselves and depending on what cell (cathode) is being produced, the price necessarily depends. For NMC and NCA*, Nickel makes up a large part. Especially recently with the humanitarian issues in the Democratic Republic of Congo, cell manufacturers and researchers are really trying to reduce the amount of cobalt in favor of more nickel. In hindsight this is still probably a good thing, especially when you add cost and toxicity of cobalt into the mix, but has put batteries into a little pickle currently.
Why? The price of nickel has gone up almost 200% since this time last year, and 105% in the last month alone. This is due to an epic short squeeze on the London Metal Exchange (LME). The LME has decided to stop/limit and retroactively cancel trades basically in order to protect the short seller from defaulting. Now I’m no markets expert, but this ultimately brings the integrity of the LME seriously into question and for a good overview on this craziness see Russell Clark’s article.
Before the short squeeze phenomena, nickel had already appreciated near 60% since last march as raw materials for batteries had seen price increases including lithium. This isn’t just people making mistakes with their money and corrupt institutions causing nickel to act like a meme-coin, there are real world phenomena underlying this. 20% of the high purity nickel needed for cathode production comes from Russia. With the escalating economic battle going on via sanctions and banning exports, supply of nickel is in serious question. This undoubtedly increases the cost of batteries for some time as nickel is a major component of NCA and NMC batteries which make up a large percentage of commercial cells and Russia is a top supplier.
It is also interesting to note that in addition to nickel, Russia produces a significant amount of iron, steel, aluminum, palladium, platinum, and neon. All of these materials are important for electric vehicles for example and could hurt manufacturers just like nickel.
Energy
Russia also produces a lot of oil, natural gas, and coal. As much as we would love to be completely independent of fossil fuels for energy, the reality of 2022 is we need them to heat homes, operate businesses, and for other reasons we will need them to some extent forever as seen here.
Energy costs are already increasing substantially across Europe due to questionable polices and are very reliant on Russian fossil fuels for energy. 20% of EU’s natural gas comes from Russia for example. The impact on energy and gas prices in the US has less to do with the Russia/Ukraine conflict in reality, as 3.3% of petroleum, 0% natural gas, and 5.5% coal imports come straight from Russia.
Energy is a direct precursor to just about everything and rising costs reverberate. Battery production requires energy along every step of the way including mining, refining, processing, cathode synthesis, cell preparation, pack instillation, shipping costs, etc. We all want renewable energy, but the unfortunate truth that is hard to face for some is that the renewable movement is reliant on fossil fuels in the short-medium term. Higher energy costs hurt the development of renewable energy infrastructure. Sanctions on Russia oil and gas constraining supply, and European reliance on Russian energy increase the operating costs for battery plants using fossil fuels. If it costs more money to make batteries, the price of those batteries will go up too.
Markets
What does the market have to do with batteries? S&P 500 is down about 5% for the last month so that’s grim and commodities like wheat, fertilizer, and nickel to name a few are ripping because of the Russia/Ukraine conflict. Inflation is also really high and likely to maintain, starting long before but certainly aided by the recent conflict. The federal reserve really has two things that it does: adjust interest rates and print money (traditionally printing physical dollars, but today includes credit expansion/injecting liquidity/quantitative easing effectively increasing money supply). Right now the fed is expected to raise interest rates to get inflation under control in the US. Doing this into a slowing economy, especially with the large deficit that the US has accumulated has real recession risks. The below tweet is more evidence of a higher chance of recession.
The typical move in a recession or when there are supply/demand problems is to turn the money printer on and inject liquidity into the market. So here we are in a spot where we are talking about printing money before we even have raised interest rates? It is a gloomy spot we are in, not even including the fact there are people dealing with a hot war on the other side of the ocean.
We currently live in a fantasy world where many are propagandized into believing increasing the money supply/printing money does not cause inflation. The reality is that there is a good possibility that due to economic consequences of higher commodity/energy prices and high recession risk that the fed does print more at some point (not a matter of if, but rather when). This monetary inflation unfortunately disproportionally hurts the savings of lower-middle class folks more, but also not likely solve many of the issues we are dealing with. Russia/Ukraine produce a large amount of the wheat, fertilizer (an issue starting before the war), seed oils, and metals that the world needs to name a few. Printing money won’t change the fact that much of the agricultural season in these areas has been missed due to the war. So the simple solution that is often used isn’t so simple as to make up for what is lost and will result in rising food costs and food scarcity.
Rising food and energy costs will unfortunately put many people in a place where they are much more worried about their day-to-day well-being, their personal security, short-term resources, and making sure they can survive financially (and in some parts of the world perhaps literally). Often not thought about, but Maslow’s hierarchy of needs doesn’t just go away because our lives in the US are so nice. Many people will get pushed lower on the hierarchy of needs which means they will be spending less time concerned with climate change which I will argue is near the top of this pyramid in a future piece (doesn’t have to be a bad thing). Fewer people worried about climate change would likely decrease the demand for electric vehicles (EVs) and batteries as long as these problems persist. There is an argument that rising gas prices would increase demand for EVs and it is certainly intuitive. If you charge your car with electricity, you do not have to worry about gas prices. Some people are even noticing this trend.
The problem is there are still many people unconvinced in the power of electric vehicles and much of the power used to charge EVs on the grid comes from fossil fuels, mitigating much of the positive impact. Furthermore, EVs tend to be more expensive than internal combustion engine vehicles which means those with tighter budgets worried about gas are less likely to be able to afford a new EV and have the infrastructure near home to support it. As ideal of a solution this would be, pure EVs are not practical for the majority of the market participants at the current time in addition to there not being enough of them (see EVs - Enormous Ventures).
Batteries will always be important; however, I could also see investment into the space decrease during times of heightened uncertainty even with the convictions and misguided fervor of the subset of the green movement that wants to nuke all fossil fuels today in favor of renewables. I say this because I think people tend to be thinking more about things lower down Maslow’s hierarchy like macro picture, food, energy, security, family, and safety during times of heightened uncertainty. Also, in an inflationary environment, peoples time horizons tend to narrow meaning they tend to think about the present to a greater degree than the future. You can think of climate change as the ultimate long run/long time horizon goal and feeding yourself as the ultimate short run goal. Higher inflation causes people to want to get rid of their money faster and look for a safe place is to hold their money, rather than think about proper investments in the future health of the planet.
“Rising fossil fuel prices will accelerate the transition to renewable energy, and higher gas prices mean you should just drive an EV.” Only if it were so simple…
Until next week,
-Grayson
*NMC=lithium [nickel manganese cobalt] oxide where the ratio of nickel, manganese and cobalt vary depending on the maker. Common ratio is one third of each transition metal. NCA= lithium [nickel cobalt aluminum] oxide. The ratio of these materials is usually 8:1:1. LFP is lithium iron phosphate.
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