EV Industry Hits Turbulence

Amid recent volatility observed across different economic sectors, the electric vehicle industry seems to have been losing its spark recently. Amid worries regarding near-term demand for EVs, several key shares related to electric vehicle manufacturing could be in trouble. Let’s take a closer look:

Albemarle Sinks As Demand Shrinks

The electric vehicle industry may be facing challenges that extend beyond automakers to companies in the EV supply chain, particularly lithium producers. 

Albemarle (ALB), the world's leading lithium company, experienced a significant stock drop of over 6% on Monday following an analyst downgrade from UBS. The downgrade cited declining prices for lithium, a key component in EV batteries. UBS analysts reduced Albemarle's rating from Buy to Neutral and lowered their share price target from $253 to $140. This shift was driven by UBS's (UBSG.VX) reduced EV forecasts, which indicated a drop in lithium demand growth from 30% year-on-year to 22% in 2024, leading to an oversupply of lithium sooner than expected.

Albemarle revised its 2023 full-year guidance on November 1st due to declining lithium prices, mainly because of weakening demand in the US and Europe. While the US and Europe collectively represent only about one-third of total EV production in 2023 and 2024, potential challenges related to economic softness and higher interest rates in these regions are expected to impact EV growth.

Unlike other major commodities like Oil (CL) or Gold (XAU), lithium is not actively traded on large international exchanges; it is primarily sold under contracts with undisclosed terms. China's spot market has seen lithium prices decrease by around 50% from their levels in June, dropping below $20,000 per ton. This sharp decline contrasts with the situation just a year ago when Chinese lithium prices exceeded $70,000 per ton.

Albemarle has reported having price floors on 80% of its contracts, but the details of these floors are not publicly disclosed. UBS analysts expressed uncertainty about when these price floors come into effect and whether they will hold during a prolonged downturn.

The declining prices of lithium coincide with warnings from US legacy automakers, including Ford (F), GM, and Tesla, about softening demand in the EV sector, partly due to higher financing costs. 

GM (GM), for instance, postponed its EV truck expansion due to "evolving EV demand," and Ford noted that American buyers are unwilling to pay the higher costs of EVs compared to gas or hybrid vehicles, affecting prices and profitability. Even Tesla temporarily halted construction of its Gigafactory in Mexico, citing concerns about global economic conditions affecting demand.

This revised outlook for the EV sector may have led battery manufacturers to reduce their lithium purchases for EV batteries. For example, Tesla supplier Panasonic (6752.TY) cut its automotive battery production in Japan and lowered its annual profit forecast.

While concerns about a potential lithium oversupply are prevalent, not everyone is bearish on the market. Some analysts contend that lithium prices could rise in 2024 as battery producer inventory destocking runs its course. According to these experts, as demand for EVs continues to grow, the lithium market will return to structural undersupply in 2024, leading to higher prices.

Tesla’s Unsteady Outlook 

While perhaps not directly related to the lithium market, EV market leader Tesla (TSLA) has been struggling recently amid concerns regarding its market reach. Yesterday, the firm’s stock price dropped nearly 0.3% over the course of the trading day. The proximate cause could have been reports from Germany indicating that Tesla was planning to introduce a new EV priced at around 25,000 euros, equivalent to $27,000.

Investors and potential EV buyers have been eagerly anticipating a smaller, more budget-friendly Tesla, often referred to as the Model 2, although it lacks an official name. Tesla's first mass-market vehicle, the Model 3, was launched in 2017. The company originally started with the higher-priced Model S sedan and Model X SUV.

While Tesla has not officially confirmed the reports about the new EV, the news highlighted an innovative manufacturing technique involving casting the vehicle's frame instead of welding metal parts. Tesla has already implemented this method at its facilities in Germany and Texas, which can lead to cost savings.

Tesla had previously unveiled the Cybertruck in 2019, focusing on entering the lucrative North American pickup truck market. However, the Cybertruck's production has faced challenges, and CEO Elon Musk has stated that it won't significantly contribute to profits for several years.

During the period when Tesla was concentrating on the Cybertruck, it ceded market share in China's growing market for smaller, more affordable EVs. Tesla lacked a product in this market segment, allowing Chinese automaker BYD (1211.HK) to become a dominant player in the Chinese EV market by offering a broader lineup of EVs.

Although details about the $27,000 EV, including its design and release timing, remain scarce, investors are aware of its impending launch. Elon Musk has mentioned this lower-priced vehicle several times in recent months.

Tesla's stock faced a challenging October, with shares dropping almost 20% over the course of the month. The decline was influenced by disappointing third-quarter delivery figures and earnings. The news of a new, more affordable Tesla model offered a glimmer of hope for investors, even though the stock relinquished some of its early gains. (Source: Barrons)

Conclusion

All in all, the future for all sectors that come together to produce the electric vehicles that reach consumers all over the world is foggy. While markets may be struggling at the moment, encouraging signs still point the way forward; time will tell which trends prevail.