Are these two events this week linked?
Just as a Chinese investor was blocked from taking a bigger stake in rare earths company Northern Minerals early in the week, CATL – the world’s biggest battery maker and long-time shareholder in Pilbara Minerals – quit most of its shareholding in the company.
On the face of it there shouldn’t be any linkage, but with Chinese investors and companies, you just never know.
The Northern Minerals situation will still see the Chinese investor keeping a 9.9% stake. It is not allowed to increase it to 19.9% to match the stake held by Iluka Resources, which has done a major supply deal with Northern.
That was a now standard foreign investment decision by an Australian government wanting to keep foreign control in the rare earths business to a minimum after the lithium sector saw a lot of strategic investments from foreign companies – especially Chinese, American and lately, Chilean.
But then what of the CATL move to sell most of its Pilbara stake when there was no pressure to do so, and at a time when CATL is engaged in moves to try and drive down lithium prices in China?
CATL sold its nearly 5% stake in Pilbara Minerals for $601 million ($US405.31 million), according to multiple media reports.
The sale helps explain why Pilbara shares lost around 10% in the week to Thursday, even though it had announced record revenues, earnings and its first ever dividend.
CATL bought its 4.9% holding for $A0.30 per share in the depths of the 2019 lithium recession. It sold the stake, – 146 million shares – in a block trade at $A4.10, netting CATL $A555 million from its original investment. Goldman Sachs and UBS ran the deal.
If CATL was looking to maximise its investment in Pilbara, why did it sell now at $4.10, and not last November when the price was well above $5 – or around 20% more. It doesn’t need the money. It is about to report a 2022 profit of around $US4.3 billion, according to a trading update issued in late January.
Analysts say the sale does not impact the battery maker’s access to Pilbara’s lithium supply. Pilbara in 2020 agreed to a five-year offtake agreement with battery chemicals maker Yibin Tianyi in which CATL is a major shareholder.
Given CATL’s lithium access is secure, industry sources said the sale was more likely about taking a profit given a slide underway in prices of lithium and its producers.
But last month CATL started offering smaller Chinese electric-vehicle makers discounted prices on batteries for terms that include a built-in assumption that prices of lithium carbonate, a key component in auto batteries, would more than halve to a reported to $US30,000 a tonne.
Perhaps the sale was as a result of the company looking to separate itself from a shareholding in a key supplier – for appearances sake as it attempts to drive down lithium prices in China and globally.
The CATL move has not been matched by BYD, the second biggest battery company and the world’s biggest EV maker. You can bet that if it does, Tesla will insist that BYD cuts its battery prices for Tesla’s Chinese made EVs.
CATL has been a Pilbara shareholder since 2019 when it was able to pick up a massive stake in Pilbara at 30 cents per share. CATL invested $55 million into Pilbara shares back then.
CATL held 207.5 million Pilbara shares on its books as of 14 September 2022, so selling $600 million worth of shares would mean it has cashed out around three-quarters of its entire Pilbara stake.
CATL has reportedly been talking to small EV makers about low priced battery deals – companies as NIO, Li Auto, Huawei and Zeekr. Tesla was not included. Li Auto this week said it was still talking to CATL about a deal when releasing its 4th quarter results.
The battery giant is pushing a lithium rebate program to automakers to drive down battery purchasing costs for the handful of customers.
Media reports in China say the core terms of the deal include that CATL will batteries based on a price of RMB 200,000 per tonne of lithium carbonate for the next three years.
At the same time, automakers signing the partnership will be required to commit about 80% of their battery purchases to CATL, according to the report.
News of the deal in mid to late February saw CATL visited by Chinese government officials, according to a brief Reuters report.
At the same time CATL revealed plans to help Ford build a big battery plant in the US, using CATL technology. The Chinese government said it would investigate the Ford deal.
CATL’s battery offers have pushed battery grade lithium prices lower in the past month. While lithium prices rose in 2022, however, they are now weakening in 2023.
Chinese spot prices for lithium carbonate have fallen from near an eyewatering 600,000 yuan ($US86,200) a tonne in mid-November to below 400,000 yuan currently.
They are likely to drop below 300,000 yuan by the end of this year, about November’s peak.
That has hit the share prices of major lithium players like Pilbara, Mineral Resources, Albemarle, IGO and SQM. Their shares prices are well down from their highs of last November, but they are all higher now than they were at the start of this year, which is something many investors forget.
S&P analysts see the average cash operating cost of lithium carbonate production at $US4,563 a tonne LCE and total cash cost $US7,540 a tonne LCE, which is still a fraction of the lower prices that analysts are forecasting for lithium carbonate.
But despite this clouded outlook, companies like Pilbara, Albemarle and SQM are pressing ahead with their ambitious investment plans.
Earnings may have peaked for the time being so far as prices are concerned but analysts and investors will be looking for higher volumes to drive revenues and profits.
Of course, all bets are off if Chinese car buyers start picking up more EVs this year as their confidence rebuilds, even if purchase subsidies are no longer available.
One factor that is emerging quickly is the sharp comeback by plu-ins (hybrids). Chinese analysts report sales boomed during winter in northern (colder) parts of China because battery powered EVs are sluggish in low temperatures and their driving ranges fall sharply.
Small plug-ins are also selling strongly to urban dwellers as run abouts in big crowded cities and towns. That could hit Tesla hard because it doesn’t have a small runabout style plug in vehicle to offer.
