Tesla's Recent Stock Surge Has Also Helped its Battery Supplier LG Chem

author: Derrick Smith   

Tesla's stock rally over the past month has left skeptics sidelined as the electric carmaker became the world's most valuable automaker, surpassing even Japan's Toyota Motor Corp. Tesla's stock has soared from $361.00 in March to $1,587.54 on Wednesday. But EV battery supplier LG Chem has also experienced a stock surge.

South Korea's LG Chem Ltd is a major supplier to Tesla, as well as the rest of the auto industry. As a result of Tesla's incredible stock surge, shares of LG Chem have also risen by 60% this year to a valuation of about US$30 billion, becoming the sixth-largest stock on the benchmark The Korea Composite Stock Price Index  (KOSPI).

LG Chem's stock has risen from its March lows of 230,000 KRW (US$192.64) when the coronavirus pandemic began to 527,000 KRW (US$433.87) as of Wednesday.

Over the past decade, LG Chem has become one of the world's biggest suppliers of EV batteries to the auto industry, along with Samsung, Panasonic, which is Tesla's U.S. battery partner, and China's Contemporary Amperex Technology Co. Limited (CATL), which is a supplier to German automaker BMW.

In addition to Tesla, LC Chem supplies batteries to Volkswagen and Hyundai.

Part of LG Chem's stock surge can be attributed to the deal to supply batteries to Tesla for all of the vehicles built and the California automaker's new Shanghai factory that went online late last year. The Shanghai factory produces the Model 3 for the China market and will eventually start production of the Model Y crossover.

Expanding electric vehicle subsidies in Europe and Tesla's recent stock rally have also buoyed related stocks worldwide, despite global economic concerns around China's cooling auto market. 

"We believe LG Chem is set to benefit the most in Europe with its high market share and positioning," said Jae Lee, chief executive officer at Timefolio Asset Management SG Pvt, a Singapore-based hedge fund that holds LG Chem shares.

Tesla's China-made Model 3s will use batteries from LG Chem.

As the auto industry transitions to building more electric vehicles, batteries are becoming the "new oil" and global automakers are racing to ensure they have a steady supply of batteries for their future EVs by forming partnerships with Asian battery suppliers, including LG Chem.

LG Chem and U.S. automaker General Motors are investing $2.3 billion in a joint venture battery factory in the U.S. The Ohio battery factory will mass-produce battery cells for GM's future battery-electric vehicles. LG Chem is currently the battery supplier for GM's Chevy Bolt EV.

LG Chem had 24% of the global electric vehicle battery market as of the end of May.

China's CATL however has been hurt by the pandemic, partially due to a trade dispute with the U.S. and a scaling back of government subsidies in its home market. However, the company recently forged a seperate supply deal with Tesla's Shanghai facility.

According to the Taipei Times, LG Chem had a US$124 billion battery order backlog early this year. The company is planning to expand capacity to 100 gigawatt hours by end of the year and 120 gigawatt hours next year.

"LG Chem has the largest capacity for EV batteries in the world now and it's even increasing it, while rivals are not doing so," said Wooho Rho to the Taiwan news outlet Taipei Times. Rho is an analyst at South Korean company Meritz Securities Co.

Rho and at least six other analysts raised their price targets for LG Chem this month, with Meritz expecting a consolidated operating profit of 532 billion won (US$440 million) for the quarter ended last month, the highest in about two years.

Investors are increasingly viewing LG Chem as a battery company rather than just a chemicals producer, despite 52% of its total revenue coming from chemicals last year, according to Bloomberg Intelligence.

However, other market concerns for LG Chem include the possibility that Tesla could announce a new battery supplier at its upcoming "Battery Day" event in September. Tesla is rumored to announce a newly designed battery that offers a million miles of use, which may be produced in a partnership with China's CATL.

Automakers including Tesla are also working to reduce the costs of EV batteries through economies of scale. Currently, the high cost of batteries is a major barrier to EV adoption, making electric vehicles more expensive than internal combustion engine models.

In 2011, when GM's Chevy Volt hybrid was introduced, battery costs were over $1,100 per kilowatt-hour kWh. Since then, battery prices have fallen by 87% to roughly $156.00 per kWh, according to data from Bloomberg New Energy Finance (BNEF). By 2023, that number is expected to drop to $100 per kWh, bringing down the cost of EVs to that of internal combustion engine models.

Once batteries reach below $100 per kWh, more people are likely to switch to EVs, which in turn will increase demand for the batteries that will power the vehicles. So it's safe to say that LG Chem is well positioned to remain the largest battery supplier to the auto industry.

Derrick Smith