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Investing in Cobalt and Electric Batteries

It’s time to talk about battery production.

I know, I know — batteries are hardly as sexy as artificial intelligence (AI) or autonomous cars.

But for technology investors who are interested in emerging sectors, having a knowledge base on battery components — including nickel, aluminum, and cobalt — could help you tap into profits.

I’m about to show you why, and I’ve decided to use lithium-ion batteries as an example.

You see, the cost of lithium-ion batteries is slowly decreasing. This is a positive thing. With lower battery costs come electric cars and electric vehicles (EVs) that are more affordable. And as vehicles become less expensive and more available to a broader market, demand will surge.

And this makes now a good time to start investing in the underlying components of batteries, which are poised to have a subsequent surge in demand.

Let’s start with exactly how far these battery costs have fallen…

The 6-Year 70% Lithium-Ion Battery Drop

Over the last six years, the average cost of a lithium-ion battery dropped by over 70%. What used to be an $800 bank breaker is now a manageable $227 per kilowatt-hour (kWh).

And $227 per kWh is just the national average. Tesla claims that it can produce a lithium-ion battery for $140 per kWh.

Tesla Powerwall

For those of you who don’t know, lithium-ion batteries are most famously used in electric cars.

They’re also the key components in dozens of electric batteries, including Tesla’s Powerwall.

Unfortunately, for the moment, these electric batteries are expensive, racking up electric car costs.

Installment and production costs range from $7,000 to $20,000 per vehicle.

These costs need to go down in order for electric cars to reach grid parity with gas-guzzling vehicles and to be successful.

Sam Jaffe, the managing director of Cairn Energy Research, believes that we’re getting there: “The journey to the mythical $100 per KWh has sped up in the last few years and we’ll definitely arrive by 2020.”

This means that for investors looking to capitalize on the electric battery surge, now is the time to start being smart.

But how exactly will we get to that mythical $100 per kWh number? To many people, the sum seems far-fetched.

But there is one big influencer that’s slowly pushing down prices: manufacturing costs…

The Cost Breakdown of Lithium-Ion Batteries

The true reason behind electric batteries getting less expensive is the slow decline in production and manufacturing costs.

A variety of factors have contributed to this decline. But before we get into that, let’s look at the actual cost breakdown of your average lithium-ion battery…

Novo reported that manufacturing costs make up just over 30% of the total battery costs. And 60% comes from the components, including the key metals that make up the cathode, separator, and anode.

Considering that it’s easier to reduce manufacturing costs than materials, many companies have been striving to reduce manufacturing costs in any way possible, including:

  1. Mass production
  2. Automation
  3. Increased efficiency

Those first two efforts — mass production and automation — go hand in hand.

You’ve no doubt heard of Tesla’s monstrous gigafactories. With the Gigafactory 1 coming online in stages in Sparks, Nevada, and with other factories in the works, Tesla is set to be a lithium-ion juggernaut.

Just one of these gigafactories will produce more lithium-ion batteries than what was produced by the whole world in 2014.

And Tesla isn’t alone. Many companies are jumping on the gigafactory wagon. LG Chem, Panasonic, and Samsung are all churning out batteries at never-before-seen rates.

What goes on inside these factories is also important. Most lithium-ion producers, lead by China, are relying heavily on automation.

Then there is the efficiency aspect. Over time, the energy density and efficiency of lithium-ion batteries have increased.

This has happened because of improved technology, which allows battery manufacturers to improve performance and appeal to a larger market without increasing costs.

All these factors will continue to influence battery prices as the electric battery market develops.

Jaffe expects the cost of the electric battery to continue to drop 15%–20% until 2020.

And this brings us to the key point: What is the best way to profit from these lower manufacturing costs?

The secret is investing in the metals behind that 60%…

The Metals Behind the 60%

Above, I talked about the various costs involved in battery production, noting that the components of batteries make up 60% of overall costs.

Of these components, the cathode makes up the bulk of the costs.

Below is a chart that breaks down the metals used in each cathode for three of the most popular kinds of batteries:

electric battery materials

As you can see, cobalt, aluminum, and nickel are the three main components in both the Tesla Powerwall and the Tesla vehicle. The iPhone battery is 100% made using cobalt.

Investors in these metals stand to benefit from growing demand spurred by reduced battery costs.

As more consumers rush to get affordable electric batteries, we’ll see an uptick in demand for the underlying components.

And with battery manufacturing costs reduced, these underlying components can prove quite lucrative.