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Lithium-Ion Battery Sector Set For Profit

According to estimates from analysts at Macquarie Research, Japan's battery-material market will grow to a 1 trillion yen ($10.6 billion) market by 2020 from a 200 billion yen market in 2008, due mainly to auto-related demand.

The analysts also predict that the market for lithium hexfluorophosphate, also known as LiPF6 -- a crucial chemical element used to make an electrolyte for lithium-ion batteries -- will grow to 50 billion yen in 2020 from 10 billion yen in 2008.

Macquarie initiated coverage on two lithium-ion battery electrolyte makers in particular last week -- Stella Chemifa Corp.

The two companies have 40% each of the market for lithium hexfluorophosphate, the analysts said in a research note to clients.

"We believe their superior product quality means they will have a higher share in the auto-related battery market," they said. Both Stella and KDK are "an excellent way to gain profitable, unthreatened exposure to the growing lithium-ion battery market."

In Tokyo's afternoon trading session, shares of Stella Chemifa were down 1.1% while those of KDK were up 2.3%. The value of both companies' stock has more than doubled in the past year, according to data from FactSet Research.

In broader regional trading, Japan's Nikkei 225 Average and Topix were each down 0.4% and South Korea's Kospi shed 0.1%. The Shanghai Composite tacked on 0.2%, Taiwan's Taiex added 1.1% and Sydney's S&P/ASX 200 rose 0.9%. Hong Kong was closed for a holiday.

Production dilemma

Material costs for the production of lithium-ion batteries have been a key concern for the market, but as demand for the batteries in consumer electronics and the auto sector has grown, battery makers have an improved incentive to work on cutting battery pricing.

"We estimate that the biggest cost-reduction potential is in fixed costs and manufacturing, not materials," analysts at Macquarie said.

And "our checks with material makers suggest that the industry consensus is that battery makers must address manufacturing and production costs (still 50% of overall battery cost) before they are in a position to demand price cuts from material makers," they said.

Battery makers may focus on reducing costs of cathodes by designing out the expensive cobalt element, they said.

And some already have. Hitachi Ltd. /quotes/comstock/ /quotes/comstock/13*!hit/quotes/nls/hit said Monday that it developed a material that can double the life of lithium-ion batteries, according to a report Tuesday in the Nikkei business daily.

The new battery will use manganese in its positive electrode, which will reduce use of the rare metal cobalt, the report said.

Hitachi will also use a metal additive in the new battery which will extend the battery's life to more than 10 years, double that of existing manganese lithium-ion batteries.

Hitachi will team up with Shin-Kobe Electric Machinery Co. /quotes/comstock/ to complete prototypes of a new battery and peripheral equipment as early as fiscal 2010, the report said.

Shares of Hitachi fell 1.6%, though the stock is up around 60% from its lows in December after having gained 13% in just over a week.

Auto drive

Reductions in material and manufacturing costs are particularly important, given that the auto production will be a major catalyst for lithium-ion demand.

Macquarie analysts expect auto ramp-up to be significant by the calendar year 2015, with auto-related demand for the batteries to account for half the market by calendar year 2018.

Demand from electric vehicles will be the "real kicker," they said. These will depend entirely on electricity, so the amount of battery capacity required is "significantly higher than other end uses" for lithium-ion batteries, they said.

At the same time, the market will continued to see limited competition.

"There is unlikely to be a serious competitor in the next five years, given the expertise needed to achieve existing quality levels" for LIPF6, analysts at Macquarie said.

"Stella and KDK both claim that reaching commercialization at current product quality levels required more than 10 years of R&D," they said.

And there is "no viable, commercial substitute for LiPF6 when producing Li-ion batteries.

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