The entirety of the lithium-ion battery industry, as well as the major players in the EV automotive industry, fail to acknowledge the potentially fatal flaw in the marketing of their wares to consumers and governments; a basic accounting term known as depletion.
Any metal mine, in isolation, can report a certain level of profitability on a cash basis when extracting ore for sale. However, a percentage of that revenue needs to be held back for the day that the mine runs out of ore and a new mine is required to continue production. Failing to account for the inevitable exhaustion of an orebody, the source of revenue, results in an erroneous determination of profit, and a significant underestimation of expense. Children operating a lemonade stand learn the concept of depletion, at least those who operate a stand for more than a single day, because on the second day a new batch of lemons are needed to be purchased, lemons paid for with a portion of the cash generated from the prior day sales.
Yet, the EV industry declares the public understanding of depletion to be a false flag, one that they intend to overcome, not with a less expensive product, but rather, through “education and awareness” marketing campaigns.
A lithium battery is quite analogous to a mine, an energy mine. Each charge reduces, or depletes, the remaining life and ultimate value, of that battery. Once exhausted, an entirely new battery is required to keep an EV operating. But, the mass media stubbornly glosses over the actuarial expense, then spins out a story that the cost of a battery replacement will decline. That’s a fine marketing line, but thus far is proven to be completely false. When one continues to promulgate a false claim, at what point does it get called out as a lie?
Furthermore, the EV industry fails to acknowledge that even if one is able to purchase a new battery at an acceptable cost, it is to be installed into a vehicle that is no longer new and all of those remaining parts, moving or not, have equivalent or greater wear and tear as did the battery. Perhaps the remainder of the vehicle is also close to the end of its useful life. In any event, before a new battery is installed, that old dead battery also needs to be removed, at considerable capital expense. Maybe other parts are quoted as being in need of replacement in the process, as automotive companies love, absolutely love, selling extra parts under the guise that they are shot, when they are not.
One rarely changes an entire engine in a car, and when they do, it comes with great hesitation, yet the EV industry expects full scale public buy-in on battery replacement, without even beginning to provide real world estimates of the total cost?
Perhaps the least trusted industry on the planet, aside from your smart phone carrier, is the automotive industry, but somehow, due to the fact that the vehicle in question is an EV, automakers are asking us to provide them with a pass: “don’t make us write down the cost of a replacement battery on paper, there are a lot of moving parts in the equation, just trust us“?
My response, to quote from the movie series John Wick: “No, I don’t think I will“.
So how’s that 10 year old Acer computer running?
Almost everyone has an old computer sitting in an attic, a basement, a garage. Sure, it might still even power up, but the motherboard instruction capability, the graphics card, they are so inadequate, given technological advances, that your Dell cannot even be updated with software anymore. And a firmware update? Please. While technically operational, that decade old computer is just junk.
Now, step into an EV and the first thing one sees is a digital panel, an absurdly outsized screen and a bank of digital touch modes, all powered by graphics cards and chips. The current EV offerings are every bit as much a mobile computer as they are a mode of transportation. Just how long will all that instruction processing power last on an EV and when will the software/firmware updates be discontinued?
When one factors in the failure of the EV industry to account for depletion of the most expensive component in an electric car, one that will assuredly fail by design; add to that the wear and tear on the remainder of the vehicle (also unaccounted for in glossy brochures), coupled with a likelihood of complete & total obsolescence of all electronic and digital equipment within that vehicle, in a short timeframe; a sequential increase in the amount of lawn ornaments, formerly known as electric vehicles, is an easy calculation to determine.
That operating vehicle to lawn ornament equation is altered, at least to some extent, when a significantly cheaper battery technology comes to the market. There will not be as much reluctance to install a new battery into an older powertrain and frame when the cost structure makes it sensible to extend the life of a vehicle.
“When my information changes, I alter my conclusions. What do you do, sir?” (John Maynard Keynes)
It is my belief that the cost issues, environmental concerns and scarcity of cheap lithium places an effective cap on the commercial potential of the sector. I further believe that at least part of the current market, and much of the future market for Li is poised to be displaced by a far less expensive, potentially far more viable, alternative. An evolution in sodium (Na) ion batteries has important implications for those currently all-in on Li, which may even extend into the hydrogen fuel hydrogen sector.
Those with a vested interest in lithium ion and hydrogen fuel sources, and also those with equity or debt positions in those industries, will vociferously attempt to support their positions through abrupt dismissal of the premise, or more likely, via minimization of the current developments in sodium ion technology. They will harrumph and guffaw that lithium ion technology is also improving (addition of graphite improves storage, etc.).
The focus of lithium research, based upon EV producer industry reports, largely centers upon improved storage, more output, faster charging rates for the existing Li-ion formulation, tweaks if you will.
Still, none of the supposed improvements on the horizon are designed to even put a dent in the astronomically ridiculous cost of the battery materials itself and that’s what is capping growth in adoption rates for EVs and other battery end use markets. When the cost of a battery, at new purchase of an EV, accounts for a full 1/3 of the vehicle price and when that replacement battery, in certain cases, exceeds the depreciated value of the remaining vehicle some years down the road; the automotive industry, for lack of a better phrase, is selling you a toaster…..a household appliance likely to be thrown away once the most expensive component requires replacement. And, given the price trend for lithium over time, just who in the automotive business can seriously express a view that battery costs are likely to drop, because the opposite viewpoint is actually more plausible.
Until quite recently, I have had no dog in this hunt. My investment practice seeks a promising surf break to hop aboard, trends rather than fads. One automotive producer is already presently rolling out EVs featuring sodium-ion batteries, and they would not be doing so in a vacuum. When a second producer publicly follows suit, that will suggest a trend. If/as/when a third EV company jumps on board, the trend will be out there for all to see.
My preferred board to surf this wave is Solvay.
Solvay SA (SOLB-BR, 27.68 EU), a holding of the Gnostic Capital Portfolio, is the world’s largest producer of soda ash. Soda ash produced from trona, a soft carbonate mineral, contains extremely high, extremely pure, concentrations of sodium, ideal for the manufacturing of sodium ion batteries. In laypersons terms, sodium represents a substitute to lithium. The extraction operation of Solvay is located in the friendliest of jurisdictions, Wyoming, USA. The mineral basin in the region where Solvay operates is estimated to hold more than 40 billion tons of economically minable reserves. 30% of the entire world’s supply of soda ash is produced by trona mining and Solvay invented the process.
An enormous cost differential exists in the necessary materials to produce a highly recyclable sodium ion battery vs the somewhat stranded lithium ion battery. From a capital perspective, sodium ion technologies benefit battery manufacturers, automotive producers, consumers, governments and industrial users alike.
Historical issues with sodium ion, that being the relative lack of energy density vs lithium-ion and the need for more regular charging, much of that seems to be on the verge of being licked by the introduction of nickel and a few other relatively inexpensive metals to the composition. Benefits of sodium ion battery storage are far better real life use in colder climates as well as a battery lifespan estimated to be 2X + that of lithium ion.
Finally, there is the 363 kg. gorilla tipping the scale, a basic cost of trona (the precursor of sodium ion) being just 2% that of lithium.
Add to that far less environmental damage in the production process, an abundance of sodium for processing and a limited need for the expensive metals such as the copper and cobalt involved in lithium ion battery production. All in all, sodium ion presently offers a vastly superior cost-benefit structure, and sooner, rather than later, could make the jump to mass acceptance.
Being the world’s largest miner/extractor of trona, the primary source of sodium carbonate in the world, with abundant soda ash on its properties to process, a steadily growing core business even without any potential windfall that may, or may not, occur as a result of sodium ion battery demand, Solvay might represent a long board to ride the wave. I have no interest in debating or parsing out the relative merits and demerits of sodium ion technology vs lithium ion technology, so don’t bother to try. The mailing to me of counterpoints, the pleas for patience by lithium pundits, as important as it may seem to those seeking support for their cause, is of less than zero interest to me, as I already own Solvay, and own it for an entirely different reason than battery tech.
The Gnostic portfolio ownership of Solvay is based upon the present global uses for soda ash, the relative valuation of Solvay, the high EBITDA margin earned on operations (which confirms the subsector is, at a minimum, oligopolistic rather than freely competitive), the enviable free cash flow earned off present operations, the low depletion expense and considerable balance sheet flexibility. I initially received shares of Solvay via a quite recent spin-out, and have since decided to add to the position, which raises my average cost from zero to zero + the new purchase price/the number of shares acquired.
https://www.globenewswire.com/news-release/2024/01/04/2803909/0/en/Soda-Ash-Market-Size-Worth-USD-32-30-Billion-in-2032-Emergen-Research.html
Should sodium ion battery technology take off, well and good, that’s just icing on the cake. Expansion of the trona facilities is being ramped up to meet demand and can be further expanded at a highly cost effective basis, should battery demand ever prove such that additional sodium is needed.
A relatively modest enterprise valuation of Solvay seems indicative of a present lack of institutional interest in sodium ion as a potential displacer of lithium ion battery demand.
As well, there is a market cap issue. Solvay and Syensco were large cap when combined but Solvay, as a stand alone entity, is barely a mid-cap for now and fails to meet most passive and active investors requirements of minimum cap weights for portfolio inclusion. That is their issue, not mine.
Some quantified environmental liabilities are reserved on the balance sheet; that suggests the potential for unquantified environmental liabilities as well. Some will hold that up as an objection against my purchase, and that is a fair objection, to be sure. In this case, I consider that unknown to be an informal poison pill, possibly preventing a premature takeover should sodium-ion battery technology hit true commercial scale. To me, the worst thing in the world isn’t being wrong on a thesis, because I can just fess up and choose to sell. No, my pet peeve is being right on the thesis, but then getting squeezed out, way too early, by deeper pockets who bribe away the company with a quick, taxable, buck. Hopefully some potentially unquantified environmental costs will hold off potential suitors, for a while.
If/as/when the technology advances, investment “Barneys” will most certainly locate, or be directed, to this reef break, but hopefully, beforehand, a lot of great surf will have already been ridden before hordes of noobs pour in.
I am quietly rather keen on this business, but prefer not to stir the pot or raise the ire of those too deeply invested in lithium sectors, the hydrogen sector and the REE (rare earth elements) used in lithium development that have consumed a great deal of investor attention and capital in the current decade. Sodium ion isn’t yet ready for mass displacement of lithium ion in every use, but for certain applications, one can see it coming. Specifically, in situ energy storage, such as utility grid battery banks and data centers, where cost represents the limiting factor preventing widescale adoption, and where the real estate needed to house a larger battery array isn’t an impediment, sodium ion appears to have a very significant capital advantage. That in itself may be evolutionary for the planet.
This represents my second mention of Solvay (the first post represented confirmation of ownership). Today’s blog piece will likely represent the last public post on Solvay that you will read from me for some years. There is an occasional investment idea that takes time to pan out and some really do deserve to be kept on the Q.T. I am more comfortable participating in a soft opening at a potentially fancy resort, one where I have the run of the property without the masses, rather than waiting for the kinks to get ironed out and then visit during high season at a vastly inflated price. Truthfully, I’m a bit reticent about even posting my views on this company, as it is far less work for me to just shut my trap and keep the location unspoiled.
Yet, my towel, sandals and paperback are already under the palapa, so trying to control even more space on the beach seems rather covetous on my part. My reluctance might really come down to selfishness. I just loved Playa Del Carmen MX beaches before they were overrun, and I thought the world of the Tulum MX beaches before the masses got wind of the location. Figurately speaking, I’ve now moved down the coast a space. Maybe Solvay is, to push out my travel analogy, an investment equivalent to the “Costa Maya“, right there, in the open, awaiting broader discovery, now that a shiny new airport is close by. But if not, hey, I still have a nice view of the ocean. So long as a hurricane doesn’t ruin the resort, as sometimes happens (the former Club Med at French Leave Beach in Eleuthera springs to mind), I can wait.
The investment industry is full of stories to be sold, many less than substantive ventures spun up to the public with great promise, only to quietly disappear once capital dries up.
The math suggests that there is a problem with Lithion ion and that problem could be insurmountable as it is a cost issue. Every effective technological breakthrough becomes cheaper over time on volume growth, rather than more expensive. Yet, Lithium ion, apparently, fails to scale, it is becoming more expensive, not less, as volume demand grows. Structural cost issues are almost impossible to resolve in any business, and that creates a risk of displacement by a superior or cheaper technology.
As for sodium ion, the science, as well as the math, in no uncertain terms, indicate that sodium ion battery tech is verging on the capability of commercial application. If successful, a greatly reduced battery production cost would directly reduce EV automotive inflation and largely eliminate the cost differential between gas powered and electric powered vehicles. In the meantime, Solvay doesn’t need my cash, nor anyone else’s, to build out their very profitable niche at this time. The math works just fine with the company as it is presently organized.
At the prevailing enterprise value of Solvay, I view any play on sodium ion battery commercialization as largely just a throw-in, a BOGO coupon, a lottery ticket, a warrant on potential success.
Strategically important businesses, substantial businesses with growth prospects, those are few and far between. Maybe, just maybe, despite the diminutive market cap, soda ash might represent a critical material for next generation electricity storage and delivery. Should that prove out, maybe, just maybe, Solvay will become potentially important to the world, a strategic investment. The valuation difference between a fine, rather basic investment vs a strategically critical investment can be vast. Should Solvay to gain a name for itself in the rollout of sodium ion, as a strategically important company, that’s when the room upgrade occurs.
There are numerous “ifs” and “maybes” to this thesis, more than normal for my typical Gnostic portfolio holding, which is why Solvay represents, using another travel analogy, a soft-opening of a new location for the public.
Soft openings of any resort carry their own sets of irritants, so they are not for everyone. First guests are essentially the crash test dummies of the hospitality industry. A lot can happen, both good and possibly bad, prior to then. Solvay has about 30% of the global market for soda ash and the other 70% market is relatively fragmented, but the market is still not a monopoly.
There is some investment hype from a potentially competing battery technology, solid-state formulation, put forth from a company funded by Volkswagen. The issue with solid state lies in the fact that the batteries only perform as designed when completely motionless (basic vibrations or any movement can lead to total failure of the batteries in very short order), and they are even more expensive than lithium ion. The issue with anything reported by Volkswagen is that the company threw away all credibility some years ago on its diesel fuel efficiency scandals; reports from VW are taken with a grain of salt, deservedly so. From a theoretical scientific line of inquiry, further research on solid-state is all well and good; for the near term, solid-state doesn’t hold a candle to sodium ion for real life commercial applications.
With a total of 34 reported sodium ion battery plants now complete, permitted or under construction in China, as compared to a single plant proposed in the United States and another single location in Europe, Chinese EV firms have clearly beaten European and North American producers out of the gate with pending commercialization of sodium ion batteries. And, China does have domestic sources of sodium, a dirty and relatively expensive sodium, often produced as byproducts of other chemical processing, as compared to Solvay’s trona product, to be sure, but China is highly strategic. They will use what sodium they have first and foremost and will logically only rely on Solvay as a buffer in the event of domestic supply issues.
If/as/when Solvay does get a pickup in soda ash revenues on EV and grid battery sales, it will logically come about North American, European and non-Chinese based Asian EV manufacturers and battery grid players. Non-Chinese EV and battery producers represent a huge market and there will be domestic pressures on manufacturers to offer a sodium ion battery alternative, as part of any push to maintain control of strategic supply.
Northvolt, a Swedish battery developer founded by former executives of Tesla and focusing on grid utility storage batteries, reportedly, has declared a breakthrough in sodium output capability. The reported increase in battery output moves sodium-ion battery technology from an imperfect substitute, to a direct substitute, at least in stationary batteries, and that represents the first direct attack on Li.
https://www.msn.com/en-us/money/news/swedish-company-says-it-s-made-huge-battery-breakthrough/ar-AA1lCWHS
The western world has, apparently, been caught off-guard by the speed of Chinese sodium battery ramp-up.
In response, there may be a faster push on the development front in America and Europe as a result, and there will certainly be increased focus upon security of supply of base materials required for domestic production.
Outside of potential North American and European volumes, Solvay is sufficiently confident of growth trends in soda ash that they are building out a 2.5 million ton per annum export facility on the US west coast, to supply export markets’ forecast global demand. This port export facility capital development is concurrent with a major expansion of the trona mine in Green River, Wyoming. So, even with a Chinese jump on competitors, Internal planners at the company are looking out at a potentially much larger market for their wares by 2026.
2.5 million TPA volume growth indicates about $600-$700 million of incremental revenues, potentially earning a 29% EBITDA margin, no small number considering soda ash sales at Solvay are annualizing at a $2.3 billion annual range.
2026 might be just a few years off, but will seem a lifetime for impatient investors expecting a steady flow of positive news in order to maintain a position. I don’t consider this a trade, news flow isn’t important to my investment modeling. Nevertheless, I am here now, maybe earlier than I normally get on a surf-board, and am using up a highly scarce ticket on my investment punch-card in the process. Having paid for my basic garden view room, hopefully an upgrade in accommodation, during my stay, is in the cards.
(North American investors should be aware that this article refers to SOLB, trading directly on the Brussels stock exchange).
https://www.solvay.com/en/press-release/solvay-and-vancouver-bulk-terminal-build-world-class-soda-ash-shipping-facility
The Sodium-Ion Battery Is Coming To Production Cars This Year
https://pubs.acs.org/doi/pdf/10.1021/acsmaterialsau.3c00049
https://hothardware.com/news/worlds-first-evs-with-sodium-batteries-begin-production
https://www.sciencedirect.com/science/article/pii/S2095809922003630
https://www.solvay.com/sites/g/files/srpend616/files/2023-08/2023H1_EssentialCo-proforma-financial-information.pdf
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