Comments Reinforce Our Electrification Thesis
Comment of the Day

September 27 2010

Commentary by Eoin Treacy

Comments Reinforce Our Electrification Thesis

Thanks to a subscriber for this interesting report by Rod Lache, Patrick Nolan and Dan Galves for Deutsche Bank. Here is a section
Demand for the EV product appears to be strong. BPLC is now receiving 250 consumers per day at its visitor center near Tel Aviv, and it is getting 20% to sign up for the Renault Fluence sedan, which will be the first EV to become available through the BPLC network (5400 consumers have signed up aso far). In consumer surveys, take rates increase to as much as 50% when consumers are provided more definitive purchasing terms (also note that delivery is 1.5 years away). In addition to these takers, BPLC indicated that 150 of the largest commercial fleet customers in Israel (which collectively own/operate 100,000 vehicles) have signed up to offer Better Place vehicles in their fleets.

The economics of vehicle electrification already looks convincing in many markets, and they should become even more compelling as battery prices decline. BPLC estimates that EV battery pack prices are currently in the $10,000 range (at least for large potential purchasers such as Better Place). These packs maintain more than 80% of their original performance specs for approximately 1500 cycles. At 100 miles per cycle, this implies 150,000 miles of initial life expectancy, or $0.06 per mile ($10,000 / 150,000 miles). But battery prices appear to be dropping by roughly 8% per year, and cycle life expectancy is increasing by 20-30% per year. In other words, even without major technical breakthroughs (which appear to be increasingly likely), battery packs are expected to drop to the $7500 range by 2015, and advancements in chemistry and process technology should increase life expectancy to at least 3,000 charges in this timeframe. This should increase life expectancy to at least 300,000 miles, and reduce depreciation to $0.025 per mile. Adding in $0.02/mile for electricity cost implies a $0.05 per mile electricity/battery cost. With those economics, retail gasoline prices would have to decline to $1.75/gallon to be competitive with electricity ($0.05 per mile x 35 miles per gallon). Gas prices in Europe and Israel are currently in the $6.00 and $8.00 per gallon range.

Eoin Treacy's view The arguments for electric cars have gained considerable credence in the last decade; incentivised by persistently high oil prices and the influence of the anti-carbon lobby. Considerable development remains to be completed, particularly in the range of such vehicles. The availability of charging stations is also a considerable hurdle. However, since just about every car manufacturer has plans for, or is in the process of manufacturing, electric cars demand for batteries has significant growth potential. (Also see Comment of the Day on July 22nd chem.

Asian companies have so far dominated the sector. Samsung SDI hit a medium-term peak near KRW 180,000 a year ago, retested it from June and pulled back once more three weeks ago. It is now testing the 200-day MA but an upward dynamic would be required to offset scope for a further test of underlying trading.

LG Chem has been in a ranging consolidation for much of the last 2 months, allowing it to at least partially unwind its overbought condition relative to the 200-day MA. A sustained move below KRW 275,000 would be required to question the consistency of the medium-term uptrend.

GS Yuasa remains in a medium-term downtrend, defined by the progression of lower rally highs. It has lost momentum in region of the 2008 highs but needs to sustain a move above KRW 650 to indicate demand has regained the upper hand.

BYD has rallied to break the 5-month progression of lower highs and is now testing the 200-day MA. It needs to hold above the September low near HK$43.25 to lend credence to the medium-term bullish hypothesis.

Johnson Controls pulled back rather sharply from the April peak but found support in the region of the 200-day MA and is now testing the upper side of the four-month range. A downward dynamic would be required to question scope for a successful upward break.

The above report speaks very highly of A123 Systems' potential but the share has posted a succession of lower rally highs since its IPO and while it has lost downward momentum over the last few months, a sustained move above $11.50 is needed to confirm the emergence of demand dominance.

Advanced Battery Technologies remains in a 1st step above the base. Ener1 has been testing the March 2009 lows, but has firmed somewhat near $3 and a sustained move below that level would be required to question scope for a further test of overhead trading. Panasonic remains in a 2-year base formation and is currently rallying from the lower side.

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