by FAYYADH JAAFAR / pic BLOOMBERG
THE creditworthiness of Asia’s leading electric-vehicle (EV) battery suppliers should remain intact over the medium term, even as they face mounting pressures from rising raw material prices and high capital expenditure requirements.
According to Fitch Ratings Inc, the suppliers’ technological edge, scale and production efficiency will help them withstand the pressure from higher raw material prices and growing competition from new entrants.
Fitch expected demand for EV batteries to rise at a compound annual growth rate (CAGR) of 24%, reaching 2.3 terawatt-hours by 2030, as more consumers adopt EVs as a proportion of total passenger vehicles.
The world’s top-five producers, namely Contemporary Amperex Technology Co Ltd (BBB+/Positive); LG Energy Solutions Ltd; BYD Co Ltd; Panasonic Corp (BBB-/Stable) and SK On Co Ltd, supplied nearly 80% of the battery cells for EVs in the first half of 2022 (1H22).
“We expect persistently negative free cash flow amid high capital expenditure to support capacity expansion during the ramp-up stage but leverage should remain commensurate with battery suppliers’ ratings aided by increasing equity funding and a rapidly expanding Ebitda scale,” Fitch Ratings said in a recent report.
It said many leading producers have secured long-term procurement contracts covering the next several years, which should underpin strong growth trajectories but rising input costs have squeezed battery makers’ margins since 2H21.
“Automakers’ urge to lock in long-term supply for batteries has prompted closer relationships with leading suppliers and generated large order backlogs at top battery makers and co-investments in production facilities.
“This will reduce the risk of lower pricing, weaker bargaining power, and extended investment payback periods for leading battery makers and support their market positions,” it added.
Fitch expects profitability at leading producers to continue to recover after negotiating pass-through mechanisms to transfer higher costs to automakers.
In addition, the report said some of the top battery suppliers have announced the completion of such negotiations in recent months.