Umicore: cathode capacity expansion cuts signal slower EV revolution

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Electric vehicles can cause a price shock for keen buyers, primarily due to the battery costs. China’s aggressive capacity expansion on batteries is two-pronged. Costs are falling, but at a time when domestic sales for EVs have lost energy. This has diminished China’s demand for cobalt and nickel, key battery inputs.

This has been bad news for Belgium’s Umicore, maker of battery cell cathodes. Its share price has fallen more than a third this year. Lower input prices affect its own revenues just when it needs to invest heavily in new western battery supply capacity. Flattish profits in its mainstay catalytic converter business for internal combustion cars have not helped matters.

Umicore took action on Tuesday. A glut of cathode material has led the group to revise capacity expansion plans lower. Its depressed share price rebounded 13 per cent.

Capacity growth in cathode materials will now be 15 per cent lower with 195 gigawatt hours expected by 2026 from the current 85GWh. This will result in a €1.2bn saving of net capital expenditure. Later, Umicore’s capacity will expand to 270GWh by 2030, but at a slower pace than previously planned.

Part of the problem is inflation. Umicore plans to supply cathodes to a joint venture partner, battery maker Automotive Energy Supply Corporation, building 35GWh of capacity in Canada at a total cost of €1.3bn. Almost half of this will come from government grants. Even so, at €36mn/GWh the cost is well above earlier estimates, notes Jefferies.

Worried shareholders would have noted that Umicore’s estimated negative free cash flow tots up to €300mn annually for the next three years. Prior to Tuesday’s announcement net debt was to rise from €1.1bn last year to €3.6bn. That is almost three times its expected ebitda in 2026, according to Visible Alpha. That would exceed its self-imposed limit of 2.5 times.

A slower expansion should placate shareholders who faced the prospect of a cash call to cover the bill for new factories. As other renewable energy companies have discovered, financial reality is catching up with bold hopes for an energy revolution.