The Big Picture:
The macro is challenging, and this too shall pass. Redwood has built a competitive moat, positioning itself to capitalize on two long-term, undeniable trends: electrification and onshoring. While the EV market has recently swung in favor of skeptics, I believe optimism will return in the back half of 2025 with higher EV growth rates. More importantly, next year is just one step toward an all-electric car future. Meanwhile, the trend of onshoring will strengthen as geopolitical tensions prompt Western countries to continue investing in alternatives to the Chinese tech supply chain, which includes batteries.
As for Redwood’s competitive moat, the company is the only US battery recycling and component company generating revenue in the hundreds of millions of dollars, with 70% US market share for recycled battery materials. Additionally, Redwood’s $2 billion in capital invested to date as well as the company’s intellectual capital make it unlikely that we will see new competitors. As for existing competitors, the EV winter is taking its toll on some of the competition, leading me to believe that at least one of Redwood’s three primary competitors (Li-Cycle, Ascend Elements, Northvolt) may not survive. I believe Redwood is in a favorable position given the company’s current cash balance along with the “JB” dynamic, which boosts the odds that the company can continue to fundraise if the current environment drags on.
Redwood Update:
We visited Redwood’s Tahoe Campus outside of Reno this week to explore the progress the business has made over the past two years since breaking ground. Redwood’s partners, including Toyota and Panasonic, who have both signed multi-billion-dollar off-take agreements for battery materials with Redwood, remain committed to their battery cell buildouts and using Redwood as their supplier. Additionally, Redwood has partnerships with nearly every significant electric vehicle automaker or US battery cell manufacturer, at this stage, for recycling. Redwood will maintain a pole position in what is a long-term move to electrification, as well as benefiting from the supply chain onshoring theme.
Redwood’s Business:
As a reminder, Redwood Materials has two businesses:
- Recycling nickel, copper, cobalt, and lithium from old batteries.
- Refining recycled metals into critical battery components, mainly cathode active material, that is sold to battery cell manufacturers.
EV batteries represent the primary source of recycled materials and EV battery manufacturers are the company’s primary customers. For more information on the battery components, see our previous series: Battery 101: The Cathode and The Anode.
The EV Winter and coming Spring:
The concept of a winter best describes the EV and battery macro. I believe we’re about halfway through this season, which is defined by soft consumer demand for EVs, and to a lesser extent, lower pricing of metals that go into EV batteries. These two factors have led to a battery headwind. However, the good news is that these factors have stabilized, and I believe will improve starting in 2025.
There are two reasons why I believe things will improve next year. First, I believe a large part of the EV slowdown is related to difficult comps that were the result of 5 years of pent-up consumer demand that was fulfilled in 2021 and 2022. This was in large part due to the wide availability of the Model 3 and Model Y. Second, I believe starting in the back half of CY25 more affordable EVs will come to market, resulting in the average price of a new EV to fall in line with the average price of a new car in the US (~$45k). Today, a typical EV in the US costs ~$52k.
The Market:
Demand for EVs plays a crucial role in the battery economy, as EVs represent the most significant opportunity in terms of producing kilowatt-hours. In 2023, US EV deliveries totaled 1.9M units, growing at 47% y/y. In 2024, that growth is likely to dip to less than 1%. While this trend is concerning, it’s important to note that EVs still account for only 8% of new car sales in the US. I continue to believe that within 20 years, the vast majority (~80%) of new car sales will be electric. This prediction is based on what I see as the long-term advantages of EVs over gas-powered vehicles, most notably a lower total cost of ownership and greater ease of ownership (despite concerns about range anxiety).
The decline in metal prices presents both challenges and opportunities for the battery economy. To provide some context, the London spot prices of the four key metals used in battery production – nickel, copper, cobalt, and lithium – have declined by 67%, 21%, 67%, and 62%, respectively, from their peaks over the past few years. However, over the past five years, these prices have increased by an average of 51%. The downside of the current spot pricing environment is its impact on the pricing of recycled metals. On the positive side, lower costs for battery components reduce the overall cost of vehicles, given that the battery accounts for as much as 40% of an EV’s total cost. Thus, lower metal prices over the long term will likely increase the demand for batteries.
Looking ahead, I expect growth rates in EV sales to improve and metal prices to stabilize, which should translate into a tailwind for battery demand.
State of the Union:
As a refresher, Cathode Active Material (CAM) is the pressure point of the business. The cathode is—at a most basic level—the element that makes a battery work. It is the positively charged part of a battery which discharges electrons used to power an electric motor. The battery in an EV is expensive, and accounts for between 40-50% of the overall cost of a vehicle. For example, in a $55K Model Y, the battery accounts for about $10-$12K in costs. The cathode (and, more accurately, the materials that go into it) make up more than half of battery cell cost. In other words, the cathode accounts for 10-15% of the cost of an EV. In the US, over 1,000 GWh of battery cell manufacturing is expected to be online by 2030. That means those factories will spend nearly $650B procuring cathode to feed those facilities over the next decade and no meaningful CAM production exists in the US today. As the single biggest cost of the battery and an electric vehicle, this is the pressure point that Redwood wants to address.
CAM will account for the majority of the company’s long-term revenue. Redwood’s cathode is currently in its pilot phase, running at 1/1,000 of the capacity once the commercialized build out is completed.