Batteries are the 'new oil' says Morgan Stanley — Here are stocks for every part of the supply chain

Published Thu, Nov 18 20216:48 AM ESTUpdated Thu, Nov 18 20215:51 PM EST

The global battery economy is the "new oil" and will reshape century-old supply chains while establishing a new industrial order, according to Morgan Stanley. Much of the attention surrounding electric vehicles focuses on the car companies themselves — Tesla , Lucid , Rivian , etc. — but there are many more ways for investors to capitalize on the burgeoning industry. "A true 'cross asset' space, the battery ecosystem is far reaching as a reflection of its transformative potential," the firm wrote Monday in a note to clients. "Beyond its direct application to electric vehicles and ESS [energy storage system], the global battery industry sits at the nexus of equity sectors, ESG, commodities, and public policy." The firm estimates that the total addressable market for EV batteries will hit $525 billion by 2040, amid a sharp jump in EV sales driven by technological advancements and supportive policies. ESG factors will also boost sales. Covid-19 and the societal shift it brought acted as a major catalyst as well, and Morgan Stanley believes the pandemic sped up development of the battery economy by between five and 10 years. "These drivers contribute to an industrial 'flywheel' that accelerates capital formation, lowers costs, and, ultimately, provides a path to commercial scale... the emerging battery economy is a story of BEVs becoming vastly superior in cost and capability to internal combustion engine cars," the firm said. Given the scope of the battery supply chain, in order to determine the most-exposed stocks, 25 Morgan Stanley analysts from around the world and covering seven different sectors scanned their coverage universe. The "battery portfolio," as the firm calls it, encompasses every step of the battery from the upstream mining operations, to the cell manufacturers and automakers, and finally to the recyclers. Roughly 60% of the battery's cost stems from the underlying raw materials, while the remaining 40% stems from manufacturing and labor costs, according to Morgan Stanley's estimates. The firm divides the ecosystem into five areas, with stocks for each step of the value chain: Mining of raw materials Forming the cell components Manufacturing and packaging the cells Delivering the battery to EV automakers Recycling the battery Mining The first step is mining the raw materials that make up the battery. While different chemistries are being developed, lithium is used alongside some combination of nickel, cobalt, copper and aluminum. The firm pointed to SQM and Albemarle as two pure-play names involved in lithium. However, Morgan Stanley rates each company at underweight thanks to geopolitical risks around mining operations in Chile. "The new policies under discussion in Chile will likely affect the profitability and investment plans of local operators, becoming an important factor that will define our order of preference of stocks," the firm said. For copper mining Morgan Stanley highlighted Australia-based 29Metals and Sandfire Resources , both of which the firm rates at overweight. Glencore , which mines both copper and nickel, is also a top pick for the firm. The acceleration in mining has led to the development of an ecosystem around the operation, which includes companies that make the extraction construction equipment. Morgan Stanley pointed to Japan-based Komatsu as a potential winner since the company already holds the second largest market share in the industry. "We expect the ongoing sales penetration of electric vehicles to contribute to corresponding demand for mining construction equipment," the firm said of the company, which it rates at overweight. Cell components Once the materials are mined, they need to be assembled into the key components of the battery: the anode, cathode, electrolyte and separator. Morgan Stanley values this portion of the ecosystem at roughly $315 billion, or about 60% of the total battery market. Tesla is one of the companies working on both anodes and cathodes as it looks to become more vertically integrated. Morgan Stanley holds an overweight rating on the Elon Musk-led company. Quantumscape , a relative newcomer to the public market, is another name through which investors can gain exposure to cell components. However, analyst Adam Jonas cut the stock to a neutral rating on Monday, saying the company's position is becoming less clear in a crowded market. "By the time we forecast QS to achieve commercial production at scale (FY25), our team believes the industry will have achieved significant improvement in battery efficiency and cost that could diminish the value of the technological 'leap' to solid state," he wrote in a note to clients. Also within the electrolyte space the firm pointed to Japan-based Mitsubishi Chem , which it rates at overweight. In terms of separators, the firm highlighted overweight-rated Sumitomo Chemical , which is also based in Japan. Manufacturing and packaging the cells Next up is assembling the newly created cells into a battery pack. "Putting together the cell requires a multi-step manufacturing process and specialized manufacturing equipment," the firm noted. "After manufacturing the cell, the cells must be grouped together in modules and packs that are ready for use in electric vehicles." When it comes to cell manufacturing the firm pointed to SK Innovation and Panasonic , based in South Korea and Japan, respectively, both of which the firm rates at overweight. CATL and BYD , both based in China, are also big players although the firm has an underweight rating on each name. Semiconductors are also a big part of vehicles, with more than 1,000 chips used in each EV. Companies that make chips for EVs include Analog Devices , NXP and Wolfspeed , all of which the firm rates at equal-weight. Delivering the battery to EV automakers Once the battery pack's been assembled it's then delivered to the automaker and placed in the vehicle. In addition to Tesla, the firm highlighted China-based Xpeng , on which it has a buy recommendation. Morgan Stanley also highlighted some OEMs that are making progress in the EV space, including General Motors and Renault. "We project an accelerated pace of BEV sales penetration out to 2040, which we believe will be met by supply from OEMs who have guided towards more electric vehicle production," said Morgan Stanley. "We view the main risk to be whether U.S. and European OEMs can catch up with Tesla and their Chinese counterparts in the EV race." Recycling the battery The final step in a battery's life cycle is proper disposal once it's past its prime. The majority of EV batteries haven't yet reached this stage, but as EVs become more popular recycling them will be key. One approach is to break them down into their original commodity parts so that the metals can be reused. "EVs are critical to address climate change, but batteries are 'dirty,' particularly the mining of batteries," the firm said. "Battery recycling can help address the problem...a nearly 100-fold increase in end-of-life battery supply by 2035 creates a mountain of a TAM," the firm added. Morgan Stanley highlighted Li-Cycle , which it recently initiated coverage on with an overweight rating. The firm also has a buy recommendation on shares of Norsk Hydro . While there's no doubt a growing need for batteries to power EVs as the world moves away from fossil fuels, Morgan Stanley was quick to point to some of the risks around investing in the space, including commoditization and geopolitical tensions. - CNBC's Michael Bloom contributed reporting.

Brine pools at the Albemarle Corporation lithium mine in Calama, Antofagasta region, Chile, on July 20, 2021.

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