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Tesla’s Gigafactory and the Price of Lithium

Tesla’s announcement to build their new battery factory in Nevada caused blips in stock prices for several local lithium producers, a reflection on Tesla’s policy to source more components domestically in future. Currently, the Tesla Model S contains just over 50% of parts made in North America. The factory, to be built in partnership with Panasonic, will reduce vulnerabilities to exchange rates as well as shipping cost and times. The logical conclusion would be that this will be good for local mines. But is this really the case?

Two components play a crucial role in answering this question:

1.Tesla’s overall success

Tesla are selling approximately 7,000 cars per quarter, 28-30,000 cars per year. For comparison: BMW sold this many cars in the USA alone just last month. Tesla does not provide a breakdown of sales by country but from what is known overseas sales of their cars played a significant role in recent months. This would suggest that U.S. sales may actually have flat lined. Fact is that while Tesla has created an amazing product and changed several industry paradigms, the company will remain a niche player in the foreseeable future.

Tesla’s business plan states a goal to sell between 240,000 units by 2020 (“likely case”) and 510,000 units (“optimistic case”). The “likely” scenario translates into 50% utilization of the new factory, unlikely to turn a profit. Much hope rests on the smaller and cheaper Model 3, launch date unknown, but industry analysts from Lux Research have calculated that the cost advantage of the new factory, if fully utilized, would result in savings of just $ 2,800 per vehicle, unlikely to sway buyers in the premium price segment to adopt a new technology (Tesla’s new carbon fiber wing for their Model S costs just that).

Sales of batteries to other car manufacturers are given as an option to utilize the extra capacity. Depending on the source, opinions on this possibility differ widely. Fact is that other manufacturers use different – and proprietary – chemical compositions for their batteries. Sizes, too, are different: Tesla is still in favor of large amounts of small battery cells while other manufacturers have opted for fewer but larger cells. At this point, no other car manufacturer appears to have committed to buying batteries from the Gigafactory, as none has to use Tesla’s patents made public earlier this year.

2.Lithium Technology

As we learned in a previous conversation with Umicore, one of the world’s leading manufacturers of battery materials, lithium itself is a non-issue in making batteries. The material is abundantly available at low cost. Its recycling rate is high and climbing, meaning that growth in the mining sector will increasingly depend on new vehicle sales rather than replacements. The secret to high performance batteries lies in everything surrounding the metal: chemical composition, size and geometry, component materials etc.

Lithium batteries have a hard time keeping up with our power-hungry lives, too: in recent years, lithium ion batteries have improved in performance by just 7% per year, while the performance of electronic components still doubles every two years. As previously reported, this already prompted research into alternative materials that might become available within the next decade.

Lithium, therefore, is a commodity, and domestic North American producers will face strong price competition from foreign sources, some of which have been in existence for quite some time, and have spare capacity without requiring new investments.

Looking at this entire picture, North American mines certainly have an opportunity. But building this opportunity on Tesla alone is a gamble when much larger markets are currently developing overseas.

By Bodo Albrecht



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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