Tesla’s Battery Plans Threaten Lithium Miners

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Tesla has ushered in a new era for electric vehicle battery technology that could shake up the materials supply chain.

-Battery improvement to reduce lithium usage
-New technique to extract lithium from clay flagged
-Excess lithium inventory unlikely to dissipate soon
 

By Eva Brocklehurst

How long before Tesla electric vehicles (EVs) are commonly seen on every suburban street? Not that long according to the company, which has outlined plans to make electric vehicles more accessible.

Tesla has ushered in a new era in battery technology, planning to increase the width of a cell through a technique which overcomes thermal issues. Thicker cells will be more efficient and cheaper, and cheaper batteries should lead to higher demand.

The company considers battery cells are the main limiting factor for growth in EVs and is looking to re-jig the manufacturing process to allow Tesla to maintain its industry-leading cost base.

UBS believes this will mean current third-party cell providers experience a lower market share in Tesla EVs after 2022. The improvement in battery technology will support EV sales in the longer term but also reduce lithium usage and production costs.

To UBS, the company's industrialisation of battery production should flow up the supply chain and provide reduced processing costs for cathodes and upstream metals. While this aggressive move by Tesla will reduce long-term supply from other battery producers, the broker believes the changes in the industry structure could also be of benefit.

JPMorgan has no doubt the investment by Tesla and other EV manufacturers will eventually filter down to lithium miners and stimulate supply but, given the underperformance of new battery grade projects over the past decade, is cautious about the ramp-up profile. The demand that could be envisaged in the long-term is difficult to measure but, in any case, the broker assesses the market remains well supplied in the short term.

Technology Developments

Changes in the design increase the range of the batteries but also reduce the amount of materials used, and Tesla aims to make recycling more efficient and lower the need for fresh material over time.

Lithium remains the preferred metal for ion transport but other materials will be re-engineered to allow for greater use of nickel. Thicker batteries will have a 16% addition in range that implies the per kilowatt hour consumption of lithium will likely decrease.

To maximise nickel in batteries, which ultimately means all lithium would be lithium hydroxide, is likely to raise the cost for brine producers, Morgan Stanley points out, as these typically produce carbonate that will then need to be converted.

A new technology to overcome silicon expansion issues was also highlighted by Tesla. Whether a 100% silicon anode has been developed was not clear although the broker assesses this would mean increasingly lower graphite use.

Lithium From Clay

A new technique to extract lithium from clay using table salt was flagged, with production costs lowered by around -33% and a reduction in harmful waste product. However, Morgan Stanley notes this appears to be a pilot and it will take some time to be commercialised. The broker is also unsure of how many global deposits there are in clay and whether this can be scalable.

Tesla's Elon Musk has pointed out lithium is plentiful and there is enough in Tesla's lithium clay mine in Nevada to “convert the entire US fleet”. This conforms to Morgan Stanley's view that lithium is a commodity and supply can adapt to growing demand.

JPMorgan asserts clay deposits have long been known as a lithium source but because of the high expenditure required for extraction, much higher prices are needed to incentivise production.

If Tesla has found a way to extract these unconventional resources, the broker suggests there may be risk to the industry supply-side structure. Hence, further detail is required to assess the impact on the lithium producers.

Lithium Stocks

Spot lithium prices are pushing into cost curves although there are signs demand is picking up. Nevertheless, there is significant brownfield capacity, particularly in spodumene, so JPMorgan envisages any significant spike in prices is unlikely.

So, is this bad news for lithium stocks? Morgan Stanley believes excitement regarding the potential for cheaper batteries will be replaced by concerns as the new technologies reduce lithium usage and production costs. Despite growth of 13% in electric vehicle demand in 2020, lithium carbonate prices have fallen -18% in China and -32% in Latin America.

Excess spodumene inventory in China throughout 2018-19 has now been drawn down because of supply reductions among Australia's hard rock miners but brine supply has continued to grow.

There have been limited mine closures to date and any prospect of a price recovery is limited by likely rebound in production. Continued brine output from Chile in coming years is expected to keep the market well saturated.

Over the long-term, Morgan Stanley expects the lithium intensity in batteries will decline as energy density rises. There will also be growth in re-use and recycling to mean primary lithium demand growth increasingly lags the growth in EV sales.

Hence, lithium prices may find a bottom but the broker does not anticipate a recovery anytime soon. Moreover, new technologies are unlikely to be at a commercial scale before 2022, meaning excess supply is likely to remain throughout 2021.

Morgan Stanley is cautious about lithium stocks and prefers Orocobre ((ORE)) because of its high-quality assets along with its key partnership with Toyota. Although the stock is now showing downside to the price target the broker retains an Equal-weight rating.

In comparison, Morgan Stanley is Underweight Galaxy Resources ((GXY)) which reflects concerns around the mine life at Mount Cattlin and a lack of exposure to conversion capacity.

JPMorgan agrees stocks are already pricing in a more than 50% rebound in spodumene prices and 70% in battery grade lithium carbonate, and this is "too much too soon". Stocks are still burning cash and balance sheets are stretched. The broker retains Underweight ratings on Galaxy Resources, Mineral Resources ((MIN)), Orocobre and Pilbara Minerals ((PLS)).

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