In this article, I’m going to highlight a truly outstanding YouTube channel, “The Limiting Factor,” and in particular, a recent video summarizing the battery news that came out of Tesla’s recent 1st quarter earnings call. This 80-minute video has enough material to make about 10 articles, but I’m going to highlight 3 related points that I hope add value to the already excellent analysis of Jordan Giesige.
- Lithium supply is the material Tesla is the most worried about over the medium to long term (4 to 10 years out).
- Refinement of lithium is more likely to be a problem than the mining of the raw material.
- Tesla is pressuring their suppliers and analyzing their operations (from a battery perspective).
Why Lithium, Not Cobalt, Nickel, Iron, Phosphate, Manganese Is The Biggest Problem
The reasons are different for each mineral.
- Cobalt is a problem, because it is rare, not widely available, expensive and the mining of it has been linked to bad labor practices in Africa. The good news is the industry has been working for years on ways to reduce its use and many new batteries, including the white hot (in the market, not in actual temperature) lithium-iron-phosphate batteries, don’t use any cobalt. Cobalt is $82,000 a ton and the price is up 82% this year!
- Lithium Iron Phosphate (LFP) batteries will solve the nickel, cobalt and manganese supply issues for the products that use it, but not all products can work well with its lower energy density by both weight and volume. But won’t it just trade one supply issue for another? The answer is mostly no. Even if iron and phosphate were as rare and limited in supply as cobalt, nickel, and manganese (and they are not), it would be a big win, since it would allow you to double production. But Tesla knows we don’t need to double battery production, we need to scale it 100×. Luckily, we mine 1000-fold as much iron as we do nickel, so although we might have to change the refinement of iron, we likely don’t need to increase the iron ore mining to make lots of batteries. Likewise, phosphate is already widely mined for fertilizer, but some expansion might be needed since we don’t want to endanger the fertilizer we use in our food production (although, I expect we will need less food production as we learn to produce protein more efficiently than using cows and chickens). Iron ore prices are down 24% in the last year and cheap at $142 a ton, while phosphate prices are up 86%, but still cheap at $178 a ton.
- Nickel will be a problem, but not as big a problem as lithium, since it has better substitutes. The price is up 70% over the last year at $32,000 a ton, but down from the spike caused by the start of Russia’s invasion of Ukraine.
- Manganese demand looks to soar, but since it is widely used in the production of steel, the market can absorb some of the increase in demand without the price spikes we are seeing in nickel and lithium. The price is up 9% from a year ago, but is only about $5 a ton for the raw ore. Although, the refined metal is of course more expensive and can range up to $4,000 per ton.
- Lithium is the biggest problem because we don’t have a good substitute ready to go. Although there is only 5 to 10 kilograms of lithium in an electric vehicle, the problem is that we have substitutes for cobalt and nickel and we don’t need substitutes for the others, since they aren’t that rare or in a severe shortage. The main alternative that has some commercial momentum is sodium. Sodium is super cheap and common. The problem with sodium batteries is the same as with all batteries, not enough density and it isn’t quite ready for commercial deployment. The largest battery manufacturer in the world, CATL, unveiled a product last year, but I haven’t seen a vehicle that uses it yet. Lithium prices have spiked 414% in the last year and cost about $70,000 a ton!
World’s Shortest History Of Tesla
- First, Tesla built the motors and battery packs and bought the car body from Lotus. Tesla just bought batteries made for laptops and engineered battery modules & packs to cool them and place them in cars.
- Next, Tesla decided to make the whole car, the Model S.
- Tesla had a lot of trouble getting suppliers to take it seriously before about 2018 or so. It would ask battery manufactures to massively expand their production, but they just didn’t believe electric cars were going to be successful and Tesla didn’t have enough money to guarantee its orders. These successful battery companies had seen a lot of companies come and go and couldn’t spend billions of valuable capital if the market didn’t materialize.
- Finally, in 2014, on the unexpected success of the Model S, which won an incredible number of Car of the Year awards, especially significant for Tesla’s first ground-up vehicle design, Tesla announced it would build a gigafactory to build as many batteries as all the others in the world combined (with a partner). This was a very gutsy move 8 years ago, but had Tesla not taken that risk, it would be have been unable to grow as quickly as it has.
- Even though battery manufacturers have expanded their output greatly, they still don’t seem to realize the size of the market or have the courage to take advantage of the opportunity. By 2020, Tesla had the resources to take the next step. It bought a couple of startups in the battery technology space and announced it would start making 4680 batteries. It doesn’t want to replace the existing manufactures — it just wants to supplement everything it can get from others with its own production.
- So, now Tesla has plans to make 20 million cars and lots of stationary batteries in support of the 20 TWh a year of batteries needed to transition the world to clean energy. This is about a 200 fold increase in production in over the 10 years from 2020 to 2030.
- Now that Tesla has spent 2 years getting the 4680 battery to production and it has paid almost all its debt, it is time for Tesla to make another BIG bet. Many think it will be mining, but that is two steps back. There are many large mining companies and Tesla can negotiate contracts with them to get the raw materials it needs. The conversation with a typical miner would go like this: Let’s say the miner produces a million tons a year of the raw ore that Tesla has plans for and it sells half to others and half to Tesla suppliers. Tesla would read their financials and find out they have proven reserves of 100 million tons of materials and probable amounts of another billion tons of unproven reserves. But the company only has a thousand employees and would need at least 10,000 employees and $100 million in capital to expand 100 fold to produce 100 million tons a year instead of 1 million tons a year. Can the current management handle that much growth? Can they raise that much money from their investors? Tesla would likely loan them some money and provide them a long-term contract that they can use to invest in the mining equipment they need. Then Tesla would also start to buy up some mining rights to develop in 5 years or so when they realize the miners are unwilling or unable to change their processes quickly enough to meet the industry’s needs. [Editor’s note: This idea to help finance the mining was put out there about a year ago on CleanTech Talk, and probably well before that elsewhere. It still seems like a critical step toward Tesla’s goals. —Zach Shahan]
Now for the refining of the many materials needed to make the huge numbers of batteries, this is the exciting expansion that Tesla will announce soon. Tesla realizes that the refining industry is technical and complex and could greatly benefit from Tesla’s first principles engineering talent and money to finance whatever needs to be done. I doubt Tesla will refine all the battery materials, probably just the ones they feel are at risk. But even huge markets like iron don’t refine enough battery-grade iron, even if there is plenty of raw iron produced.
What benefits is Tesla looking for?
- Controlling its own supply is its first goal.
- Reducing costs to make its products more affordable.
- Ensuring environment is protected.
- Applying first principals engineering.
- Locating the refining close to either the gigafactories or the mines, preferably close to both to reduce transportation expenses.
I am eagerly awaiting Tesla’s next move!
Disclosure: I am a shareholder in Tesla [TSLA], BYD [BYDDY], Nio [NIO], XPeng [XPEV] and Hertz [HTZ]. But I offer no investment advice of any sort here.
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