Tesla’s Lithium Supply Constraints Might Hamper Its Growth

The reason Tesla Motors (NYSE:TSLA) is building a giga factory is to bring down the cost of batteries used in its cars. Currently, Tesla says that its battery costs are around $200-$300 per kilowatt hour. The Silicon Valley based auto maker says that it can bring down the costs by 30% through scale alone. However, the entire process of bringing down battery costs presupposes the availability of the grade of lithium required for the making of those batteries. Tesla might run into snags on that front in two possible ways: 1) There might not be enough lithium to support the volume of its giga factory and 2) there might not be enough supply of lithium hydroxide at a cost low enough to support the economics of the giga factory.

We have a price estimate of $171 for Tesla, which is about 10% below the current market price.

Is there enough lithium to feed Tesla’s Giga Factory?

The short answer to this question is Yes, but it requires qualification. First, there’s the matter of how much lithium does Tesla need for its giga factory? Then, there’s the matter of how much lithium is actually out there? Last year in August, Bloomberg asked these question and came up with an estimate of 150,000 tons a year usage with 13 million tons of lithium reserves. ^[1] But there is a caveat here. What is classified as a reserve is stuff that can be located and extracted at current prices using current technology to make a profit. However, even over and above these ‘resources,’ there is stuff lying around that can be extracted  but not at the current prices because it is not profitable for companies to under take extraction given their current cost structures. There are firms in the minerals industry that have identified techniques to extract lithium from sources such as lithium carbonate, but cannot do so profitably if they have to pay the cost of digging the mineral up. Consequently, when the resources currently identifiable in a technical and legal sense are exhausted, the industry may require subsidies from governments in order to keep it viable or it will need to come up with the technology that can be used to dig up these minerals and still be profitable.

Supply of Lithium

Currently, there exists an oligopoly in the lithium industry. Three big firms-Sociedad Quimica y Minera de Chile SA,  Albemarle Corporation, and FMC Corporation-dominate this space. These companies have not expanded their lithium hydroxide capacity fast enough to support Tesla’s projected demand for lithium. As a result of their hesitation, an opportunity has been created for Chinese hydroxide producers and their Australian feed stock suppliers. Panasonic, Tesla’s battery supplier, has imported a lot of lithium from Chinese suppliers recently. In the second half of 2014, lithium exports to Japan from China rose sharply. ^[2] However, the cost of lithium supplied-which is extracted from the spodumene ore-is much higher than the lithium extracted from lithium carbonate. The addition of Chinese VAT on top of these extraction costs makes it prohibitively expensive. ^[3] Moreover, historically, the lithium quality from Chinese suppliers has not met the standards required for car batteries. Chinese producers will have to improve the quality to meet the specifications from Panasonic, adding more complexity to their supply chain. As a result, this is another risk factor to consider for Tesla investors.

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1. Is there enough Lithium to support Tesla’s gigafactory, Bloomberg, August 2014 [↩]
2. Lithium Carbonate Market Research Report for Global (US, Europe, China, Japan) Regions Now At DeepResearchReports.com, Press Release Rocket, January 2015 [↩]
3. Hedge Against Short-Term Cycles with Lithium: Daniela Desormeaux, The Energy Report, February 2015 [↩]