Solving Lithium Supply Bottleneck Is Critical To Tesla Profitability

  • Tesla has recently approached a major Chilean miner as it seeks a lithium supply for its giant battery factory.
  • Lithium is one of the major raw materials that go into EV batteries, and the known economic sources are rapidly dwindling.
  • What does this imply about Tesla's ambition to expand its EV production?

Tesla (NASDAQ:TSLA) is serious about achieving its ambition to expand its EV footprint. But achieving that goal will not come easy. For Tesla to produce and sell millions of EVs, the company will have to produce its cars economically. Despite major advances in battery production technology, battery costs remain very high and constitute the biggest component of an EV vehicle. Current estimates are that an average electric car battery costs around $400/kWh. Tesla is ahead of the pack and its batteries are estimated to cost ~$300/kWh, a whole 25% cheaper than the industry average. Still, that’s way above the $100/kWh that analysts estimate will be necessary for EVs to compete effectively with their gasoline-powered counterparts. In other words, the cost of the 70D battery that powers Tesla’s base Model S will have to come down from about $21k currently to only $7k.

For Tesla to achieve lower costs, it will have to produce its batteries on a large scale. Currently Tesla sources its EV batteries from Panasonic, but will soon start manufacturing its own at the Nevada Gigafactory, the world’s largest Li-ion battery plant capable of producing 35 Gigawatt-hours of batteries that will go into the 500,000 EVs Tesla plans to produce in 2020. But Tesla is not just looking to become the biggest EV manufacturer, but also to challenge auto giants such as General Motors. Tesla’s CEO Elon Musk recently talked about Tesla growing bigger than GM. For that to become reality, Tesla will have to build dozens of Gigafactories to produce the millions of batteries it will need for its vehicles.

Tesla of course has to think ahead regarding how it’s going to source the raw materials necessary for its giant battery factories. One of the key raw materials that go into EV batteries is lithium. It’s estimated that an average EV battery packs 9lbs of lithium. In fact, EV batteries are the biggest consumer of the world’s lithium.



Source: Battery University

Tesla’s Gigafactory will be capable of producing both NCA and NMC batteries. NCA (Nickel-Cobalt-Aluminum Oxide) batteries are the more common batteries used for ordinary applications while NMC (Nickel-Manganese-Cobalt) batteries are used as backup batteries for peak power operations. Many hybrid vehicles use NMC batteries, which has led many observers to suspect that Tesla not only aims to produce enough batteries for its EVs but also some extra to sell to other EV manufacturers.

Now the big problem with Lithium is not so much that it’s a scarce metal (there is plenty of it in the world’s seas and oceans) but that the most cost-effective sources are rapidly dwindling. Mining lithium carbonate ore from the earth’s crust is the cheapest source of lithium while extracting it from sea water or recycling it from used batteries is considerably more expensive.

It’s estimated that considerable resources will have to be expended to expand current lithium production to meet future demand as the EV industry matures.




Tesla is not waiting for the dice to roll but rather is trying to be proactive about its future lithium supplies. The company reportedly met with Chilean government authorities to discuss a possible lithium mining venture with Codelco, Chile’s giant state copper miner. Codelco is the world’s largest copper producer but has no current mining interests in lithium. The company though has in the past expressed an interest in entering the lithium mining business if an opportunity arose. The world’s largest lithium deposits straddle Chile, Argentina, and Bolivia. Tesla’s business could be enough to lure Codelco into the lithium business.

This is not the first time that Tesla is trying to solve the lithium supply bottleneck. The company recently expressed an interest in sourcing the metal from Nevada mines, though it later reneged and instead decided to pursue a deal with Mexican miners that guarantee the company lithium supplies at below-market prices for the next five years. This came even after Nevada authorities had given Tesla a big $1.3 billion tax break to encourage it to source the metal from Nevada.

Perhaps Tesla has figured Codelco can cut it a better deal than Nevada miners. But more importantly, by approaching a major miner in the world’s richest lithium reserves, Tesla might be trying to guarantee itself years of an abundant supply of the metal. The fact that Tesla has approached Codelco should give investors an idea of the scale of production that the company hopes to achieve. And large scale production is exactly what Tesla needs to become profitable.

Brian Wu Brian Wu   on Amigobulls :
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