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Tesla Inc (TSLA): The Electric Car Blindsides the Automakers

With demand for electric cars on the rise, Ron Struthers examines the lithium market.

By Ron Struthers

You cannot go out and buy an electric car, if you want one. Instead, you have to put down a deposit of $1,000 and more just to get on a waiting list that could be several months to a year long. Other than Elon Musk at Tesla Inc (NASDAQ:TSLA), the rest of the industry did not see this demand coming or so much of it.

Tesla customer line

The line above is for the new Tesla Model 3, priced around $35,000. There are three obvious reasons why demand for electric cars (EVs) are on the rise.

  • Mechanically they are much simpler with electric motors compared to combustion engines and also add the benefits of less noise and pollution, but more torque.
  • As always technology advances so in this instance the battery is going a longer distance on a charge and the price of EVs has come down considerably.
  • The biggest reason is fuel cost. If you live on the planet earth you will know the number one thing consumers complain about is fuel costs, no matter the price. If gasoline prices fall, it is not far enough and if prices rise, they were already too high.

The Big 3 and automakers around the world are scrambling to ramp up EV production and the battery manufactures are scrambling for raw materials.

This new technology wave in the auto industry is going to create huge demand for a handful of different metals, in particular for the lithium ion batteries. This next chart from Bloomberg shows the projected demand and makes today’s consumption of these metals minuscule.

It is too much to cover all these metals in one report so the focus for this report is lithium.

Lithium is white hot

That has been a description for the metal but now relates to the lithium price and related stocks.

The lithium sector is white hot as the focus moved from graphite to lithium over the past few years. Now graphite prices are rising again and cobalt has joined the battery party. I have pointed out some charts on the market in the past, but as an example:

“During our world travels and meetings with investors, we constantly get asked where we see prices in 2017. We have consistently answered that we do not expect a lithium price crash in 2017 and the signs are pointing to further price increases, especially in China after Galaxy Resources signed a spodumene contract for $830-905/tonne—way up from the ~$650/tonne peaks in 2016.” Benchmark Minerals

Finding the price of lithium is not cut and dried. There are prices for lithium carbonate or hydroxide and spodumene mentioned above. Some prices are quoted in Kg and others per tonne. There is China prices and prices vary depending on the grade of lithium. In general battery-grade Lithium is about double the price shown in the chart above. No matter how you measure the price, they are way up with new record highs in May of this year with prices up another 15% to 20% in 2017 alone.

One issue is that four producers control 85% of supply and are the big influence on price.

“This oligopoly poses a real challenge for Tesla, will need about 27,000 tons of lithium carbonate a year to reach its sales target of 500,000 vehicles a year by the end of 2018. That equates to 16% of global consumption last year, Macquarie estimates.”

Beyond a doubt the lithium market is white hot and one of the hottest commodities going.

For investors one of the difficulties is there is no good direct investments. The four big producers derive their income from so many other sources they are not great proxies on lithium, and while lithium funds and ETFs own these, their holdings also include a lot of other battery and EV related stocks, so they are not a very direct proxy on lithium; nevertheless, lithium ETF ‘LIT’ has been hot too.

So the focus of many and mine has turned to the juniors that are exploring and trying to develop new lithium projects. Many of these have been heavily promoted and have seen wild price swings. Shorts have jumped on to some of these and were spewing fears that lithium prices would crash.

 

  • sd101285

    “You cannot go out and buy an electric car, if you want one.” WHAT?! Of course you can! Tesla Model S, Tesla Model X, Chevy Bolt, Nissan Leaf, BMW i3…. Do your homework!

  • LakhiD

    Only in US, where people will make a deposit and wait for a half baked car – — as championed by the POTUS. Only reason I can think is that the mood is to BUY ” American” because of the large negative Trade deficit with the rest of the world.. In Germany people will not wait more than a week for a car the intend to buy.