It would seem electric vehicles are taking over. And that has huge implications for a related industry: lithium mining and production.
Lithium-ion batteries are what power today’s electric cars and trucks and EV giant Tesla (ticker: TSLA) is planning for 3 terawatt-hours of battery-making capacity to supply its vehicles by 2030. That is an increase of more than 50 times today’s available supply.
Tesla CEO Elon Musk recently tweeted that he thinks the industry could produce 30 million battery-powered electric vehicles by 2027 as other auto makers begin to buildEV models. Roughly 2 million EVs were sold globally in 2019.
The global auto business is a multitrillion-dollar industry. The numbers contemplated for a transition to EVs are huge and raise the question: Does the world have enough raw material to meet the goals? The short answer is yes, but it won’t come cheap. Companies, including Tesla, need to make sure they have supply agreements locked up or risk being stuck in the pit lane of the coming EV race.
Morgan Stanley’s research team published an interactive lithium supply-and-demand model shortly after Tesla conducted its battery technology day on Sept. 22. The team says global production of lithium carbonate equivalent, or LCE, totaled about 380,000 tons in 2019. About one-third was destined for lithium-ion batteries put into electric vehicles.
The industry counts lithium supply as lithium carbonate. Lithium carbonate is a salt that is stable. Lithium metal is refined from the salt and requires special handling because it is highly reactive. It takes about 5.3 tons of lithium carbonate to make a ton of lithium metal.
A typical EV battery cell has perhaps a couple of grams of lithium in it. That’s about one-half teaspoon of sugar. A typical EV can have about 5,000 battery cells. Building from there, a single EV has roughly 10 kilograms—or 22 pounds—of lithium in it. A ton of lithium metal is enough to build about 90 electric cars.
When all is said and done, building a million cars requires about 60,000 tons of LCE. Hitting 30% penetration, as Musk tweeted about, which conveniently is roughly 30 million cars, works out to about 1.8 million tons of LCE, or 5 times the size of the total lithium mining industry in 2019.
Livent (LTHM), Albemarle (ALB) and SQM (SQM) are large lithium miners and account for roughly half of global supply. Albemarle is the world’s largest lithium producer, with about 85,000 tons of capacity, as of 2019. All three are expanding production to keep up with growing demand. Based on recent plans, the companies spend about $5,000 a ton for LCE capacity.
The lithium industry needs to spend about $7 billion to expand its mining capacity. And that is a drop in the bucket compared with the investments needed to make batteries and assemble cars.
Large global battery makers, according to GLJ Resarch analyst Gordon Johnson, including Panasonic (6752.Japan), LG Chem (051910.Korea) and Contemporary Amperex Technology (300750.China), could manufacture about 200 gigawatt hours of battery capacity at the end of the 2019. That was enough to manufacture the roughly 2 million EVs made that year. It isn’t near enough, however, to make 30 million battery-powered cars.
Capacity has to increase dramatically. Panasonic, for instance, is spending $100 million to expand Tesla’s Nevada battery capacity by 10%, or 3.5 gigawatt hours. That is almost $30 million per gigawatt hour of battery-making capacity. Using that number, Tesla, the word’s most valuable auto maker, would have to spend $85 billion to build 3 terawatt hours—equivalent to 3,000 gigawatt hours—to hit its battery capacity goals.
Three terawatt hours should be enough for about 30 million vehicles. A typical EV has about 100 kilowatt-hours of energy storage in its battery pack.
The total bill probably won’t be that steep. “During the battery day, Tesla listed out various initiatives that would cut investments by 69%,” Daiwa analyst Jairam Nathan said in a recent research report. He assumes Tesla will spend about $27 billion on its 3 terawatt hours of capacity, or about $2.7 billion a year. Jairam rates Tesla stock the equivalent of Hold and has a $390 price target for shares.
But that is just battery capacity spending. Tesla also has to assemble cars. Over the past 10 years, Volkswagen (VOW3.Germany), which can make about 11 million vehicles a year, spent almost $180 billion. That’s the money required to maintain and retool plants. Tesla has spent about $11 billion over the past decade. It has enough capacity to produce about 700,000 vehicles.
It is another approximation, but including other auto makers, it takes about $10,000 per car to put up a plant. Even if that is too high by 50%, it implies at least $150 billion to build new EV auto assembly capacity to hit 30% EV penetration.
The industry has to spend, at the low end, about $200 of incremental capital to make 30 million EVs by 2030. And if it happens, investors might want to consider investing up the EV value chain—in miners or battery companies.
EV maker stocks are on fire in 2020 and battery makers and lithium supplier stocks haven’t kept up. EV stocks Barron’s tracks are up more than 400% year to date. Battery-maker stocks are up about 70% and lithium-miner shares are up about 17%, on average. All of them are far better than comparable gains of the S&P 500 and Dow Jones Industrial Average
Lithium has lagged behind because commodity prices have been falling. Investors, when investing in any miner, have to factor in commodity prices. LCE prices are down roughly 40% compared with 2019. The good news for investors looking ahead. Morgan Stanley’s research team sees flat pricing for the next few years.
Lithium miners trade for about 30 times estimated 2021 earnings. Battery makers trade for a similar multiple. EV makers on the other hand trade for very high multiples of expected sales. Many of them don’t make money yet, making PE ratios meaningless.
What if LCE prices spike? Could that kill the EV theme? It is possible but unlikely. Lithium carbonate was priced at roughly $12,000 a ton in 2019. If LCE costs double, the cost of an EV would have to rise a few hundred dollars to offset the higher commodity costs.
Source : barrons
