Analyzing Tesla's Lithium Sourcing Strategy

Abstract:

This analysis delves into the sources of lithium supply for Tesla, a prominent electric vehicle (EV) manufacturer. Lithium is a critical component for powering EV batteries, making its procurement essential for Tesla's production goals. The report discusses Tesla's interest in lithium, its reliance on various lithium chemistries, and the growing demand for this metal in the EV industry. It also explores the diverse suppliers of lithium to Tesla, including established companies like Ganfeng Lithium, Livent, and Albemarle, as well as emerging players such as Liontown Resources and Piedmont Lithium. Additionally, the report sheds light on Tesla's battery suppliers, which encompass Panasonic, LG Energy Solutions, CATL, and potentially BYD Company. It addresses the impact of rising lithium costs on battery expenses and the challenges posed by the supply-demand gap in the lithium market. Finally, it contemplates whether automakers like Tesla might venture into lithium mining and mentions Tesla's lithium refinery project in Texas.

In the ever-evolving landscape of the energy transition, Tesla, the US electric vehicle (EV) pioneer, is strategically securing the raw materials required to meet its ambitious production targets. Among these materials, lithium, a critical component of EV batteries, has attracted significant attention from Tesla's CEO, Elon Musk.

Back in 2020, Tesla made headlines during its Battery Day event when Musk revealed that the company had acquired lithium-rich tenements in Nevada, aiming to develop an innovative method for lithium extraction from clay. This unproven process was pursued as a potential solution to the increasing demand for lithium.

Since then, lithium prices have skyrocketed to all-time highs, remaining elevated even in 2023 despite some retracement. The surge in lithium prices, along with increased costs for other key battery metals, has resulted in higher battery production expenses. According to Benchmark Mineral Intelligence, raw materials now account for approximately 80% of battery costs, up from around 40% in 2015.

Elon Musk acknowledged the rising lithium prices in a tweet in April 2022, highlighting that while lithium is abundant on Earth, its extraction and refinement processes are slow. Although lithium mining primarily occurs in Australia from hard-rock sources and in Chile from brine deposits, lithium refining is predominantly carried out in China, which holds over 75% of global lithium processing capacity.

Musk urged entrepreneurs to enter the lithium-refining business, emphasizing the ease of mining compared to refining. He even suggested that lithium processing offers software-like profit margins, making it a potentially lucrative venture.

1)?? Lithium and Cobalt in Tesla Batteries

In addition to lithium, cobalt is another vital component in EV batteries. Although its price doubled in 2021, it remains essential for battery production. Most cobalt mining is concentrated in the Democratic Republic of Congo, an area associated with child labor and human rights abuses, raising concerns about long-term supply stability.

Tesla is known for using nickel-cobalt-aluminum (NCA) cathodes, which have higher energy density and lower cobalt content. However, these cathodes are not as widely adopted in the industry as the nickel-cobalt-manganese (NCM) cathodes. South Korea's LG Energy Solutions is working on supplying Tesla with batteries using nickel-cobalt-manganese-aluminum cathodes.

Nevertheless, Tesla has diversified its battery chemistry. In 2021, the company announced the adoption of lithium-iron-phosphate (LFP) cathodes, which are cobalt- and nickel-free, for its standard-range vehicles. Tesla began producing vehicles with LFP chemistry at its Shanghai factory, which serves markets in China, the Asia-Pacific region, and Europe.

In April 2023, Tesla confirmed plans to use LFP cathode chemistry in its short-range heavy electric trucks, referred to as "semi-light." The company is also exploring the use of LFP batteries in its mid-sized vehicles.

2)?? Lithium Content in Tesla Batteries

While the lithium content in Tesla batteries is not extensive compared to other raw materials, its availability and quality remain critical factors. Elon Musk once described lithium as "the salt in your salad," estimating it to make up about 2% of the cell mass. Although this estimate was conservative, lithium still constitutes only a small portion of a battery's weight, as shown in the chart.

However, volume is a key consideration. To meet its ambitious production goals, Tesla needs a steady supply of raw materials. The company, like others in the EV industry, may face bottlenecks if it cannot secure sufficient quantities of lithium and other essential materials.

Demand for lithium is projected to surge in the coming years, with Benchmark Mineral Intelligence forecasting lithium demand to reach 2.4 million metric tons of lithium carbonate equivalent by 2030, significantly surpassing the estimated 900,000 metric tons of demand in 2023.

3)?? Lithium Suppliers to Tesla

Tesla does not rely on a single supplier for lithium; instead, it diversifies its sources. At the end of 2021, Tesla signed a three-year lithium supply agreement with Ganfeng Lithium, a leading lithium producer based in China. Major mining companies like Livent and Albemarle also have supply contracts with Tesla. Furthermore, China's Sichuan Yahua Industrial Group agreed to supply battery-grade lithium hydroxide to Tesla in 2020 for a five-year period.

Tesla has also entered agreements with junior mining companies that are expected to supply lithium in the future. Liontown Resources, for instance, will supply Tesla with lithium spodumene concentrate from its Kathleen Valley project starting in 2024, pending commercial production.

Core Lithium was in negotiations with Tesla to supply lithium from its Finniss project, although discussions broke down in October 2022. Piedmont Lithium is another supplier set to provide spodumene concentrate to Tesla, starting in the second half of 2023 through 2025.

However, it's important to note that Tesla's supply chain is not limited to direct lithium procurement from miners. The company also collaborates with battery manufacturers like Panasonic and CATL, which have their own lithium supply agreements.

4)?? Will Tesla Become a Lithium Miner?

The question of whether automakers like Tesla will engage in lithium mining remains a topic of debate. Elon Musk's announcement in 2020 about Tesla's rights to lithium-rich clay deposits in Nevada raised speculations about the company's potential involvement in mining. Musk suggested a sustainable and straightforward mining process using table salt and water.

However, lithium mining is a complex endeavor, requiring significant expertise and investment. Mining processes vary due to different geological conditions, making consistent quality at a reasonable cost a challenge. SQM's Felipe Smith expressed doubts about automakers becoming miners, citing the steep learning curve and the fundamental difference in focus between OEMs and mining operations.

Nonetheless, as OEMs increasingly recognize the need for a secure EV supply chain, they might consider more involvement in raw material sourcing. Benchmark Mineral Intelligence's Simon Moores suggested that automotive OEMs producing EVs may need to secure direct stakes in mining operations to guarantee supply, as relying solely on paper contracts may not suffice.

5)?? Top Lithium Producers

The world's top lithium producers by market capitalization include Albemarle, a US-based company with lithium brine and hard-rock operations; SQM, a Chilean company with primary operations in the Salar de Atacama; and Ganfeng, a Chinese firm with lithium resources worldwide.

6)?? Tesla's Lithium Refinery

Although Tesla does not currently mine lithium, it has embarked on constructing a lithium refinery in Texas. Elon Musk has stated that this facility could produce enough lithium for about one million EVs by 2025. The refinery is expected to be completed next year, with full production scheduled to follow. Specific details about Tesla's lithium refinery capacity are yet to be disclosed.

As the energy transition accelerates, Tesla's sourcing and utilization of lithium remain pivotal to the company's electric vehicle production goals. The complexities and challenges of securing lithium supply in a competitive market continue to drive innovation and diversification in the EV industry's raw material strategies.

Conclusion:

As the global shift towards electric mobility gains momentum, Tesla's quest for a reliable lithium supply chain remains a focal point. Lithium, though a relatively small component by weight in EV batteries, is indispensable for these vehicles' continued proliferation. Tesla's strategic alliances with prominent lithium producers like Ganfeng Lithium, Livent, and Albemarle underscore the significance of securing consistent lithium sources. Furthermore, the collaboration with battery manufacturers such as Panasonic, LG Energy Solutions, and CATL ensures a diversified supply chain.

The soaring lithium prices and the foreseeable surge in demand present challenges for Tesla and the broader EV industry. Ensuring an adequate supply of high-quality lithium becomes paramount to meet ambitious production targets. Tesla's exploration of lithium mining and its Texas-based lithium refinery project signal a proactive approach to mitigate supply risks. While the journey towards electrification is marked by hurdles, Tesla's commitment to innovation and resource diversification positions it as a trailblazer in the pursuit of sustainable and reliable lithium sources for the EV revolution.