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Alex Kimani

Alex Kimani

Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com. 

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Is Elon Musk Wrong About Lithium?

"There is a massive amount of lithium on earth...there really is enough lithium in Nevada alone to electrify the entire U.S. fleet." Elon Musk, Tesla CEO. Back on November 23, lithium producer stocks got badly hammered after Tesla Inc. (NASDAQ:TSLA) CEO Elon Musk made the above remark on Tesla's battery day event. Tesla's main thrust of the event was that EV batteries were about to become much cheaper and more powerful and could give internal combustion engines (ICEs) a serious run for their money in the years to come.

Musk's comments are certainly bearish for a commodity that has seen its price in free fall, tumbling 33% in the space of just 12 months.

Musk's observation is true, to an extent, since battery costs have been on a sharp decline over the past half-decade. Indeed, the cost of lithium-ion batteries has dropped dramatically since 2010 and is expected to continue to do so. 

To illustrate the point, consider that back in 2010, the price of an EV battery pack was $1,160/kWh (USD) compared to the 2018 average price of $176/kWh. Batteries and the EV powertrain make up 70% of the cost of an EV, so falling costs of EV batteries affect EV costs in a big way.

However, Elon Musk could still be wrong about the future lithium price trajectory. Indeed, Global X Lithium & Battery Tech ETF (LIT), an exchange-traded fund designed to track the performance of the Global Lithium Index by using a full replication technique, has climbed 105% YTD.

Source: FastMarkets

Source: CNN Money

Global EV Market

For years, Tesla has been striving to secure its raw materials supply and has made impressive progress in that regard.

According to Fortune, Tesla has managed to secure its own lithium mining rights in Nevada. Previously, Tesla held talks with Cypress Development Corp., a company seeking to extract lithium from clay deposits in southwest Nevada, but failed to reach any agreements. So Tesla appears to have changed tack and turned its focus on digging for lithium on its own in the state in a bid to achieve its goal to slash battery costs by 50%.

Related: Canada's Oil Heartland Goes Into Lockdown As Covid-19 Infections Surge

Still, it's doubtful whether Tesla will be able to supply all its own lithium. Whereas lithium really is an abundant natural resource, considering the element is present in ocean water, the majority of the world's lithium supply simply is not economically viable to extract at current prices.

In fact, at current prices, the world's leading investment bank UBS estimates that lithium supplies could run out as early as 2025.

Why, you ask? Because Tesla currently represents less than a fifth of a global EV market that's been recording robust growth and a much smaller sliver of the global passenger vehicle market. In fact, Tesla currently has ~18% of a global EV market that itself has about 3% of the global passenger vehicle market. In other words, Tesla might very well secure its lithium supplies, but the other 82% of the EV market could be left high and dry. Even if Tesla was to produce some lithium, greater demand on a global scale is likely to sop up the new supply.

In fact, the EV megatrend seems to suggest that other EV companies not named Tesla will become more dominant as the years roll on.

Tesla's marketplace is likely to look very different from the current one, with Bloomberg Energy Finance (BNEF) predicting the company could be going up against ~500 EV brands by 2030 from a few dozen currently.

And Tesla is already facing much stiffer competition than it did a few years back.

Wedbush Securities analyst Dan Ives has predicted that GM's GMC Hummer EV will be the foundational model of the company's $20B push into the EV space over the next five years. GM has a target of 1M EV sales a year across the U.S. China, though the GMC Hummer starts at a much higher price point of $113K compared with a base price of $39,990 for Tesla's Model 3 Standard Range Plus.

Recently, BMW (OTCPK:BMWYY) launched the iX, a 500-hP full-electric SUV that the company is positioning as its flagship EV model. Luckily, Tesla again has an upper hand on pricing, with The Verge estimating that the iX could start at $70,000 or more.

Tesla is also facing growing competition in its pivotal China market, where a GM Model has been outselling the immensely popular Model 3.

Tesla remains, by far, the most recognizable name in the global EV space. However, there won't be a shortage of rivals trying to knock it off its pedestal in the coming years--and the likes of GM are already proving to be serious contenders.

In short, Tesla might not even be the main driver of lithium prices just a few years down the line, which in itself is bullish for lithium prices.

By Alex Kimani for Oilprice.com

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