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Tesla indicates scope of lithium demand with latest supply deal, analysts say


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Tesla indicates scope of lithium demand with latest supply deal, analysts say

A recent five-year lithium supply deal between U.S.-based Tesla Inc. and China-based Sichuan Yahua Industrial Group Co. Ltd. demonstrated "huge demand" by the electric vehicle company for battery-grade lithium hydroxide and should be a positive catalyst for battery materials, according to Daiwa Capital Markets Hong Kong Ltd.

The deal with Elon Musk's EV company appears to translate to a total of 63,000 to 88,000 tonnes of battery-grade lithium hydroxide supply, or 12,600 to 17,600 tonnes per year, Daiwa analysts Dennis Ip and Leo Ho wrote in a Dec. 29 note. The latest agreement may prove the sheer need for lithium hydroxide by Tesla ahead of an expected ramp-up in production of its Model Y SUV.

"We see this deal being positive to the battery material sector as a whole, particularly for lithium producers with heavy lithium hydroxide exposure," the Daiwa note stated.

Another Chinese lithium company, Ganfeng Lithium Co. Ltd., is most likely to continue to be the major supplier of lithium hydroxide to Tesla, the analysts wrote. Tesla has been sourcing lithium hydroxide from Ganfeng since 2018.

Yahua may have been chosen because Tesla is seeking more localized and regional supply chains, as the company expects to have a domestic supply of spodumene online in 2022, from the Lijiagou mine in Sichuan, according to Daiwa. Such a supply agreement should "have lower geopolitical risk" compared to purchasing Australian spodumene and converting the material in China. The mineral spodumene is a source of lithium.

"The agreement ... does not specify which factory to be supplied and we suspect the deal may be a preparation for the ramp-up of Model Y production in Giga Shanghai from 2021E onwards," the Daiwa analysts stated.

Tesla's move to procure more lithium from China occurred as the global battery metals space was buffeted by the coronavirus pandemic and its economic consequences. Manufacturer demand plummeted as consumer spending halted and, in response, producers slashed output projections and exploration budgets. As a result, automakers seeking to foster a burgeoning EV market have started signing long-term mineral supply contracts to inspire additional investor confidence, which analysts expect will be a strengthening trend.

In October, Tesla CEO Elon Musk declared the company would enter the mining industry to vertically integrate its supply chain. However, the company has since maintained that other mining companies will need to help with heavy lifting on supply in order for widespread EV adoption to be achieved.

Stocks of lithium hydroxide are expected to face a "serious" shortfall beyond 2027 and the deal between Tesla and Yahua indicates "why investors are excited about hydroxide," Benchmark Minerals Intelligence managing director Simon Moores said in a late December 2020 tweet.

"The reality is we are facing an imminent shortfall of both [lithium] carbonate and hydroxide," Moores said.