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Tesla's Ambitious Cost-Cutting Plans Positive For Nickel, Lithium If Realized

* In its Battery Day event Sept. 22, Tesla Inc. CEO Elon Musk and other executives outlined plans to increase battery production over the next two years, to implement a vertically integrated battery supply model centered in North America and to produce batteries with zero high-cost cobalt and more low-cost nickel.

* Our analysis suggests that these plans would be bullish for medium- and long-term nickel and lithium fundamentals and prices if realized. In contrast, if no cobalt-based lithium-ion batteries are used in passenger plug-in vehicles, or PEVs, sold by 2024, we expect global cobalt demand to be 37% lower than our current base-case forecast for 2024.

* Headwinds such as limited nickel and lithium reserves in North America compared with the rest of the world and concerns around the safety of high-nickel batteries represent significant risks to these expectations.

In Tesla's Battery Day event Sept. 22, Musk outlined the company's vision for electric vehicle and battery development. The vision centers on the implementation of a vertically integrated battery supply model and production of more cost-effective batteries for its EVs as part of the company's strategy to reduce EV production costs.

This article evaluates the implications of Tesla's announcements for metals demand, covering nickel, lithium and cobalt, and draws on analysis from our September Nickel Commodity Briefing Service and Lithium and Cobalt Commodity Briefing Service.

Goodbye cobalt, hello nickel

In its presentation, Tesla outlined plans to produce EV batteries that contain no cobalt and more nickel in order to lower production costs.

Producers' efforts to reduce the cost of EV batteries have underpinned the move toward batteries with more nickel and less cobalt, given that cobalt typically costs more. Indeed, the London Metal Exchange cobalt cash price closed at about $34,000 per tonne Oct. 1. This was roughly 2.4 times the closing LME nickel cash price of $14,430/t on the same day. In 2019, China began commercializing NMC 811 cathodes. These contain eight parts nickel to one part cobalt and manganese and are cheaper to produce than NMC 532 and NMC 622 cathodes largely due to NMC 811's higher nickel and lower cobalt content. NMC 811 cathodes are also known for having longer driving ranges compared with NMC 532 and NMC 622 cathodes.

Increased use of nickel in EV batteries will be a positive for nickel consumption by the battery sector but a negative for cobalt consumption. This shift will have profound long-term impacts on metal demand due to rising EV production globally. Safety concerns over high-nickel batteries could, however, be a headwind to their wider adoption by the industry. It was reported that a Beijing Automotive Industry Holding Co. Ltd. hybrid PEV caught fire in early September. This came after three Guangzhou Automobile Corp. Aion S sedan vehicles caught fire in May and August in China. These vehicles typically contain NMC 811 cathodes.

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New cathode production process, vertical integration

To further reduce costs, Tesla also outlined plans to streamline the nickel and lithium production part of its cathode production process. The company plans to use metal powder and refine it into a suitable product for its battery cathodes, instead of the traditional process whereby an intermediate battery-grade metal sulfate is processed. Using nickel as an example, Tesla's proposed process will initially mostly use nickel sulfide ore to produce nickel powder. It will eventually shift to using recycled batteries to produce nickel powder as the availability of recycled batteries increases. This process would theoretically be less costly because it uses cheaper nickel ore instead of more expensive nickel sulfate and it requires less input chemicals and has no intermediate processing stage.

The company added that the production facilities for this process would be based in North America and would use nickel and lithium mined in the region as part of its plans to become more vertically integrated to further reduce costs. In one challenge to the plan, our data and analysis show that North America accounts for just 1% of global lithium raw material supply and 8% of mined nickel output. Based on announcements made since 2017, there are vastly more nickel reserves in Australia and lithium reserves in Chile. It is therefore likely that some nickel sulfide ore will need to be imported, which would increase production costs.

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Battery sector lacks suitable long-term nickel supply

Tesla's ambitions to produce high-nickel batteries and to lower cathode production costs highlight an existing challenge for the battery sector: More nickel will need to be produced to meet long-term demand from the EV sector, either in the form of nickel sulfide ore or powder for Tesla's planned process, or in battery-grade nickel products for the traditional process. These obstacles underpin Musk's calls for more nickel from environmentally sustainable mining and Tesla's recent efforts to develop partnerships with nickel miners.

It was reported Sept. 11 that Tesla is in talks with Canadian miner GIGA Metals Corp. about helping to develop Giga's low-carbon Turnagain nickel sulfide project in British Columbia. Giga expects the mine to produce 40,000 tonnes of nickel per year, according to a company statement in September; no further information on this potential partnership was given during the Battery Day presentation. The project is at the reserves development stage, but if fully developed, it would satisfy Musk's plea for environmentally sustainable nickel for Tesla's EVs. We expect that more such projects will need to be developed to satisfy growing nickel demand from Tesla and the battery sector as a whole over the long term.

Tesla targets 100-GWh additional battery production by 2022

Tesla sees battery manufacturing capability as important for its long-term competitiveness. The company aims to increase captive battery production to 100 GWh per year by 2022 and 3 TWh/y by 2030 to meet future demand for a fully electrified vehicle fleet. This increase in captive battery production is in addition to battery procurement from other battery-makers.

In 2019, battery energy demand was 92 GWh for the 2.22 million passenger PEVs sold worldwide. An additional 100 GWh/y of battery capacity will meet demand for 2 million standard range Model 3 or 1 million Model X Performance vehicles.

Our base-case estimates, published in the September "Lithium and Cobalt CBS," forecast 198 GWh of battery demand in passenger PEVs in 2022. Scenario 1 assumes global battery energy demand increases by 100 GWh to 298 GWh in 2022.

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The results show that in 2022, under Scenario 1:

* The corresponding passenger PEV penetration rate will increase to 8.4% compared with 5.4% in the base case.

* Corresponding passenger PEV sales will increase to 6.4 million units compared with 4.1 million units in the base case.

* Global lithium demand will increase by 87,000 tonnes of lithium carbonate equivalent compared with the base case, and the market balance will swing into an 18,000-tonne LCE deficit under Scenario 1.

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* Global cobalt demand will increase by 20,000 tonnes compared with the base case, and the market balance will move into a 14,000-tonne cobalt deficit under Scenario 1.

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* The market will see higher lithium and cobalt prices than in the base case as more supply will be needed to meet demand.

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Tesla's plans could hurt cobalt demand

Our cobalt base-case forecast in the "Lithium and Cobalt CBS" assumes cobalt-containing lithium-ion battery chemistries will still have a place in the PEV battery mix.

In Scenario 2, we assume no cobalt-based lithium-ion batteries are used in passenger PEVs sold in 2024, the furthest year of our forecast. Comparing Scenario 2 results with our current base-case forecast for 2024:

* Global cobalt demand will be 125,000 tonnes under Scenario 2, compared with 198,000 tonnes in the base case, which is equivalent to a 37% demand reduction.

* The cobalt market will be in a 58,000-tonne surplus under Scenario 2, compared with a 15,000-tonne deficit in the base case. The Scenario 2 market balance implies lower cobalt prices than the base case as less cobalt will be needed.

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Tesla's ambitions bullish for long-term nickel and lithium prices if achieved

In contrast with events in early August, when Musk's comments generated positive sentiment surrounding the EV sector and contributed to a surge in the LME three-month nickel price, his comments on Battery Day failed to boost prices. The LME three-month nickel price continued its recent correction and fell by $175/t day over day to $14,431/t Sept. 23 following Battery Day as the U.S. dollar strengthened on concerns about the rising number of COVID-19 infections globally. The price fell further to nearly $14,000/t in trading Oct. 2 — its lowest price since mid-August. This was triggered by news that U.S. President Donald Trump tested positive for COVID-19, one month before the presidential election

Since Battery Day, the lithium carbonate minimum 99.2% China domestic price has remained between 35,200 yuan/t and 35,750 yuan/t, according to high-frequency price data from Shanghai Metals Market. The LME cobalt cash price has also remained broadly stable around the $34,000/t level since Sept. 16.

Despite the exciting nature of Tesla's plans, it is important to remember that no timelines for the projects were given during the Battery Day presentation. Should the company's vision become a reality, however, it will support expectations for strong EV production and commensurate nickel and lithium demand from the battery sector, thereby providing more support to lithium and nickel prices in the medium and long term.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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