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Tesla's move into lithium mining could weigh on prices: Morgan Stanley

Highlights

Tesla wants affordable EVs for all

Looks to lower battery buying dependency

Lithium prices remain subdued

London — One of the world's biggest names in electric vehicles, Tesla, has its sights set on reducing its dependency on outside battery metal supply chains by investing in mines and processing, which could negatively impact the lithium price, Morgan Stanley said Sept. 23.

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At its inaugural Battery Day Sept. 22, CEO Elon Musk announced a clutch of initiatives, including new tab-less battery technology and cleaner lithium mining practices in Nevada.

"Tesla announced improvements to battery technologies that are likely to support EV sales in the longer term, but also to reduce lithium usage and production costs. They also announced their own lithium mine with a new, lower-cost and more sustainable process. Lithium stocks [likely] to react negatively," said Morgan Stanley.

Musk said that the vision is to make EVs affordable for all, citing possible ticket prices of $25,000 by 2025.

"It's absolutely critical that we make cars that people can actually afford. Affordability is key to how we scale," he told the Battery Day audience.

Musk added that nickel availability was important to scaling up battery manufacturing and urged miners to mine more nickel.

"Sept 22. the tech/automaker announced plans to increase production and reduce costs of batteries, in order to make EVs more accessible. The announcement included profound changes in the production process of batteries and mining of materials," said Morgan Stanley analysts.

Before the event, investors had expressed optimism regarding the potential for cheaper batteries, expected to translate into higher EV penetration and lithium demand.

"We believe the excitement will be replaced by concerns, as the new technologies announced can reduce lithium usage and production costs. Lithium stocks are driven by lithium price expectations and should underperform, in our view," the bank added.

Changes in the design of Tesla batteries are expected to increase the range and power, at the same time reducing the amount of [raw] material used. Tesla is also aiming to make recycling more efficient to reduce mining needs over time.

According to Musk, Tesla has developed a new technology to extract lithium from hard rock using sodium chloride (table salt), which can lower their current lithium expenditure by 33% and at the same time make it more environmental friendly, the investment bank's research read.

Stripping out cobalt content

Tesla will source spodumene from its own mine in Nevada without intermediaries.

"This means not only more supply, but also potentially lower costs that could spread across the industry," the bank said.

Musk said during Battery Day that there is "a massive amount of lithium in the world" and "there is enough lithium in Nevada to convert the entire USA fleet."

The CEO also said that Tesla planned to make EV batteries with cobalt-free, nickel-heavy cathodes in-house, which would make its vehicles more affordable.

Tesla Powertrain and Energy Engineering division senior vice-president Drew Baglino added that nickel was the "cheapest and the highest energy density metal," making it a goal to increase nickel content and eliminate cobalt.

S&P Global's Managing Director, Global Head of ESG Research & Data Manjit Jus said in reaction: "It was surprising to hear that Tesla made a commitment (if not time bound) to phase out cobalt from its batteries. From a social impact perspective, this is quite significant given the human rights issues around cobalt in the supply chain. Of course, from an ESG perspective, a more firm commitment to when this will happen would have been welcomed (not to mention the fact that it will bring down the price of batteries)."

Trading like commodity

Morgan Stanley argued that this idea is in line with its own thesis that lithium is a commodity.

S&P Global Market Intelligence said that more frequent price data suggests lithium prices are bottoming out in China as both industrial- and battery-grade lithium carbonate prices increased in the first half of September.

S&P Global Platts assessed lithium carbonate at $6,500/mt and lithium hydroxide at $9,000/mt on Sept. 17. Both prices are for battery-grade quality material on a CIF North Asia basis, reflecting deliveries to the main ports of China, Japan and South Korea. Lithium carbonate, however, is normalized to deliveries at the Shanghai port.

"The impact of new technologies discussed should not be at commercial scale before 2022, meaning the excess supply that keeps Li prices depressed should stick throughout 2021," argued Morgan Stanley.