Voodoo Economics & Lithium — Lithium Supply = 15% of 2023 Global EV Sales Target

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In the second portion of our latest Cleantech Talk podcast with RK Equity’s Rodney Hooper and Howard Klein, we ventured outside of mining more than we typically do to talk about battery energy density and vehicle-to-grid solutions, but we also circled back around for a strong focus on the gap between electric vehicle sales forecasts from automakers and actual battery-grade lithium production.

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Rodney talked a bit about evolving battery energy density, particularly from the Tesla Roadrunner project, and how that could cut the amount of nickel, lithium, and cobalt needed to achieve a fixed range thanks to higher energy density per kWh. On the flip side, improved cell performance will drive greater raw material demand as EVs become cheaper than fossil fuel vehicles. Rodney also talked about the potential for vehicle-to-grid systems to get more value out of EV batteries, something that becomes especially attractive with “million-mile batteries.”

We then got back into battery mineral supplies. We discussed LG Chem, which has grand plans for battery production capacity, including 220 GWh of production capacity globally in 2022, and a massive order book from automakers across the globe, but, according to RK Equity, less than 20% of the raw material supply is secured.

Rodney also pointed out that Paul Graves, CEO of Livent, mentioned that if OEMs were to go to the market today with their lithium needs for 2023 based on current EV sales forecasts, the market would be able to supply them with less than 15% of their needs. Graves even referred to George H.W. Bush’s criticism of Ronald Reagan’s infamous voodoo economics when explaining the disconnect between EV sales forecasts and battery material sourcing, to make the point that there’s a false assumption that EV sales goals are adequately trickling down to battery material contracts. (As a quick side note, voodoo economics is still a big problem with Republican economic policy.)

Furthermore, at the same time as OEMs are forecasting much higher sales and softly requesting that battery mineral companies scale up production, they are asking for lower prices and locking in very little actual supply. Rodney states, “In the second quarter of this year, Livent made $6 million EBITDA, and if you exclude FX, I think $4 million, and it costs $500 million to put a 20,000 ton/year plant up if you include all the bits and pieces. So, how are they supposed to, with only $4 million in EBITDA, spend $500 million expanding, to supply the OEMs that won’t pay them now?

“And none of them are making any money. The cell manufacturers are making money. The OEMs — some of them — Tesla is starting to make money — but the lithium guys aren’t. So, it’s the voodoo economics. You’re asking for cheaper prices now, and to grow, and the guys are unable to make an operating margin to fund growth.”

Howard added that Wall Street could potentially fund the mining growth, if commodities become sexy again, as investors understand the connection to battery materials from so much investment into Tesla [NASDAQ:TSLA], NIO [NYSE:NIO], Xpeng [NYSE:XPEV], and many Special Purpose Acquisition Companies (SPACs) funding Nikola, Fisker, Hyliion, and Lordstown Motors.

I summarized this portion of the discussion by teasing out how this is the EV market version of trickle-down economics. The assumption is that if money just pours into the automakers, it will trickle down to the miners, but we’re not seeing that.

“Well, that’s not going to work,” Howard noted with his no-nonsense Northeastern accent, “because they’re spending all that money on building cars. But — to the LG point — Livent announced an agreement with LG Chem around this time last year. Livent’s not going to be able to provide LG Chem with the material for that MoU contract, because they’re not investing. … So, either LG Chem needs to start writing checks, or someone else needs to start writing checks.

“But, it’s happening. You will see it happening. You shouldn’t be crazy paranoid about it, but, you know what, what’s the risk? The risk is that things don’t happen as fast, right? They just happen a little bit later.”

So, that’s where we are.

Howard put out one more interesting thought. Rodney had noted earlier in the conversation a recent statement from a Volkswagen executive that admitted Volkswagen was “two years behind Tesla.” (On that topic, I’d say that when you’re publicly admitting you’re two years behind your competitor, that’s a good sign you’re more than two years behind them.) Howard’s comment was about how Volkswagen could potentially close the gap.

“One way for Volkswagen to catch up to Tesla is not to actually catch up, but to slow them down. One way they could slow them down is if they were actually to write big checks for mining companies and take the best assets away from Tesla. I doubt they’re going to do that! It’s just a thought I had.”

I find that to be a fascinating consideration. I mean, it seems simple, but at the same time, it appears that complications from a fast transition in this complex industry has led to this transparent but real vulnerability. As Howard and Rodney keep pointing out, there’s a bit of a stalemate or catch-22 in the industry right now. Volkswagen could presumably close the gap with the leader if it made bold enough orders for raw materials. Whether Volkswagen would make such a bold move, and whether it would do so strategically to try to not fall further behind, is an open question. Furthermore, Tesla itself could go that route and create a real challenge for other automakers.

At the moment, instead, the summary seems to be that no one is securing battery minerals quickly enough. But Rodney has repeatedly emphasized that Tesla, which has had a team focused on this matter for years, is well ahead of the others and is the least likely to suffer from a supply crunch. We’ll see.

For now, the summary of the situation on the ground, according to Rodney, is the following: “We have hydroxide being in tight supply at the end of next year, and short by early 2022. We’ve been saying that for some time. And a lot of it is also — I’ve spoken about this before with you — the adjustment in the CO2 penalty formula in Europe, where the 5% phase-in allowance of your worst polluting cars, etc., all falls away, as does the supercredits ratio for how many EVs you sell. So, there should be quite a big bump in EV sales in Europe next year. There’s a chance to surprise on the upside certainly if Tesla can get going and they are going to manufacture cells of their own and can supply out of the US or if they’re going to set up this same plant by mid-year next year. …

“But there is still some offtake availability from the major suppliers of hydroxide. I’m wanting to see that finalized. You’ve even got a contradiction of Albemarle idling its Silverpeak plant.

“But I think there’s a bit of a Mexican standoff between producers and OEMs, as to what price is going to be paid.”