Published on July 28th, 2020 |
by Zachary Shahan
July 28th, 2020 by Zachary Shahan
Electric vehicles need batteries, and it takes one or two years to get a battery production plant up and running. However, something that is often forgotten is that you don’t make batteries out of thin air. Before the battery production process, you have to produce the components of the batteries, like the cathodes, and you have to create the compounds that go into the cathodes. Before any of that, you need to mine the raw minerals.
The challenge that experts in the industry are telling CleanTechnica and others is that it takes at least 5–7 years to get a mine operational and there has been a lack of investment in the mining.
Furthermore, while there is a growing push from Tesla, Volkswagen, and others for the mining to increase, there’s a disconnect and potential stalemate on the investment needed for this. It’s going to take a few paragraphs to explain what is going on here, as explained to me by Howard Klein and Rodney Hooper of RK Equity, but I think it’s worth going through this — and probably returning to it regularly. (Also, for background on Tesla and other automaker lithium and nickel sourcing, see: Tesla’s Lithium & Nickel Sourcing — Australia? Bolivia? China?)
As in any industry, when product demand forecasts are too optimistic, production overcapacity results, which hurts the producers. It becomes hard to recoup investments on production facilities that are far overbuilt for the needs of the market. Competitors are also eager to sell their goods in this oversaturated market, so prices are lowered in order to compete better in the highly competitive market. This has happened in the past two years in the Chinese spot market for lithium chemicals and over a longer period in the nickel market with the increased production of the replacement material, nickel pig iron.
In such a situation — like the situation the lithium and nickel mining and processing markets are in right now — the companies are reticent to ramp up production capacity too much again before incentive price targets are reached. They are also more focused on getting firm, clear commitments — cash money — to increase capacity, so that they don’t get burnt again. Unless acceptable project investment returns are highly probable, risk capital won’t enter the sector. And this is where it gets extra tricky.
We just noted that the prices of lithium and nickel have been low because of oversupply. The problem is that battery makers and automakers like Tesla looking this deeply into the supply chain now expect the same low prices going forward. As Howard noted in our conversation, it’s very hard to forecast commodity prices, so what people often do is look at today’s prices and project them forward. However, when prices are low because of recent oversupply, but then demand is picking up and you want investments in a lot more production facilities (mines in this case), you need to realize that this is going to require higher prices again. Mining is a capital-intensive industry, with large capex needed up front. Furthermore, to get construction on those started, the supplier needs a firm commitment so that they won’t be throwing their money away and will get a decent return on investment, or at the very least they won’t get stuck with a lot more production capacity than the market wants.
So, you have buyers that expect low prices that resulted from years of overcapacity, but then you have suppliers that need both more money and firm commitments in order to ramp up mining or production capacity. If the buyers don’t bend, you’re stuck in a stalemate, or a catch 22.
One more thing that Rodney highlighted, which gets us into a really interesting corner of the story, is that the rather small junior mining companies can’t get great interest rates — have interest rates in the double digits even — whereas large automakers and even Tesla can get much lower rates, and companies in the S&P500 (ahem) get rates well below 1% (0.3% or 0.4%, for example). So, if you really want lower-cost battery minerals for lower-cost batteries, these larger firms able to get better interest rates should be taking out the loans to invest in the increased mining capability. You cannot get battery/mineral prices down nearly as much (and they may well increase as demand rises and supply is crunched) if you expect the mining companies to get their own financing to ramp up operations. The key takeaway here is that “mining efficiently” as Elon requested isn’t the only route to lower commodity prices — optimized balance sheets and well structured offtake/physical streaming contracts can also play an important role.
So, Howard and Rodney highlighted a few key recommendations:
- Automakers need to commit to price floors for lithium and nickel that are high enough to invest in new mining capacity.
- Automakers could help to bring down costs by securing the loans/financing needed to ramp up mining/production.
- Shareholders need to drop a focus on dividends and get more focused on growth potential for these mining companies. While new investors need to come in and help ramp up interest and capacity as well.
- More vertical integration might really be in order to get the battery supply chain better integrated, to get capacity ramping up, and to lower costs.
For more on these and related topics, the first part of my weekend conversation with Howard and Rodney is covered here: Tesla’s Lithium & Nickel Sourcing — Australia? Bolivia? China?
While I hope that this article was helpful and captures the core points well, I do think listening to the audio is clearly worthwhile on this topic. Aside from listening via the embedded SoundCloud player above, you can listen to this and other Cleantech Talk podcasts on Anchor, Apple Podcasts/iTunes, Breaker, Google Podcasts, Overcast, Pocket, Podbean, Radio Public, SoundCloud, Spotify, or Stitcher.
To close, if you have any questions you’d like me to ask Howard and Rodney — or other battery and mining experts — in future conversations, let me know! I’m next going to be talking to them about Standard Lithium and other unconventional options for mining or collecting lithium. Though, that conversation may well be over by the time you read this.