The Tesla effect: one year on

By Josie Shillito
Published: Friday, 27 February 2015

Tesla’s Gigafactory will create extra demand for lithium and graphite when it comes on line in 2017, but there is question over where it will source its raw materials from. Junior producers will need to look to new and innovative ways of financing their projects to be ready for Tesla, possibly even tapping the electric vehicle maker and other end users, Josie Shillito, reports.

Tesla Motors’ planned Gigafactory, under construction in Nevada, US, will test the old adage "build it and they will come". 

Paypal founder and Telsa CEO, Elon Musk, is a reputed visionary who hopes to manufacture enough lithium-ion (Li-ion) batteries to make both electric vehicles (EVs) and energy storage solutions affordable for a mass market. In 2014, Musk removed all patents covering Tesla’s technology to encourage other car manufacturers to take on EV development and Tesla confirmed it will look beyond North America to source its battery minerals. 

Estimates suggest that the factory will require 25,000 tpa lithium compounds on top of an approximate 2013 market volume of 125,000 tonnes and an additional 126,000 tpa flake graphite over the 375,000 tonnes of 2013 demand.

The announcement that Tesla intended to build a large scale Li-ion factory was unveiled in March last year, during the same week that the Prospectors and Developers Association of Canada (PDAC) annual convention in Toronto, Canada, sending a ripple of excitement through the meeting and anchoring the term "Gigafactory" firmly in the industry’s lexicon.

What is the legacy of Musk’s announcement one year on? Some analysts argue that 2014’s developments mean that a lithium supply deficit is inevitable, it is only a matter of when the shortage will be felt in the market. Although this is less of a concern for graphite, concerns here tend to centre on the industry’s supply concentration in China, which produces over 80% of global graphite output and is increasingly earmarking its reserves for internal use.

To prevent a deficit and any harmful price volatility that could cause long term damage to the battery minerals sector, junior producers of lithium and graphite will need access to financing to bring extra capacity online, but given the current downcycle in resource investment, the question is, where they will get this from?

"If the financing is not available from the capital markets, then it is going to have to come from strategically interested groups such as Tesla, or there won’t be any additional capacity," Jon Hykawy, president of Stormcrow Capital, told IM.


The Tesla effect has reignited interest in the battery minerals lithium and graphite, but
questions remain about capacity.
SOURCE: Adam Fagen 


Musk scrapped his patents to encourage competitors to enter the market and encourage EV penetration into the automobile industry, justifying his decision on the premise that a rising tide lifts all boats. In 2014, Chinese automobile manufacturer BYD announced that it would build a battery factory similar to Tesla’s but on the Asian subcontinent. Both were joined by battery maker Boston Power, which is targeting its own Gigafactory-type facility. Although Tesla’s name is most associated with the concept, it could now be one of three large scale plants vying for the world’s battery minerals supply.

Established car brands are competing with Tesla to produce the best EV. Last year, BMW unveiled the BMW i3 to the European market. The car, which has a range of between 80 and 100 miles (130-160km), uses Li-ion batteries.

But EVs are not the only product to make use of lithium’s energy storage properties. The US state of California revealed plans in 2014 to install 1.3GW of storage by 2040 using Li-ion phosphate batteries, while the Hawaiian island of Kauai plans to use a Li-ion storage system to regulate its electricity supply.

In Bolivia, French battery maker Saft, which is supplying the Kauai project, recently won a contract to supply a megawatt scale Li-ion energy storage system for the world’s largest solar photovoltaic (PV) and diesel hybrid power project in the country’s Pando department.

"There are lots of areas of growth for lithium batteries out there, beyond storing energy for vehicles," Hykawy said.

"Global electronics demand for batteries will continue to grow strongly.  Automotive and other storage uses should continue to advance. As prices for lithium batteries continue to fall, the space and weight savings of using lithium cells for SLI (starter, lights and ignition) batteries in cars becomes more attractive."

Supply and pricing

In July 2014, US-based chemicals manufacturer Albermarle Corp. announced its intention to merge with lithium producer Rockwood Holdings to create a market-leading speciality chemicals business. The merger/buyout followed the takeover by China’s Tianqi Lithium Group of Australia’s Talison Lithium in September 2013, after a 10-month process.  Rockwood Holdings, which initially lost out on the bidding for Talison, then acquired a 49% interest in the Australian company in December 2013."

The consolidation allows for companies to act as swing producers.

"Talison has added 55,000 tonnes of new capacity, but it has maintained this under capacity," said the analyst. "Why is it not using it?"

Maintaining capacity at existing levels supports lithium prices for now. Rockwood Holdings also announced at the beginning of October that its Rockwood Lithium division will implement price increases for butyllithium and other organometallics by approximately 4% globally from 15 October, as contracts permit.

"As a swing producer, do you push pricing or do you push capacity? They are pushing pricing," said the analyst.

When larger producers eventually hit capacity, the lack of funding for junior producers could create a supply deficit, according to analysts, who point to the time lag for getting new projects into production.

Junior lithium producers experienced an investment boom in 2010/2011 (see pp33-34), when they were easily able to obtain funding from public markets as investor confidence in the industry’s future soared. Since 2012, however, a collapse in the financial sector’s enthusiasm for mining generally has taken its toll on the lithium and graphite sectors, leading to a particularly tough year in 2014. 

Vancouver, Canada-headquartered lithium company RB Energy filed for creditor protection last October after its stock price collapsed and it could no longer use the capital markets to fundraise, leading it to delist from the TSX-V. Rival Australian-listed Orocobre recently went to the capital markets to successfully raise A$50m ($39m*) of financing, but will need to ramp up its lithium production or refinance in order to maintain this, the analyst told IM.

"It is possible that project financing becomes an approach, but you still need parties interested in putting money to work in resources, and with the weak valuations in the space it does not seem reasonable," said  Stormcrow’s Hykawy.

"I believe that what you are leaving out is the potential for strategic involvement by end users or those who would like a bigger stake in the industry," he added.


According to Cosmin Laslau from consultancy Lux Research, consolidation in the battery minerals sector is likely to be limited to small and mid-sized businesses in the foreseeable future. 

"Now the larger producer targets have been snapped up in 2014 we may see mergers with smaller technology companies," Laslau told IM.

One example is Lithium America’s memorandum of understanding (MoU) with Korea’s largest steel company, POSCO. POSCO is developing a new method of extracting lithium which is more environmentally friendly than traditional brine evaporation. 

As part of the MoU, POSCO has situated its next-generation lithium extraction pilot plant at the Lithium Americas Cauchari-Olaroz project in Jujuy, Argentina. Lithium Americas believes the new processing technology could produce up to 50,000 tpa lithium carbonate. 

Canada’s Pure Energy Minerals, which also has an MoU with POSCO, announced in January 2015 that it had engaged Italy-based Tenova Bateman Technologies to conduct lithium recovery process testing of brine samples from its Clayton Valley project in Nevada using Tenova’s proprietary LiSX technology.

The demand for good quality lithium assets can be seen in the premium that Albermarle paid for Rockwood. Analysts suggested that an enterprise value multiple of 9-10 times EBITDA** would be suitable for the business. Albemarle paid 15 times EBITDA.


A few myths can be dispelled when it comes to the Gigafactory, said analysts speaking to IM. The demand for energy storage is unlikely to increase graphite prices because synthetic graphite can be used instead, although US-based Asbury Carbons chief operating officer, Noah Nichelson believes that Tesla is unlikely to use synthetic material and, if it does, will blend it with natural graphite (see p26). 

It also may not be cost effective to ramp up graphite production because the by-products are hard to shift, according to Hykawy.

"In graphite, if battery makers need +100 mesh graphite material to make their anodes, then they have to be willing to subsidise significant production of -150 or -200 mesh material.  This is graphite that is not that pure, selling for a low price that makes anything other than local use difficult to justify due to shipping costs," Hykawy told IM.

Low oil prices are unlikely to curb interest in electric cars, even if they translate into low petroleum prices. 

"As long as EVs are used by what I call the early adopters, there is no price influence there. They cost upwards of $100,000 so people are using them because they care about the environment, for the novelty factor, for the image," said Cosmin from Lux Research.

When the mass market adopts the car, price sensitive customers could be driven towards cheap fossil fuel. However it is unlikely that oil prices will maintain their historic low at this point, Cosmin pointed out.

"The electric power industry is very, very conservative," said Hykway. "They make automobile manufacturers look like weekend parachute jumpers, compared to the level of risk that they are willing to tolerate."  

"Right now, the demonstrations are being done to determine whether lithium batteries are cost-effective in grid energy storage use. The answer is down to battery life. If battery life is long enough, then the cost of the batteries can be defrayed over a long enough time to justify their use. If not, then the answer will not be 'no’, it will only be 'not yet’, because battery prices will continue to fall," Hykawy continued.

Rockwood predicts that world demand for lithium products will grow by 15-20%, according to their March 2014 conference call. "The issue for Rockwood is going to be, can we actually supply it?" they said. Meanwhile, Albemarle has said it expects to see growth in lithium demand, with or without a surge in EV take up. 

FMC Corp., another US-based lithium producer, said in its investor marketing in December 2013 that "lithium demand growth of 9% CAGR is expected through 2020". It also announced in December 2014 that it will increase global pricing for all grades of lithium carbonate and lithium salts, including lithium hydroxide, pharmaceutical carbonate and specialty salts by 10%.

The world’s largest lithium producer, Chile’s Sociedad Quimica y Minera (SQM) has said it believed that lithium market demand would grow between 8-10% in 2014 – a forecast whose accuracy has yet to be analysed.

While predictions vary, and whether or not Tesla and its rivals will deliver on the growth projections many are hoping for, one thing that is certain is that cost will be a determining factor for growth in the Li-ion battery industry, 

"Once batteries get down to $350 per kilowatt hour then energy storage becomes cheaper, the cars become commercially competitive then the value comes in. It’s where the rubber meets the road," one analyst said.

*Conversion made February 2015

**Earnings before interest, taxes, depreciation and amortisation