During Tesla’s January 27th earnings call with investors, CEO Elon Musk stated that the company does not have enough battery cells to put into production new electric vehicles (EVs) such as its Semi truck. The key takeaway from this statement is the rising prices of battery materials like lithium and cobalt are creating a battery shortage even for the world’s largest EV manufacturer.
A cell is a basic unit of a lithium-ion battery containing a cathode, anode, separator and electrolyte, generally surrounded by aluminum. Cells are combined into a module, and a number of modules comprise an EV battery (perhaps eight modules with 12 cells in each module). The key takeaway from this statement is the rising prices of battery materials like lithium and cobalt are creating a battery shortage even for the world’s largest EV manufacturer.
In turn, this pricing trajectory appears to be a confirming positive for the stock price trends of the emerging lithium suppliers Lithium Americas Corp. (TSX: LAC) and SIGMA Lithium Resources Corporation (TSXV: SGMA) and the junior cobalt supplier First Cobalt Corp. (TSXV: FCC). Each is a pre-revenue company building important processing facilities, and the stocks of all three have rallied primarily on EV optimism. The hopefulness is now being supplemented with the first rising commodity prices in around three years.
The figure below depicts the significant outperformance of these stocks relative to the TSX Index over the last five months.
Lithium Supply-Demand Conditions
After being in a supply glut for a couple years, the global lithium supply-demand balance has tightened considerably. According to Benchmark Mineral Intelligence, those two key parameters were roughly in balance at year-end 2020. By 2025, demand could exceed supply by more than 200,000 tonnes per year. The gap could widen further in subsequent years.
Reflecting all this, in December 2020, China’s Sichuan Yahua Industrial Group announced a US$630 – US$680 million deal to supply battery-grade lithium hydroxide to Tesla over the five-year period 2021 – 2025. (Prior to the burgeoning EV demand, lithium’s primary use was as a medicinal cure for depression.)
Prices for battery-grade lithium carbonate, which is used in Tesla’s Shanghai-made Model 3, reached 59,000 yuan (around US$9,100) per tonne in mid-January 2021, up by around 50% from the August 2020 price. Prices continued to move higher as the month progressed.
Cobalt Prices Have Increased As Well
Cobalt has likewise rallied noticeably, rising around 20% in the first month of 2021. Supply of the blue metal was reduced in 2020 by the COVID-19 pandemic, as shipping was curtailed in South Africa. Cobalt mined in the Democratic Republic of Congo (DRC) is transported to a port city in that country for shipment to China.
A further similarity to the lithium supply-demand equation: despite being the priciest material in an EV battery, cobalt demand could exceed supply by 100,000 tonnes in 2025, per Benchmark Mineral Intelligence.
Lithium Americas, SIGMA and First Cobalt are all pre-revenue companies. Furthermore, none of the three have completed their planned processing facilities, while SIGMA and First Cobalt have yet to begin construction on their processing plants. Yet, all three have considerably outperformed as of late on the back of the rising demand for cobalt and lithium.
Over the past five months, the stocks of suppliers to the EV battery industry have rallied on unrelenting market enthusiasm toward the overall EV industry. To be sure, lithium and cobalt prices remain well below the “mega-optimistic” peaks of a few years ago, but prices of each have increased significantly over the last couple months.
This pricing direction suggests that improving fundamentals for lithium and cobalt companies now supplement the constructive stock price momentum in the sector.
Information for this briefing was found via Sedar and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.