Tesla’s grand battery plan could cause re-rating of graphite stocks
Car maker Tesla’s plans for a gigafactory — that is, a giant battery making factory — caused a ripple in the lithium and graphite worlds when the concept was unveiled earlier this year.
But, surprisingly, Tesla CEO Elon Musk made some more recent comments that have garnered considerable attention in the technology media but not in the general investment forums — both from the point of view of graphite but also lead, used in the traditional lead-acid battery. One who did sense the implications of Musk’s comment that the world by 2040 could need as many as 200 gigafactories was London-based analyst Roger Bade at Whitman Howard. As he wrote in his daily client note: “The base metal lead doesn’t appear to be factoring in its replacement in batteries by lithium-ion, but give it time. As yet none of the graphite stocks have latched on to yesterday’s comments but, again, give them time”.
(To give credit where it is due, Jon Hykawy has latched on to what is happening in lithium, noting in his Investor Intel post yesterday that the lithium market in dollar terms has increased by 80% in five years.)
But the point Bade is making is that the development of the lithium-ion battery has much more dramatic consequences for graphite, as these batteries use many more times graphite than lithium.
Now a gigafactory as planned by Tesla will make lithium-ion batteries for 500,000 new electric vehicles a year. There are about 1 billion automobiles in the world. In 2013 another 65 million came off the assembly lines. It is estimated that, within a few years, that number will be 100 million a year. If all those were electric vehicles, that would mean 100 million batteries needed each year — hence the 200 gigafactory projection. But, of course, they won’t all be electric vehicles; they won’t even be mostly electric vehicles. Until perhaps 2040, by which time your average Bolivian, Bhutanese or Botswanan will be zipping along in their electric vehicle (or so you might like to imagine).
So, let’s not get too carried away with Elon Musk’s daydream.
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That said, though, the chances are that in the coming decade there will be a number of gigafactories opened and that, assuredly, will have implications for graphite demand. (And the fact that Japanese researchers have, according to a news report this week, come up with a way to build the Li-ion battery so it cannot overheat or catch fire is reassuring.) And let us not forget the recent deal by Australia’s Syrah Resources whereby it will supply graphite to China’s largest aluminium maker for a new process, a technology if adopted by the rest of the world’s aluminium makers could have significant implications for graphite demand.
Musk, while probably being a little too eager about the trajectory for lithium-ion battery sales, has changed the state of play. As I reported in March on Investor Intel, analyst Brian Johnson at Barclays Bank investment arm has described the gigafactory concept as reminiscent of Henry Ford’s push for vertical integration in the 1920s.
But we must keep in mind that there’s another wrinkle to the Tesla/Panasonic gigafactory plan plan: it could also transform the power industry, a prospect even more spectacular than its potential to promote electric cars. Utility customers throughout the U.S. are already beginning to turn to battery storage as a way to reduce power bills and sever ties with their local power companies. By lowering the cost of energy-storage with its lithium-ion batteries, as Bloomberg noted in March, “Tesla could accelerate the disruption of the electric utility business”.
The first $5 billion gigafactory will employ 6,000 people. Also keep in mind that Musk is not the only one with an electric vehicle battery dream. Chinese billionaire Lu Guanqui has taken over the bankrupt Fisker Automotive, which developed the hybrid Karma sports car and began manufacturing it in Finland. Fisker also owns an abandoned General Motors plant in Wilmington, Delaware. You would have to think Lu must have some serious plans for electric vehicles and, in that sector, vertical integration.
Meanwhile, Sacramento, dry your tears: your turn might still come. The Californian state capital is angling to get Musk to chose its Mather Airport battery park for the first gigafactory. But the word is that the location has slimmed down to four possible choices — Nevada, Texas, Arizona or New Mexico. Maybe next time, Sacramento.
In the meantime, let’s keep on this story and whether it might just need to be factored into graphite valuations. There have been some analysts who have taken the view that there are simply too many graphite projects for the size of the potential market. Maybe — but that view was formed before talk of graphite in the aluminium process or, indeed, making 500,000 lithium-ion batteries per gigafactory.
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