The US government is investing billions to support domestic EV production, reduce reliance on China, and establish a local battery ecosystem. The Biden administration aims to achieve net-zero emissions by 2050, with EVs comprising half of new light-duty vehicle sales by 2030. This investment, though not yielding immediate results, represents a positive step toward reducing dependence on foreign sources for the US's battery needs.
Tesla Inc (NASDAQ:TSLA), the leading US electric vehicle manufacturer, relies on lithium to power its vehicles. In 2020, CEO Elon Musk highlighted Tesla's interest in lithium during Battery Day, revealing the acquisition of tenements in Nevada to explore clay-based lithium production.
Despite challenges in lithium mining, carmakers face the dilemma of securing a stable supply. Efforts by the public and private sector are being made to bridge the gap in the lithium battery supply chain, emphasizing the need for a reliable domestic supply, but challenges such as lengthy permitting processes and opaque decision-making persist.
Amidst ongoing production delays for manufacturers such as General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F), coupled with the perception that affordable electric vehicles (EVs) remain a distant aspiration, a strategic investment in domestic battery processing and production has the potential to rejuvenate American carmakers.
US lithium companies are stepping up their efforts to close the gap between supply and demand. Nevada Lithium Resources Inc (CSE:NVLH, OTCQB:NVLHF), with its Bonnie Claire project in Nevada, is one example. CEO Stephen Rentschler shared his insights with Proactive in this op-ed, which underscores the urgency of securing essential battery materials like lithium, nickel, cobalt, and copper. Facing an unprecedented demand growth of 15% CAGR for lithium, car companies become the next generation of portfolio managers.
Using a metaphor that we’ve never seen before, but instantly understood, Rentschler emphasizes that, unlike in the investment industry, the decision is straightforward for car companies: securing lithium at all costs, as the consequences of not doing so are dire. Here is the first of a two-part series from a lithium CEO with a firsthand view of what will be required to build an entire industry from the bottom up.
“The Newest Generation of Portfolio Managers is Building the World’s EVs”
The electric vehicle is firmly embedded in the global way of life. Only the trajectory of adoption is in question, not the outcome. Whether EVs achieve dominance or not, the outlook for the battery makers (and therefore the EV companies) is bleak.
Except, of course, for those battery makers foresighted enough to secure their future battery material supplies now. That means their lithium, nickel, and cobalt. The very smartest end-users are also looking to secure future copper supplies.
Why is any of this necessary? Because, at best, mature commodity industries can only increase supply volumes at global GDP growth rates plus a few percent. The wheels fall off when growth is pushed faster -- and that’s for established commodity industries. Where is all the lithium for these EVs going to come from? We’re asking for the development of an entire industry at a 15% CAGR for many years – and that’s about the easiest scenario I’ve seen. Nothing like this has ever been attempted.
So how do we do it? When you think about it, it’s up to the car companies. Or to be more exact, the battery metal purchasers in those car companies. These folks have become our next generation of portfolio managers, whether they want to be or not. But luckily, these new portfolio managers don’t need an MBA or hedge-fund experience to figure out how to solve the dilemma. All that’s needed is a leap of faith.
Do you remember the movie scene where Indiana Jones conquers the final hurdle of traversing the chasm and confronts the 600-year-old Knight guarding the Holy Grail?
Taking that first step over the cliff edge, throwing gravel over the hidden bridge, conquering the remaining Templar Knight and selecting the Holy Grail seems like a great metaphor for the decisions facing Detroit, Stuttgart and Tokyo. The entire process is unbelievably daunting. The difficulty explains why there currently isn’t a car logo engraved on every shovel blade buried in dirt with even a whiff of lithium.
The appropriate metaphor is much simpler. It should begin and end with the initial decision to step over the cliff. For the newly minted generation of portfolio managers, this is great news. Why? Because these portfolio managers have it simpler than their colleagues in Wall Street, London, or Toronto. They don’t need to outperform their peers by immediately selecting the correct Holy Grail and avoiding the associated penalty of drinking from the wrong cup.
In the investment industry, small differences in performance determine which funds survive, and which funds flounder -- which funds grow their assets and fees, versus those facing redemptions. For the car companies, it really is a much simpler decision. It’s not a question of who gets lithium on the best terms, it’s a question of who gets the lithium at all.
The payback for investing in developing lithium assets is potentially great. In contrast, the blowback from not making the investment is incalculable. What’s the opportunity cost of not having a car in the showroom because your battery’s lithium is still in the ground somewhere in Nevada or Australia? Would that be an infinite negative margin? Does it really matter what you call it?
For the car companies, there should be one goal. Get the lithium for their batteries and secure that supply for as long as needed. Should they invest only in the low-cost producer? Who knows who will be the low-cost producers? There is no existing lithium industry from which we can reasonably infer a cost curve. For the first time in history, lithium needs to be sourced from deposit types that were previously never considered.
Coming up in Part Two: “Beyond the Holy Grail: why the EV sector needs every lithium project to succeed”