It’s headline-grabbing stuff - Elon Musk says that his Tesla Corporation (NASDAQ:TSLA) aims to accelerate technological and market development by up to ten years in the roll-out of electric cars.
The cars will be powered by lithium batteries built in Tesla’s facility in Nevada, which is known colloquially as the “gigafactory” and is costing a cool US$5bn.
One question remains: where will all the lithium come from?
Because it’s not just Tesla advancing lithium-powered battery technologies even though it does get the most headlines.
Duke Energy is now replacing the lead-acid batteries at its 36 megawatt (Mw) energy storage facility in west Texas. The new batteries are exclusively lithium.
And the list goes on.
“Every manufacturer in Europe is bringing out electric and hybrid vehicles,” says Steve Kesler, the chief executive of European Lithium, a company that’s planning to list on the Aim market of the London Stock Exchange shortly.
He’s clear that there is going to be a huge spike in demand when Tesla and its ilk start to manufacture in earnest and that the spike is coming sooner rather than later.
Supply will almost certainly struggle to keep up.
To support that view, Kesler cites recent analysis conducted by Canadian research house Stormcrow Capital, which argued that in order for lithium supply to keep up with projected demand there will need to be a new mine constructed every year.
“Overall lithium demand will more than double from present levels through 2025,” says Stormcrow.
No wonder that Steve Kesler is excited.
“We believe that lithium really is the commodity for the future,” he says. “It really is a seismic shift.”
Over in Canada, somewhat closer to the Tesla action, Guy Bourassa of Nemaska Lithium (TSX:NMX) agrees.
“We’re confident that the market’s going to grow,” he says. “And the capacity of existing producers to increase production is nil.”
New projects will eventually come on stream, but it will take time. Only one will be ready this year: Orocobre’s (TSX:ORL) Olaroz and even that’s had its issues.
Aside from Olaroz, new supply is limited, so those projects that are more advanced, like Nemaska’s Whabouchi property in Quebec, look to be in pole position when Tesla suddenly comes into the market with its huge appetite for supply.
The likelihood is that Tesla and its peers will help Nemaska and other lithium hopefuls with up-front capital in return for certainty of supply, and that dynamic means that the usual market uncertainty about any given company’s ability to secure development funding are greatly mitigated.
At UK broking house SP Angel, Bonnie Hughes points out that Tesla has undertaken to source all of its raw materials from North America.
That has its good and bad points as far as global suppliers are concerned, but it’s certainly likely to wake investors up to the potential that Nemaska offers before too long.
In the UK, while European Lithium finalises its funding, other companies are getting in on the act too.
Rare Earth Minerals (LON:REM), one of many resources vehicles controlled by Dave Lenigas, has exposure to several lithium projects around the world, and Premier African Minerals (LON:PREM) has just raised £450,000 to pay for early development work on the Zulu lithium-tantalum project in Zimbabwe.
There will be more.
“Tesla will need 20,000 tonnes of lithium hydroxide,” says Guy Bourassa.
“That currently exceeds total production. It’s not a matter of how they’re going to pay. It’s a matter of how they’re going to get it.”
The price is already moving in anticipation.
Back in early 2014 end users were unwilling to sign deals at US$7,000 a tonne, arguing that they would be able to average down over the course of the year.
Then came the announcement of the Tesla gigafactory. By May the price was already over US$8,000.
It’s now at around US$9,500 and looks likely to strengthen further, according to the Stormcrow analysis.