Tesla, SolarCity, And The Birth Of The Lithium-Based Economy

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 |  Includes: KNDI, LIT, POT, ROC, SCTY, SQM, SSNLF, TSLA
by: Locked Down Investments

Summary

Tesla, SolarCity and others could kick off a massive increase in the demand for lithium as major automakers and competitors seek to secure their own battery supplies.

How Lithium has the potential to eventually displace foreign oil in favor of domestically produced electricity as our transportation fuel in the long term.

Musk believes 50% of all vehicle production will be fully electric by 2030. If so lithium demand will increase from 165,000t/yr in 2013 to a minimum of 3,000,000t/yr in 2030.

Stocks to watch: Sociedad Quimica y Minera de Chile, Rockwood Holdings, BYD, Kandi Technologies, RB Energy, Tesla, SolarCity, Samsung Electronics.

If you are one of the many who are kicking themselves for not getting in on Tesla (NASDAQ:TSLA) or SolarCity (NASDAQ:SCTY) a year ago there may still be some very interesting investment opportunities, which will benefit from their success.

While I won't provide any in depth stock analysis here, I do aim to paint a picture as to what the future may have in store in terms of future demand and how the following companies may benefit. I leave the detailed analysis to those who wish to dig deeper into each individual company.

Introduction

If Tesla has hailed the dawn of the EV era, then the announcement of its battery "giga factory" just may have hailed the slow birth of the Lithium based economy.

Tesla's giga factory will produce more lithium ion cells under one roof than the ENTIRE WORLD produced in 2013.

To quote Elon Musk..."We need a lotta battery."

This massive factory will produce enough battery cells for 500,000 long range electric vehicles (LREV) by 2020, but the giga factory will begin producing cells for around 200,000 LREV's in 2017.

There is simply no way that Tesla would be investing in the giga factory if it did not think it was possible to create their long range GEN III mass market vehicle for an affordable price in 2017 (estimated $35,000 USD).

You will notice that I make a real point of emphasizing "long range" electric vehicle. This is simply because Tesla is the only car company currently mass producing a long range EV. This is important and I will thus subdivide the EV market as follows:

1. LREV - Long Range Electric Vehicle - is a vehicle with 150+ miles of all electric range from a full charge. (Tesla Model S is the only mass production vehicle in this category with over 200 miles of EPA range in its base 60 kWh vehicle)

2. MREV - Medium Range Electric Vehicle - is a vehicle with 50-149 miles of all electric range from a full charge. (Nissan Leaf and BMW i3 are examples - however both have less than 100 miles of range).

3. SREV - Short Range Electric Vehicle - is a vehicle with less than 50 miles of all electric range from a full charge. Most of these are actually plug-in hybrids, which also use gasoline. (Chevy Volt with 40 miles of all electric range and the Plug-In Prius with just 11 miles of all electric range are examples of SREVs).

My point is this - unless big auto (Ford, GM, Toyota, etc) wish to surrender the long range electric vehicle market to Tesla for the next decade they will soon need to announce plans for their own battery giga factories in order to secure enough battery supply to compete with the Tesla's Gen III in just 3 years.

It should be noted here that a Tesla long range EV uses 3-4 times as much lithium as a medium range EV, and 5-15 times as much lithium as a short range (or plug-in hybrid) electric vehicle.

In terms of big auto internally owned battery facilities Nissan has the only large scale battery factory in the USA (built in 2013) which has the potential to eventually provide enough batteries for 200,000 Leafs per year (or perhaps only 65,000 long range EVs/year if Nissan plans on competing with Tesla in this market).

More on Nissan's battery plant.

GM on the other hand has only enough internal battery capacity for just 60,000 Volts per year (which would be equivalent to only around 15,000 LREVs)

More on GM's Volt battery plant.

It seems then that big auto has a long way to go in terms of building out more battery capacity if they aim to catch up with Tesla. Indeed at 500,000 LREVs per year Tesla alone could be using up nearly 20% of the 2013 worldwide demand for lithium.

Goldman's lithium estimate for Tesla.

Looking ahead to 2030 it is estimated that vehicle sales will top 150 million per year.

Elon Musk has stated that he believes that more than 50% of all vehicles sold by 2030 will be fully electric.

If his prediction is correct, this will equate to 75 million vehicles requiring nearly 3,000,000 tonnes of lithium per year. The worldwide production of lithium in 2013 was only around 160,000 tonnes! As you can see this market has a lot of growing to do (and this is not even taking into account any other increased lithium demand for two-wheeled EVs, grid energy storage, and portable electronics of which I will get to in a moment).

Of course, big auto could contract out their battery making duties to major battery players such as Panasonic, LG, or Samsung however, it is clear that these entities will also have to drastically expand production to keep up with demand. If big auto do not choose to produce their own batteries, a la Tesla, they will not have much security in their battery supply, as only the highest bidder will secure large scale supply from the battery makers. This will raise the cost per kWh substantially for those not making their own batteries.

As a side note, my eye is on Samsung (OTC:SSNLF) to get in on the EV game very shortly. They have everything they need as one of the world's largest battery, computer, and touchscreen makers (and also the cash on hand to give it a real shot). But that is another story that I have touched on in my instablog for those that are interested.

Bottom line… with world vehicle production already edging ever closer to 100 million per year, many more giga battery factories will be needed by 2017 and beyond, that is a certainty.

There are also other investments besides lithium that will gain from an increase in the adoption of EVs. Graphite, Cobalt, Nickel, and many other commodities and companies also stand to gain. I hope to touch on Graphite and Cobalt in future articles.

Additional lithium demand growth

1. If any of you have been to China recently you will have seen the electric scooter and e-bike mania that has taken over most Chinese cities (which is now slowly spreading to Europe and North America).

The number of two wheeled EVs are expected to jump from 17 million to 138 million by 2017.

More on 2-wheel EV growth.

2. SolarCity will install solar panels on your roof with zero money down, whilst simultaneously promising to beat your current utility's monthly electricity bill. They have also just begun to offer battery backup solutions to enable total grid independence.

This solar/battery backup market is expected to grow rapidly.

See the Rising Sun on Solar Grid-Tied Energy Storage.

3. Finally, I certainly don't see any slowing of the world's demand for portable electronics (tablets, smartphones, power tools, etc). These are now all primarily powered by lithium based batteries.

See the Battery Demand Forecast here.

The Simple Superiority of Electric Drive

I will not explain them in detail here but the advantages of the electric drivetrain are many:

1. Faster accelerating dollar for dollar vehicles. (e.g. Tesla Model S can out accelerate the more expensive BMW M5 0-100mph)

2. Better efficiency (over 90% energy conversion from battery to the wheels compared to around 20-25% from gas tank to wheels for an ICE vehicle).

3. Much cheaper to refuel and maintain over ICE vehicles (1/4 to 1/8th as much to fuel and maintain when compared to an equivalent performing petrol powered vehicle).

4. Higher safety (as evidenced by the Model S unique EV design receiving the highest safety rating of ANY vehicle ever tested)

5. Less reliance on foreign oil - more money spent on domestic electricity creating domestic jobs - money stays within the country.

6. Less oil disasters/spills costing billions to clean up along with untold permanent damage to ecosystems/tourism/fisheries, etc.

7. Fewer oil wars/military expenditure to protect oil resources and supply lines. MANY billions spent every year here.

8. Less local air and noise pollution and lower associated healthcare costs due to poor air quality. Poor air quality (such as in Los Angeles due primarily to vehicle emissions) can result in respiratory illnesses, heart disease, and cancer.

9. Infrastructure is already in place. 95% of charging for LREVs is done overnight at very cheap off peak rates (remember everybody sleeps - this is your charging time). Most people have a plug in their garage or driveway (or can install one for a few hundred dollars). This is not the case for hydrogen, natural gas, or any other hyped up solution. Parking for apartment dwellers and off-street parkers will evolve over time to add charging options for relatively little cost.  

10. The EV is practical. As the vast majority of people drive less than 50 miles per day an EV with a range of 200 miles stomps out any daily range anxiety. Tesla offers free supercharging for those rare (200+ miles in a single day) long distance trips.  

Bearing all of these advantages in mind there are few who would disagree that if an affordable/smaller Model S were available that they would be selling extremely well. Especially when combined with the only FREE supercharging network to enable long distance EV travel (the Tesla supercharging network will cover most of the developed world by the time Gen III is set to roll off the production line in 2017). The superchargers provide a quick recharge in just 20 minutes for roughly every 2.5 hours of long distance driving.

Tesla supercharger network.

How lithium can replace oil... well... eventually

My next point is the disruption possible in the energy market if EVs start to gain significant market share.

People seem to assume that since EVs are plugging into a power plant that they too must get most of their energy from oil and other fossil fuels.

However, what most people fail to understand is that oil is NOT the world's electricity generation fuel... it is the world's TRANSPORTATION FUEL.

Indeed 70% of all American oil demand is ultimately refined into gasoline, diesel, and jet fuel.  

IER Energy Overview - Oil

But less than 1% of American electricity is generated from oil based fuels (less than 5% worldwide).

37% (and falling) is generated from coal, 29% from Natural gas, with the remaining 33% coming from a mix of near zero emission hydro, nuclear, wind, solar, geothermal, biomass, etc.

USA electricity statistics in brief.

Many EV detractors will claim the contrary but when using this average electricity mix there is no doubt that an EV is the cleaner way to power an automobile from A to B. Largely in part to the massive gains in efficiency from a large stationary power plant over a tiny mobile vehicle engine. As coal declines and cleaner forms of energy take root the electrical grid (and thus the EV) will only get cleaner. Solar and wind power are growing faster than all other forms of electricity generation with the exception of natural gas in the USA.

Solar surpasses wind.

I like to explain it like this: You wouldn't power your home from a small portable gas or diesel generator because it would be inefficient, noisy, smelly, and inconvenient to refuel. Slowly people are realizing that this same argument applies to the vehicle that they are driving.

Bottom line: EV owners have the ABILITY to drive on renewable energy, ICE powered vehicles will NEVER have that ability. In addition, we can more easily better filter the emissions of a few stationary power plants over hundreds of millions of mobile ICE vehicles.

Increasing public and governmental support for vehicles using DOMESTIC energy creating DOMESTIC jobs

To me this is may be the most important issue when considering a switch from ICEs to EVs, and it is not talked about nearly enough.

As more and more people become aware of just how much EVs can displace foreign oil in exchange for domestically produced electricity, an EV purchase will increasingly become the "patriotic choice." Something that people and governments (through increased subsidies/rebates/incentives) will rightly want to get behind.

While the USA, China, and India import around 50-70% of their total oil requirements other major economies like Germany, Japan, France, South Korea, etc., import well over 90% of their oil needs. The switch to EV from ICE for all of these countries will translate into massive balance of payment benefits for these nations, in addition to the pollution, health and other benefits mentioned above. Most countries therefore would be wise to encourage the increased use of electric vehicles.

List of Countries by Oil Imports

List of Countries by Oil Consumption

Furthermore it is estimated that, "Every dollar spent on gasoline at the pump only generates 40 cents of economic activity because most of that dollar goes to pay foreign producers. Domestically produced fuels, on the other hand, benefit from the multiplier effect with each dollar spent generating an estimated three dollars in economic activity."

The real foreign oil problem.

I shouldn't have to tell you that a strong shift towards the EV would mean TRILLIONS of dollars of cumulative increased domestic economic activity within the USA, China, Germany, Japan, S. Korea, France, India, etc, etc. Talk about a stimulus program with teeth!

But what about the grid? Won't it fail if everyone starts plugging in their vehicles?

While the shift will be gradual with utilities able to see and forecast increasing EV demand, it should be noted that there is plenty of excess electricity to be had overnight whilst the vast majority of people are asleep and most of their electrical devices are switched off.

Given the right incentive to charge at very cheap overnight electricity rates, EV users can set a timer to only charge at night. It has been estimated that right now tens of MILLIONS of EVs could be charged overnight without ANY additional power plants being created in the USA.

In fact utilities should be behind the wide spread adoption of electric vehicles because it would allow them to more profitably utilize their existing equipment. Running generators and charging for electricity overnight instead of switching them off and letting generators sit idle whilst everyone is sleeping.

As a result more EVs charging at night might actually mean lower average power bills for everyone else during the day.

Okay, so who stands to benefit?

I believe that all companies associated with EV/battery components and lithium will do well in a natural "rising of the tide" in this market.

Personally, I believe that the major lithium producers are the best bet right now. As it will take many years before new supply can be brought on line and certainly not at the scale of the current major players who also have the potential to more easily expand in their own right.

It should also be noted that while a typical long range Tesla battery pack might cost somewhere around $15,000, the 40 kg of lithium inside only costs around $300 at today's prices. Therefore lithium producers have a lot of room to increase prices without affecting overall battery demand. This is a good position to be in.

Sociedad Quimica Y Minera (NYSE:SQM) and Rockwood Lithium (NYSE:ROC) are my top picks, as they each produce around 30% of the world's lithium (60% of total world supply). Talison Lithium was another major player but they were bought out by the Chinese firm, Chengdu Tianqi Group (of which ROC now owns a 50% stake in).

Important lithium producers

FMC Corp. (NYSE:FMC) is another major player in the space worth looking at.

For those more conservative investors there is always the Global X Lithium ETF (NYSEARCA:LIT) which holds a mixture of large and small lithium producers mentioned here.

I personally like RB Energy (RBI.TO) as an up and coming Canadian firm who, unlike many exploratory lithium companies, are already producing and aim to be at full production by the end of this year.

As an outlier I also like Galaxy Resources (GXY.AU) as an Australian firm with lithium deposits in Australia and a refinery in China. Currently their shares are on hold by the exchange as a major company announcement is imminent. I emphasis however that Galaxy is a micro-cap penny stock and highly speculative.

Update: Just announced that Galaxy Resources has sold its lithium refinery in China to the Chengdu Tianqi Group who are now rapidly becoming a major player in the lithium world.

I also like BYD Corp. (1211.HK/ BYDDF) and Kandi (NASDAQ:KNDI) as my Asian EV plays. In fact I believe that BYD has the potential to be the Asian equivalent of Tesla and SolarCity combined, again I have touched on this topic in my instablogs for those that are interested. Certainly Elon Musk and the CEO of BYD Mr. Wang Chuan-Fu share similar goals in terms of EVs and Solar Power. It would be great for all mankind if these two geniuses could work together somehow in helping to "Solve the WHOLE problem" (BYD's company slogan).

Nonetheless I believe ROC will benefit most directly from the Tesla giga factory, as I have a hunch that Tesla is going to try and source its lithium from the only active lithium producer in the USA right now (the Rockwood lithium plant in Silver Peak, Nevada).

It makes sense that Tesla use American lithium as this will boost their chances of gaining further incentives from the federal and state governments. After all Nissan did get a $1.4 billion Dept of Energy Loan for their battery factory which they built in Tennessee.

The Tesla GEN III will thus most likely be the most American made car produced in the USA by 2017 (using the most American made components). Between the Tesla vehicle factory in CA, the giga battery factory in NV, the lithium plant in Silver Peak, and the solar installations performed by SolarCity, there will be many tens of thousands of American jobs created in the run up to Gen III production. Rockwood has also interestingly applied for the construction of a Geothermal plant to power its lithium operations at Silver Peak. This would be another feather in Tesla's cap if it were to source from Silver Peak, as the less CO2 in their supply chain the better for their eco image.

Despite all of this SQM is still my current favorite as it, unlike ROC, is well off its 52-week high (SQM shares were decimated in the potash war that broke up the Russian cartel last year).

Most analysts agree that the low for potash is now in and just recently I viewed an article on Russian Television that claimed that the potash war between the Russian giants is soon coming to an end. As this is a substantial portion of SQM's revenue they stand to benefit not only from positive potash developments but in addition to the rapid increase in demand for lithium that is clearly just around the corner. If ROC is directly supplying the Tesla giga factory it will cause lithium shortages elsewhere that SQM will step up to fill. SQM also sits on one of the biggest lithium brine reserves in the world in Chile and can increase production more easily and at less cost than the other major players.

Another catalyst for SQM is that there have been rumors regarding a potential buyout by the Canadian giant Potash Corp. (NYSE:POT). If I were Potash I would certainly scoop up SQM right away before it moves higher on the back of more battery factory announcements or any Russian potash cartel developments. I certainly don't believe SQM is going any lower and have a $45 price target by year end. SQM is also currently paying a nice dividend of over 3% to reward you while you wait. Its balance sheet is also healthy and not nearly as risky as some other lithium investments in my opinion.

Risks: The potential for a new revolutionary form of energy storage not involving lithium

Many believe that Tesla is foolish for investing in a giga battery factory just in case some new revolutionary battery technology comes out that does not involve lithium ion cells.

While I am no expert, I have been following the EV/battery market for over a decade now and can say one thing for certain that most battery experts agree with... Battery developments are painfully slow and if breakthroughs do occur they are often on a tiny scale in the lab, obscenely expensive on a per unit basis, and may not ever be scalable for mass production.

Any new battery technology will also have to be tested for at least a decade before any auto manufacturer is going to put it into a vehicle and risk human lives on it. IF capable of mass production its supply chain has to be refined and final pack price brought down to a level comparable to lithium ion in terms of a $ per kWh price and a comparable power to weight ratio (remembering that lithium ion has had nearly 25 years to get to where it is now).

Regardless many new promising technologies do involve lithium (such as lithium-air and lithium-sulfur batteries). Lithium is likely to be a part of any new battery chemistry for the simple fact that lithium is the lightest metal on the periodic table. Since the overall weight of an EV battery is always of critical concern it is thus likely that lithium will be an integral part of the EV market for the foreseeable future.

Super/Ultra Capacitors are something to keep an eye on, however most experts agree that they are still nowhere near capable of storing enough energy to power an EV on their own. But perhaps in another 10-20 years we may be closer to a capacitor based solution. They will however have to prove themselves up against far superior and cheaper lithium batteries than what we have today.

There is more than enough lithium in the earth's crust to satisfy our needs for many millions of EVs. As demand increases new deposits will be discovered and will be more profitable to extract as prices rise. The point here is that as it will take time to bring new lithium production on line (usually 5-10 years from initial core drilling to production of battery grade lithium carbonate/hydroxide from any new sources). Therefore the current major producers stand to benefit the most in the interim, as they can most easily expand their own production as the market evolves, because they currently sit on the largest and lowest cost lithium resources to extract from.

I would also point out that in the long term significant amounts of lithium will be recovered through recycling. Unlike oil/gasoline when it is burned into thin air, most of the lithium in an EV battery will eventually be recoverable at the end of each battery's useful life.

Conclusion

What I hope to have proved is that the Tesla giga factory is a game changer and ushers in the start of a slow shift to a lithium based economy.

Obviously, I don't expect this to happen overnight. However, I hope I have proved that the EV and electricity have the potential to seriously displace oil over the coming decade and beyond. I believe that the people and their governments will eventually get behind a product that is better in nearly every way, which also promotes domestic energy and domestic jobs over that of imported oil.

While I don't believe that we will or should ever stop using oil (it is incredibly useful when sustainably used - such as in plastics which can be recycled for example). Unfortunately when we burn oil and its by-products into thin air this is not sustainable, especially if those in the developing world each wish to have their own vehicles just as we do in the West. EVs thus offer us an opportunity to prevent a major oil supply crisis that will occur if we do not diversify away from oil when it comes to powering our transportation sector.

I believe we should look at the major lithium producers and their potential for large gains when compared to the current oil giants.

SQM for instance controls around 30% of worldwide lithium production. Now just imagine if Exxon controlled 30% of the world's oil production? In reality Exxon only produces around 3% of the world's oil and is currently valued at over $400 billion.

While I realize this is far from an apples to apples comparison it should serve as some food for thought as to where some of the major lithium producers might be valued in a few years time as people begin to realize the steady shift to a lithium based economy.

I also believe that it won't be long before the price of lithium is posted on the major commodity exchanges, its price will be well known to all and will be traded just as frequently as other economically vital metals are today.

I think it is safe to say that one needs to be on board the lithium train as it leaves the station.

Good investing out there.

Disclosure: I am long SQM, ROC, KNDI, BYDDY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Also long RBI.TO and GXY.AX

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.