As Tesla Races Ahead, Big Auto Is Running Out Of Time To Secure Its Own Battery Supplies

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

Summary

The Tesla gigafactory is underway and will be ready by 2017.

With the gigafactory, Tesla will have access to batteries at a cost close to $100 per kWh (at least three times cheaper than anyone else).

If big auto does not start work on its own gigafactories, they will have gifted the EV market to Tesla.

Tesla (NASDAQ:TSLA) has broken ground on its gigafactory site in Nevada and a deal with Panasonic has been reached.

Thanks to Tesla's previous capital raising efforts and an immediate commitment of roughly $300-500 million from Panasonic, it is clear that close to $2 billion is available for the gigafactory construction over the next year.

By this time next year, Tesla will be producing close to 100,000 vehicles per year (Model S+X) and obtaining further financing to finish the gigafactory will not be difficult (if required at all).

In the most recent Tesla conference call, Elon Musk suggested that "in light of the technical and logistical advances the factory would bring, he would be 'disappointed' if it took Tesla 10 years to make a $100-per-kWh pack, suggesting it could happen before the end of the decade."

"It's heading to a place of no contest with gasoline," Musk said. "In the absence of the Gigafactory, this progress would be much slower."

Since the gigafactory is not expected to reach full production before 2020, one can only conclude from Mr.Musk's words that he expects the gigafactory to be able to get battery costs down to $100 per kWh or below.

The best estimates place Tesla's current per kWh battery cost somewhere between $250-$300, while the rest of the auto industry is believed to be paying well over $400 per kWh for their EV batteries.

If the gigafactory is capable of reducing battery costs to $100 per kWh or below, Tesla will hold all the cards when it comes to the Electric Vehicle market.

One must remember that the gigafactory will only produce enough batteries for 500,000 vehicles and that to do this it must produce more lithium ion batteries under one roof than the entire world produced in 2013.

As I have written in my previous articles, nobody in the auto industry will be close to being able to produce as many Electric Vehicles as Tesla unless they embark on building their own battery gigafactories in the very near future.

For example, Nissan (by far the leader in terms of pure EV production within the mainstream auto business) has only enough battery capacity to produce 200,000 Leaf's per year -- and that's when its battery plant is eventually running at full production.

Of course we must remember that a Leaf has less than half the range of the base 60 kWh Tesla Model S, which means that currently, Nissan only really has the ability to produce less than 100,000 long range EV's per year. That's assuming they plan on challenging Tesla's 200+ mile range, $35k Model III (expected in 2017) and halting production of the current Leaf.

The rest of big auto has virtually no battery supply on which to draw. GM, with the Chevy Volt, is in a distant second place behind Nissan with its battery plant able to produce enough for just 60,000 Volt's per year at max capacity (or maybe less than 15,000 long range EV's).

These battery capacity figures are taken from my own research which can be found here (with original sources).

Where to invest

Most of the big auto executives have admitted that fully electric is where we will be in the end. They only disagree on how long it will take to get there.

Looking at what Tesla is doing with its rapidly expanding (and free) supercharging network, along with the company's ability to produce significantly cheaper batteries (potentially enabling a $35k mass market long range EV), big auto should be nervous about the speed at which things are moving.

If they wish to have any hope of competing in the EV market in the coming years, they better start thinking about their own battery gigafactories right now.

I am betting big auto isn't as dumb as they have looked thus far and will soon start making moves to secure their own EV battery supply. I am thus looking at investments in those companies that provide the necessary materials for battery production, namely lithium, nickel, graphite, and cobalt.

Those in the lithium business know things are heating up with many of the big players making acquisitions in Australia and China.

Just three weeks ago, one of the biggest lithium producers, Rockwood Lithium (NYSE:ROC) was acquired by chemical giant Albemarle. Looking ahead just 5 years, everyone will see that Albemarle got a great deal.

The only other major player in the lithium sector that hasn't made any deals as of yet is Sociedad Quimica y Minera (NYSE:SQM). Trading well below half of its near $60 high in 2013, I believe many smart investors will start to see value in this low cost lithium producer -- especially as big auto shifts its attention to building massive lithium ion battery factories the likes of which we could never have imagined just a few years ago. Potash Corp. of Saskatchewan (NYSE:POT) may even take another stab at acquiring SQM if it is smart.

SQM is thus my top pick for the rest of the year and beyond.

For more conservative investors, there is always the Global X Lithium ETF (NYSEARCA:LIT), which holds a basket of the big lithium miners and a few of the juniors in the lithium space as well.

Happy investing!

Disclosure: The author is long SQM, ROC. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.