Recently, Cathie Wood, CEO of Ark Invest, tweeted that according to Wright's Law, the market for EVs should grow to 26m by 2023, thereby providing Tesla (TSLA) with plenty of growth potential. Whilst this growth profile may be possible in theory, in practice, the available supply of battery raw materials, in particular, lithium, will limit EV penetration to well below 26m. As 2023 is only 4 years away and ramping lithium production is challenging, only projects that are either in production, funded, or currently under construction will contribute to global supply. Any projects greenlighted from 2020 onwards will struggle to make a meaningful contribution within 3 years. Based on my lithium supply models, after deducting demand for industrial uses (ceramics, greases, etc.), energy storage solutions, and consumer electronics, there is only 440KT of supply remaining in 2023 for ALL e-mobility. Translated, 440KT equates to approximately 500 GWh of batteries (generously assuming all remaining 440KT is battery grade and quality). E-mobility includes e-bikes, light and heavy commercial trucks, e-buses, ships/ferries, and EVs. Investors should be wary of any EV manufacturer that is forecasting market share/sales based on a total passenger EV market (BEVs and PHEVs) greater than 8m in 2023.
Based on the assumptions of:
- 0.88kg/kWh lithium intensity in the battery cell
- All remaining available lithium supply is battery grade/quality
- All other e-mobility demand equals 150 GWh
- BEV sales represent 67% and hybrids/PHEVs 33% of EV sales in 2023
- The average EV battery size is 43.75 kWh in 2023
The balancing figure (350 GWh) is 8m EVs in 2023 split between 5.36m BEVs and 2.64m PHEVs. Volkswagen (OTCPK:VWAGY) is targeting 3m BEV annual sales in 2025 and a total of 22m BEVs in the 10 years to 2028. The OEM is likely to target 1.5m BEVs in 2023. Given EU CO2 emission standards and penalties being introduced in 2020, there are a number of EU OEMs that are going to be looking to introduce EV models to lower average fleet CO2 emissions to below 95g/km. In my opinion, given limited battery availability and established technology/reduced costs, EU OEMs will look to extend the use of hybrid models to meet the immediate emission standards and defer the switch to full BEV models until battery pack prices are below $100/kWh. Much has been made of the recent Toyota (TM) announcement regarding the advancement of its EV roadmap, moving forward its sales targets by 5 years from 2030 to 2025. However, their 2025 sales objective of 5.5m "electric and electrified" vehicles include 4.5m hybrid and PHEVs and only 1m battery vehicles including both BEVs and fuel-cell cars. Given that Toyota's European average CO2 emission was 99.9g/km in 2018, the company looks set to meet the 2020/2025 standards with the proposed fleet plan.
The early introduction of new EU emission standards and the desire of OEMs such as VW and Mercedes-Benz to be carbon neutral in the future means initiatives like VW's partnership with Northvolt to produce batteries in Germany (12 GWh to start - ramping to 30 GWh) may be emulated by other OEMs in time and battery manufacturers (some subsidized by the EU). Overall, the ultimate target capacity for planned European plants is 210 GWh. It would be fair to assume that ALL or close to all of that capacity is spoken for by European OEM battery demand.
Source: Infinity Lithium
Adding up all the EV plans by OEMs versus the available lithium supply points towards a likely shortfall in actual production. Alternatively, we're likely to see hybrids play a greater role in the interim. Typical hybrid/PHEV average battery sizes are between 12kWh and 15 kWh versus BEV battery sizes of 40kWh and 70kWh. In 2018, the split between BEVs and PHEVs was 69%/31%, BEVs are anticipated to represent 80% by 2025, however, given the impending shortfall in battery supply due to lithium shortfalls, my expectation is that we could see PHEVs gaining market share in 2023.
The above chart is suggesting that BEV sales will be +5m in 2023 from Tesla (TSLA), VW, and Toyota alone. Considering my total forecast is 5.36m BEVs globally in 2023, the above projection for just 3 OEMs is a highly unlikely if not impossible outcome. Tesla/Panasonic has already warned that they have a battery shortfall for the "soon" to be released Model Y. This shortfall is being highlighted whilst Tesla's production volumes are still well below 0.5m vehicles per year.
Is it possible to ramp production of lithium chemicals to meet projected 2023 OEM battery demand? Yes, but there would need to be an immediate and substantial investment made into lithium chemical production capacity. Investors are unaware of the magnitude of the task at hand. Historical chemical plants could only produce 5-8KT per annum of variable quality material for the ceramics/glass/grease etc. markets and consumer electronics. New plants are attempting to produce 20-25KT per annum of high specification, battery quality chemicals that can ensure 8-year EV battery warranties are honoured. The difficulty and time required to achieve these higher standards cannot be underestimated. Unless accelerated lithium from brine technologies achieve a breakthrough in the near future, a new brine project will only contribute meaningfully from 2025 onwards. That leaves only hard rock to hydroxide/carbonate projects.
There are vertically integrated projects currently being constructed in Australia, however, either the chemical processing plant and/or spodumene concentrate are greenfield operations. This inevitably means delays and difficulties in production ramp-ups. As things stand existing hard rock projects are struggling to meet feasibility level recoveries and impurity/grade targets. Independent chemical converters in China have been unable to build out production capacity to match spodumene concentrate supply. Feedback from industry insiders suggests the industry is evolving and specification sheets are now going to require reduced impurities and potentially even acceptable ranges rather than simply maximum impurity percentage cut-offs. In short, experienced incumbents in the lithium industry and facing numerous challenges to rapidly ramp up production and meet increasingly stringent quality requirements.
OEMs and battery manufacturers are seeing their markets evolve resulting in large capital outlays and in some instances, reduced profitability in the mid-term. As such, the most probable outcome by 2023 is a shortfall in upstream investment in lithium chemical production. Hence, Benchmark Minerals statement that there is a "battery arms race". There is a distinct difference in the level of urgency between Chinese/EU auto manufacturers and US/ROW due to regulatory standards and associated penalties. We're already seeing battery manufacturers adjusting contract terms with Samsung SDI (OTC:SSDIY) likely reducing deliveries to VW to 5 GWh or less, down from 20 GWh. This no doubt contributed to VW's decision to sign a JV agreement with Northvolt.
Investors should be wary of EV sales projections in excess of 8m vehicles by 2023 unless there are immediate investments made to increase lithium chemical production. Even the 8m sales estimate could be lowered further if achieved chemical production quality is consistently below OEM qualification standards. E-buses and 2/3 wheelers have lower battery standard requirements and are already economic at current pricing. EU and Chinese OEMs may elect to produce more PHEVs to achieve emission standards and avoid battery supply shortfalls, this could increase total EV sales.
Investors should pay particular attention to each OEM and their battery supply chain and how secure their battery metals/cathode/battery cell/battery pack contracts are. At present, there is a huge discrepancy between projected battery manufacturing capacity, forecasted EV sales, and available lithium chemical supply in 2023.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.