Borrowed from other Li stocks.
While I, along with many industry professionals, have disagreed with Morgan Stanley’s take on the lithium market for some time, the latest offering from their lithium analyst crosses the line from contentious into one-sided, and seems to ignore relevant data.
In a note* written as a reaction to the Tesla Battery Day, MS analyst Javier Martinez de Olcoz Cerdan doubled down on their already-negative view on the lithium industry.
Now, I’m experienced enough as an analyst (c.20 years) to know that markets work because people have differing views. I don’t have a problem with MS’s negative view on the lithium market. Sure, I believed that their analysis was third rate and the premise for their negative view on the industry was based on shaky ground, but I don’t have an issue with the fact that they had a different view to mine.
What Idoobject to is a sell note on an entire industry which is based on a complete lack of understanding of what makes that industry tickandtaking what a company says as a certainty without any sort of analysis on whether that could, in fact, take place. I was a sell-side analyst for many years and I wouldneverhave been allowed to publish such a one-sided note with a lack of in depth consideration of both sides of a story.
I can’t reproduce the MS note here because of copyright reasons, but let me go through the key points:
1) “Bad news for lithium stocks”: MS suggests that Tesla’s new technologies will reduce lithium usage per unit of power in a cell, so that’s bad news for lithium demand.
In itself, thatwouldbe bad news for lithium demand if Tesla hadn’t, in the same presentation, announced a massive increase in capacity for its own battery business and, by extension the battery industry.
Tesla announced that it expects to reach 3 TWh of capacity by 2030. Just to put that in context, I had 3TWh of demand in my model for the whole battery industryfor 2030E. Now, depending on what market share Tesla would have by that time, that’s between 2x and 5x more battery production than most people had in their models. Even if you cut lithium usage by 20% on a per cell basis, that’s still a massive amount more lithium demand in aggregate.
And this for an industry that already has a substantial emerging supply/demand gap.
2) Tesla intends to make use of recycling to reduce lithium demand
So, this is an area where the MS analysts are demonstrating their lack of understanding of the battery industry, in my view, and accepting what Tesla said without checking into it. Tesla suggested that a large proportion of raw materials supply could come from recycling going forward, but timing’s the key in that statement since it will take until the end of the 2020s before there are sufficient old EV batteries to be recycled. Note that the lifetime of an EV battery is c.10 years and there’s probably of the order of eight million EVs in existence (of which five million have been sold in the last three years). While there are significant amounts of phone and laptop batteries available, these are so tiny as to be irrelevant. Recovery on recycling is c.90% on a commercial scale so some of the material is lost.
While battery output continues to grow rapidly it’s possible that up to 20% of raw materials could be derived from recycling by the late-2020s. It’s not until battery production gets to a steady state that it can become a truly circular market.
Oh, and by the way, while lithium prices remain as depressed as they currently are, it’s also not economic to recycle lithium from batteries…
3) Tesla is developing its own mine which is bad for the lithium market
For me, this is the section where the MS analysts got it most wrong. For starters there is a factual error in this paragraph. MS talked about spodumene being derived from a lithium clay mine – this is simply incorrect. Spodumene is a lithium mineral which is contained in pegmatite (hard rock) lithium deposits, which can be concentrated and then converted into lithium carbonate and lithium hydroxide. Lithium clay deposits contain totally different lithium minerals.
And herein lies the problem because the industry has known about lithium clay deposits for many years, and yet they haven’t been developed. Why not? Well, there have been concerns about the viability of processing on a commercial volume basis and also the capital cost of those processing solutions is high compared to lithium brine or hard rock projects.
The other red flag for anyone who has experience in the mining industry is that Tesla talked about a new processing technology to use on its clay deposit. Mining industry experts know that successful development of new processing technologies in the mining industry is extremely rare. I’m a geologist and I’ve been a mining analyst for just under 20 years and I can count successful new processing developments in mining on less than the fingers of one hand. Unsuccessful ones? That’s more digits than I’ve got!
It’s all very well for Tesla to say that by bunging some sodium chloride and water into this lithium clay they can produce lithium chemicals. But they need to be able to prove that they can do that on acommercial scalebefore I, as a materials analyst, am going to get excited about it.
Elon Musk’s processing engineers are chemists, most experienced in working with high purity compounds. When I talk about high purity, I mean above three nines, ie 99.9% purity levels.
But materials that are dug up from the ground are not pure and, most importantly, they are likely not uniform throughout a deposit. So one area may be rich in iron, another rich in sodium and so on. As a result it is necessary to do a massive amount of drilling on a deposit (I’m talking hundreds of thousands of metres here), not just to understand how large and how deep and what shape the ore body is, but also for grade control. It takes three to five years to drill out a deposit and do the requisite chemical and engineering studies to build a mining operation. Then, on top of that, for a new technology I would recommend a commercial-scale pilot plant. Because what works on a limited basis in a lab often tends to work differently (or not at all) on a commercial scale.
So let’s be realistic here. Teslamaybe able to supply its own lithium from clay deposits in Nevada. But it likely won’t be able to do so until 2025 at the earliest. And even then it would need to add ten times the scale of most lithium hydroxide projects. It’s highly unlikely to happen within a near-term timeframe in my view. For the next five years then Tesla will likely be buying its lithium from outside sources.
The MS analysts show a complete lack of understanding and appreciation for these issues. It looks like they haven’t even considered them. So factual inaccuracy and lack of understanding of the mining industry – not convincing, in my view.
4) Musk said there’s “a massive amount of lithium in the world”
This one’s a shocker and I cannot believe that an institution respected for its industry analysis would perpetuate this sort of rubbish.
The issue with these elements hasneverbeen about the amount of lithium or cobalt or manganese available in the Earth’s crust. There’s plenty of it there. The issue has always been the amount of lithium or cobalt or manganese that’seconomically extractable.
That is the crux of the matter.
It’s about deposits that are big enough to be mined for a long enough period that supports the investment in building that’s necessary and at a high enough purity or concentration. And there isnota surplus of such occurrences.
5) MS’s contention that lithium is a commodity not a specialty product
This is not a new issue in MS’s research and is, in fact, why many industry experts dismiss their lithium industry research, in my view. Because the problem is that lithium has been becoming more and more a specialty material over the past few years. Dismissing lithium chemicals as a commodity shows a lack of understanding of how the industry is developing.
A key word in the battery industry at the moment is “qualification”. Qualification refers to the process whereby material from raw material producers, intermediate chemical makers and anode and cathode makers needs to be qualified by its users. Material is vetted for purity but also forimpurities. Increasingly battery materials are about very high purity levels (four nines – 99.99% and five nines 99.999%). What we’re seeing is that cathode makers balance off impurity levels in one element used in the cathode against another. As a result of that they are focusing on material from a limited number of sources. Just enough to diversify supply, but very specialised in nature. Lithium raw material price contracts, and indeed lithium hydroxide and lithium carbonate ones, are agreed between seller and buyer with tight specifications. This isnotthe sign of a commodity material.
This is important because it means in general terms that production from one lithium project may not be interchangeable with production from another. Generally new raw material projects go through a 6-24 month qualification process with potential customers. That has significant implications for the speed of ramp up of new supply.
Another point to make, and it’s one I’ve made recently in Battery Materials Review, is that incentive prices are very important. The incentive price is the prevailing price that is necessary for a company to pull the trigger on an investment in new capacity. It’s made up of elements of the operating cost of the new project (including sustaining costs), capital cost and a portion of margin or return for shareholders. Our analysis suggests that the upside required from current prices levels in lithium raw materials to get to the incentive price is between 50-80%.
Why is that important? It’s important because it can take between 3-5 years to build a new Greenfield mining project. The rapid development of the global battery sector and the acceleration in EV sales as a result of European Covid subsidies likely means that battery demand will accelerate faster than we had previously expected. Based on our modelling, that could pull forward the emergence of a supply/demand gap in lithium from 2025E to 2023E. So it’s really important that some of these lithium projects start to get financed, and soon.
But raising new money for projects is not possible when stocks are trading at bargain basement levels. By forcing the prices of lithium equities down for longer, it’s impossible to finance expansions which is likely eventually to cause a substantial spike in prices. Such a spike will not be good in the long run for either producers or consumers.
Matt Fernley is Editor of Battery Materials Review.
The views expressed in this article are my own and in no way reflect those of Westbeck Capital Management.
*Reference
Martinez de Olcoz Cerdan J, Browne R, Andrews V, Bates STesla’s New Battery Technologies Are Bearish for LithiumMorgan Stanley 23 September 2020.
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