Why Is Elon Musk Buying This Rare Metal Hand Over Fist?
Elon Musk relies on one crucial resource: lithium.
Lithium is the “fuel” in the batteries that power Tesla Motors Inc (NASDAQ:TSLA) cars. Commodity prices from crude oil to iron and copper have dropped all worldwide. But there is one notable exception: lithium. The price of lithium has tripled over the past year. (Source: “Lithium price on the rise,” The Financial Times, April 14, 2016.)
In many ways, if lithium is rising in value, it owes much to Elon Musk and his electric cars. TSLA stock itself is lithium-dependent. If there’s ever a shortage of this metal, Tesla would suffer major production delays. You don’t need to be Nostradamus to predict what would happen to Tesla stock—it would collapse. Elon Musk needs lithium to make its batteries in the famous “Gigafactory,” now under construction in Nevada.
Likewise, Panasonic, Tesla’s battery supplier, needs lithium to make those batteries. Those interested in lithium and its battery applications should also note that aircraft manufacturers like Boeing Co. (NYSE:BA) are using lithium-based batteries in airliners at an increasing level. The very uses for lithium-ion (Li-ion) batteries are expanding across a variety of sectors.
Lithium’s value, in turn, depends on the electric car. If there is a single thing that the history books will cite about Tesla, it is the fact that it has revived the electric car out of limbo. He didn’t invent the electric car, but he made it cool and popular. This is what’s driving the value for lithium.
Given that Tesla is soon going to be shifting from Park Avenue with the “Model S” to Main Street with the “Model 3,” which has gathered 400,000 orders in a matter of days, it’s clear that lithium demand will be rising exponentially.
Of course, whenever Tesla makes the news, some related stock somewhere goes up. The company’s religious-grade allegiance all but guarantees support for its stock and for lithium. But there’s more… Indeed, lithium is also an essential element in batteries for the so-called technology sector. The growing demand for electronics expansion in Asia has contributed to lithium’s rising values.
Simply put, Goldman Sachs says, “Lithium is the new gasoline.” But, in the modern and fast-changing energy environment, no one resource can remain at the top for long. Cost and technological advancement imply that while lithium is essential, remaining as such for the current decade, it will not be crucial indefinitely. Battery producers are already looking for cheaper and more efficient alternatives. (Source: “Emerging Theme Radar,” Goldman Sachs, December 2, 2015.)
The advancement of electric transportation is adding pressure to the development of ever more powerful and lighter batteries. Understanding the materials that they require could prove highly profitable for well-informed investors. We will do our best to keep up-to-date with the evolution of the battery, its design, and materials. Whoever dominates battery technology today owns the future. Until scientists find an alternative to lithium, the latter will remain crucial; it will continue to appreciate.
Still, so far, lithium need not fear competition. The batteries of the future may rely on a special structure, which would change the current Li-ion structure. But lithium is not going away. Rather than lithium ions (hence, the current “Li-ion” designation), it would use a combination of lithium and oxygen. (Source: “New design points to a path to the ‘ultimate battery’,” University of Cambridge, last accessed June 17, 2016.)
The results have been excellent. Such batteries outlast the best of the current Li-ion battery on the market today by a factor of five. They would also be more durable, able to provide up to 2,000 charge cycles.
But there is a limit to be overcome: the use of pure oxygen inside the battery pack carries some risk—too much given the high flammability. Still, that need not worry lithium investors. One of the takeaways is that for both current and future battery technology, lithium will remain the king.
The Bottom Line for Elon Musk
The key takeaway is that lithium, more than other resources, can only expect growing demand. Note, however, that lithium—unlike gold or silver, for example—is not listed on any international stock exchange. This means that buyers must negotiate directly with manufacturers.
Investors interested in lithium should consider the various players in this space. They are few and often relatively small players. Also, note there are dozens of lithium varieties and prices vary depending on demand. The market for lithium batteries, the largest source of demand for lithium, can easily absorb and justify all price increases.
Overall, most analysts agree that the favorable outlook in lithium relies on expectations of rapid growth in demand for lithium batteries.