By Andrey Dashkov, CFA, analyst, Casey Research
Tesla is the biggest name in the electric vehicle (EV) industry. And its CEO Elon Musk can sway whole markets with a sentence or two.
He recently used this power when he stated that he and Tesla “weren’t concerned about the supply of lithium.” Lithium, as a reminder, is one of the key metals used in EV batteries.
Following Musk’s comments, lithium went down, taking lithium-related stocks with it. The Global X Lithium & Battery Tech ETF (LIT) dropped 5% in a single day.
But the market was wrong here. Investors panicked too soon on the news, selling off without seeing the full picture. (I’ll tell you more about that below.)
Since then, the sector has recovered slightly, with LIT up around 7% as I write.
So it’s not the beginning of the end for lithium. In fact, I think there’s still plenty of room for it to soar from here…
20 Million Teslas by 2030…
First off, let’s provide some clarity to Musk’s “sufficient supply” story.
Tesla recently purchased a lithium mine in Nevada, which is the supply that Musk was referring to.
But that doesn’t mean that Tesla will have enough lithium forever. In fact, it’s just the opposite…
There’s enough long-term demand to drive the price of lithium higher regardless of the short-term supply Tesla’s secured.
Between now and 2030, the global stock of EVs is expected to increase by 30 times.
And during its recent Battery Day, Tesla announced a long-term plan to increase its current car sales volume from about half a million a year to 20 million per year. That’s a 40x increase.
And all those extra EVs will require batteries…
Tesla Isn’t the Only EV Player in Town
Tesla will need a lot more batteries if it plans to power 20 million EVs a year. And the company made another big announcement during its Battery Day…
To control costs, it will in-source its battery supply. This means Tesla will produce all the batteries it puts into its cars.
But that’s not the only thing Tesla is doing.
As EV demand ramps up, Tesla knows it will never be the only EV player in town. And with more EVs on the road, we’ll need more batteries to power them.
So Tesla plans to tap into an even greater market by selling batteries to other EV manufacturers.
That means Tesla will need to manufacture 20 million batteries for its own EV fleet… plus more to supply competitors in a growing market.
And all these batteries are going to require lots of high-grade lithium.
Take it from Dave Forest, our go-to commodities expert:
The amount of lithium required for batteries is absolutely staggering. From nearly zero in 2015, lithium demand for batteries is now exploding.
Even as far out as 2040, year-over-year lithium use is expected to continue surging as more and more EVs roll out.
Even in the lowest forecasts for lithium use, demand from the EV sector is expected to explode by over 1,000% in the coming years.
I agree with Dave. Demand for lithium will only grow as it’s needed for more and more EVs. But there’s a problem…
How to Take Advantage of Lithium’s Supply Crunch
Lithium demand is expected to surge faster than supply.
That’s because it takes a long time to bring a new mine to production. And it can take years to expand an existing mine, which has only been worsened by COVID-related slowdowns in the mining industry.
And with Tesla securing a lithium supply for itself, there will be less “free” lithium available on the market for other EV companies that will want to manufacture their own batteries.
And this soaring demand, coupled with lagging supply, will drive the lithium price higher.
That’s why I think the market was wrong when it sold off lithium. Even if Tesla says it has enough lithium for now, that doesn’t change the long-term outlook for lithium supply and demand.
And right now, at about $6 per kilogram, lithium is cheap. It’s over 60% off its 2018 highs.
That tells me it still has room to run. Which makes today the perfect opportunity to buy.
To take advantage, consider the Global X Lithium & Battery Tech ETF (LIT). It holds a broad basket of companies involved in lithium mining, refining, and battery production. Just remember to position size appropriately.
And of course, my colleague Dave Forest has been following the lithium story… and is on top of all the latest news. If you want to find out more… including the best way to play the space with just a small stake today… go here to access Dave’s special briefing.
Andrey Dashkov, CFA
Analyst, Casey Research