Manufacturers of automobiles and battery cells are striking direct contracts with miners and refiners. On Friday, Stellantis (STLA.MI)invested $53 million in Vulcan Energy Resources (VUL.AX) to become the second-largest shareholder of the Australia-based wannabe lithium hydroxide producer. Tesla (TSLA.O) recently finalised a five-year agreement with Australia’s Liontown Resources (LTR.AX). Benchmark Minerals Intelligence told Breakingviews it recorded more such deals in 2021 and 2022 than in all previous years combined. Terms are demanding: some miners give clients options to buy 100% or more of a project’s planned production capacity.
The $186 billion battery behemoth CATL (300750.SZ) has invested in four different mining companies since 2018, per Dealogic. Elon Musk has raised the prospect of Tesla trying its hand at digging up the metal. BYD (002594.SZ), (1211.HK), the world’s largest electric-car maker by sales, per Bernstein, has already taken the leap in China; now the Warren Buffett-backed company, which also makes cells, is considering buying six African mines, local media reports.
Such vertical integration is tempting when times are tough, but can overstretch buyers. Traditional automakers tried to own the supply chain before, only to offload assets. A similar experiment by Delta Air Lines (DAL.N), which bought an oil refinery, added complexity but only reduced fuel costs around 0.5%,
Overcommitted projects can underdeliver; agreeing on a pricing mechanism for deliveries due years ahead is tough too. Investors are just starting to see these kinds of tensions deeper in the supply chain: last month, CATL reported $270 million of derivative liabilities, admitting a nickel market meltdown had hurt.
Carmakers are used to getting dinged by the cost of commodities like steel. But lithium carbonate’s spot price is particularly volatile, now trading 10 times higher than two years ago, per Fastmarkets. There is no shortage of the element, but it’s hard to predict precise supply and demand. Analysts at Goldman Sachs argue the heavy investment of recent years will send metal production soaring, pushing the price down as soon as next year, and Wood Mackenzie researchers calculate lithium-ion battery production capacity will rise five-fold by 2030. Rushing in now could leave Tesla and peers stuck between a rock and a hard place.
Stellantis has invested A$76 million ($53 million) to become the second-largest shareholder of ASX-listed Vulcan Energy Resources, the lithium miner said on June 24. Vulcan will use the proceeds for its already planned expansion of its brine field in the upper Rhine valley in Germany. The field already produces geothermal energy, which will be used to mine lithium hydroxide with a net-zero carbon footprint. The two companies are also extending the lithium hydroxide offtake agreement signed last November by five years to 2035.
Australia’s Liontown Resources on June 6 signed an agreement with Tesla to supply lithium spodumene concentrate to the electric-car maker for five years beginning in 2024. The miner said that contracts with Tesla, LG Energy Solutions and other clients would cover 85% of lithium spodumene concentrate produced from its Kathleen Valley site in Western Australia.