Tesla’s big bet on falling lithium is paying off Tesla’s big bet on falling lithium is paying off Tesla’s big bet on falling lithium is paying off

Tesla’s big bet on falling lithium is paying off

Equities 8 minutes to read
Picture of Peter Garnry
Peter Garnry

Chief Investment Strategist

Summary:  When Tesla cut its prices by 20% in mid-January it looked like lunacy because the EV-maker operates at a 25% gross margin which would surely compress its margins. Higher inventories by Q4 were an approximate cause but it turns out that the real decision variable was a high risk bet by Elon Musk and the management team that lithium carbonate prices had finally begun falling from its highs. By the time Tesla made its decision lithium carbonate prices were already down 20% and has continued down since down 34% from the peak. Tesla's bet is paying off for now but risks to its margin remain high.


A risky bet by Elon Musk on lithium

When Tesla in mid-January announced that it slashed its prices across its various car models by 20% on average it was a big shock to the car industry as an abrupt price change causes big disruptions in the secondary market. Our initial thought was that a 20% price cut on average is a desperate move considering a gross margin of 25%. It would effectively erode the majority of Tesla’s profits.

The price cuts also led to angry customers that had just bought a new Tesla. Initially we thought that the price cut was to increase demand that had seen a negative impact from higher and more volatile electricity prices in many key markets. Tesla had also raised prices several times in the previous year increasing the price point. When Tesla announced its Q4 deliveries it was clear that inventory was building as deliveries were lower than production which is a bad signal of demand, but it also locks up capital on the balance sheet. While demand considerations were a key decision variable for Tesla something else was happening.

During several speeches in the late part of 2022, Elon Musk expressed his frustration with lithium carbonate prices saying lithium refinery margins were making it a ‘gold mine’ and urged entrepreneurs to enter the industry. Around mid-November the 99.5% lithium carbonate price out of China topped out at CNY 598,000 per tonne and by the time of Tesla’s price cuts the price on lithium carbonate had fallen 20%. This is when Elon Musk and the management made their big bet aggressively cutting prices. It has since worked out for Tesla with lithium carbonate price down 34% from the peak in November offsetting most of Tesla’s hit to its gross margin. However, in the case that lithium carbonate prices should rebound it will eat into Tesla’s gross margin.

One of the reasons why lithium carbonate prices are falling is of course extra supply coming into the market but also CATL’s, China’s largest battery maker, decision to dump prices as it is lowering its margin in its mining division to lower prices on its batteries and fuel demand even more.

23_PG_1
Lithium carbonate price | Source: Bloomberg
23_PG_2
Tesla share price | Source: Bloomberg

EV adoption is continuing at a blistering pace

While we are still waiting for Q4 delivery figures from VW and BMW it is safe to say that EV adoption is acceleration at a blistering pace. By the time we get the Q1 2023 figures it will show that BEV (battery EVs) deliveries will have increased 10x in just three years. With Toyota’s new CEO recently saying that Toyota has made a mistake on hybrids and would chase the BEV technology to catch up with Tesla the whole industry will massively accelerate production in the years to come. Extrapolating the expected trend in EV adoption will create massive changes to our society.

Right now the current fleet of EVs is displacing around 1.5-2mn barrels per day of oil demand with passenger cars only being less than 20% of this displacement. The expected peak in oil demand from road transportation is expected in 2027, but with the current pace it could very likely earlier. By 2050 the oil demand from road transportation could be down more than 20mn barrels per day. If net-zero carbon is achieved then it is closer to 45mn barrels per day. These are some of the points that this transition will cause:

  • Oil prices will likely remain high as oil and gas majors will adjust capital expenditures to reflect the rapidly declining oil demand.
  • EVs will eventually lead to more stable electricity grids through V2G (vehicle-to-grid discharging) which will happen first in Europe, because the continent has the most advanced electricity grid in the world.
  • Air pollutions levels in big cities will drastically improve potentially creating new biodiversity in cities
  • Massive growth in electricity production potentially creating the second renaissance of electricity with the first growth phase happening 100 years ago. Electric utilities could transition away from boring stable growth to high growth companies.
  • The transition will significantly increase the need for investments and thus add demand for capital underpinning the structural inflation outlook
23_PG_3

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • 350x200 peter

    Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • 350x200 althea

    Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • 350x200 peter

    Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • 350x200 charu (1)

    FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • 350x200 ole

    Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.