E Tesla’s Cobalt Blues; Growth Fallacies And Supply Chain Risque Majeure

Overall, it appears that Sumitomo’s capacity expansions were sized to fully utilize its refined cobalt production capacity of 4,200 TPY in NCA cathode powders that average 7.7% cobalt by weight. If you assume that cathode powder represents 40% of cell weight, Sumitomo can make cathode powders for 32.8 million kWh of cells per year. It does not, however, have the refined cobalt supplies or processing facilities to make greater volumes.

With an average battery pack size of 85 kWh, Tesla’s combined Model S and Model X run rate of 100,000 cars per year will absorb 8.5 million kWh of Sumitomo’s cathode powder capacity, leaving 25.6 million kWh of cathode powder capacity available for Tesla’s Gigafactory and all of Sumitomo’s other NCA customers.

I do not know whether Sumitomo and Panasonic sell NCA batteries to customers other than Tesla. But even if I assume the answer is, “absolutely not,” their supply chain can’t support the production of more than 340,000 long-range Model 3 battery packs per year unless Panasonic stops making cells for Model S and Model X battery packs.

If Sumitomo and Panasonic have hedged their bets by diversifying their customer bases to include companies other than Tesla, the Gigafactory’s supply chain will be weaker and the production caps lower.

Given Sumitomo’s status as sole supplier of Panasonic’s NCA cathode powders and hard limits on Sumitomo’s (a) refined cobalt production capacity, and (b) NCA cathode powder production capacity, I don’t see any reasonable foundation for Tesla’s apparent impression that “continued rapid growth” is possible, much less likely.

The geopolitical risks of cobalt mining, refining and use are enormous.

Cobalt Mining. In 2017, the world’s miners produced 120,200 tonnes of cobalt concentrates that yielded 104,800 tonnes of refined cobalt. The huge Mutanda and Tenke Fungurume copper mines in the Democratic Republic of Congo, or DRC, produced 40,700 tonnes of concentrates as a byproduct of copper mining while a dozen smaller copper mines in the DRC produced 40,600 tonnes of concentrates as a byproduct. Roughly 36,000 tonnes of cobalt concentrates were produced as a byproduct from nickel mines in a dozen countries. Less than 2% of the world’s cobalt concentrates were produced as a primary mine product.

Over the next five years, two additional mega-projects in the DRC (the Katanga Mine and the Roan Tailings Reclamation project) are expected to add about 45,000 tonnes of cobalt concentrates (~39,200 tonnes of refined cobalt) to global supplies. Additionally, three small projects in North America and Australia are expected to add about 6,300 tonnes of cobalt concentrates (~5,500 tonnes of refined cobalt) to global supplies.

While stock market investors may have been lulled into complacency by fake-news reports that cobalt isn’t a big issue, the International Energy Agency, or IEA, which expects cobalt demand for EV batteries to soar 10x to 25x by 2030, is very concerned that a single poor nation with the historic instability of the DRC controls 68% of global cobalt supplies. <sarcasm font on> But they also fret over the market behavior of a 15-nation trading block named OPEC that controls 40% of oil supplies and 60% of the international oil trade. Surely power brokers in the DRC will take a kinder and gentler approach. <sarcasm font off>

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Disclosure: I am short Tesla’s stock through long-dated out-of-the-money put options.

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Danielle Rogers 2 years ago Member's comment

Excellent read.

Vasilii Pollock 2 years ago Member's comment

Somebody must have done a good research before investing billions in the factories. Am I wrong?

Danielle Rogers 2 years ago Member's comment

Vasilii Pollock, some times people see what they want to see. It's called "confirmation bias" and can be an investor's worst enemy.

John Petersen 2 years ago Author's comment

In a March 2016 article I referred to the cobalt cliff as the biggest Oops in the history of supply chain management.


Bill Myers 2 years ago Member's comment

These articles on Tesla have been very eye-opening. The drama yesterday was intense. Baffled by $TSLA.

John Petersen 2 years ago Author's comment

If its any comfort I'm baffled too.

Jack Lifton 2 years ago Member's comment

My theory is that Musk is designing an exit strategy. He can sell his shares into the privatization for "the good of the company."

Nicky Paterson 2 years ago Member's comment

I think #Musk is a little on the nutty side. Maybe the pressure got to be too much for him.

Barry Hochhauser 2 years ago Member's comment

Could be Jack Lifton. There's an interesting read about the benefits of an Apple/Tesla merger worth reading that you might like: www.talkmarkets.com/.../the-time-has-come-for-apple-to-buy-tesla Perhaps Musk will jump at the opportunity (should one manifest).

Howie Sandberg 2 years ago Member's comment

Interesting theory, could be. But I think he's just trying to pump up the stock. I get the feeling that he believes Tesla would be successful, if people would just ignore some of the inconvenient truths.

John Petersen 2 years ago Author's comment

I think the most likely explanation is pressure from institutions that want out but can’t sell into the market without crushing the price because they own so much stock.

In a going private scenario XYZ and Musk could each say “we loved the company but our policies don’t let us own illiquid securities. So we’re reluctantly taking the cash.

Alpha Stockman 2 years ago Member's comment

You are probably right, John. This scenario makes the most sense to me. Musk is too intelligent to have simply screwed up by accident. I think the tweet was a carefully thought out decision.