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

Cobalt Demand. Cobalt is an extraordinary minor metal because it’s essential for a wide variety of technologies including:

  • High energy lithium-ion batteries;
  • Superalloys for combustion turbines;
  • High-speed steel and machine tooling;
  • Hardened carbides and diamond tooling;
  • Catalysts;
  • Pigments;
  • Magnets; and
  • Other specialty materials.

Since cobalt has always been expensive, industrial users have switched to substitutes wherever possible and the remaining industrial demand is extremely inelastic. Moreover, non-battery cobalt demand is highly price insensitive because cobalt costs are a relatively insignificant percentage of total product cost. Demand growth among industrial users is modest, but those cobalt users will always be able to outbid the battery industry to obtain the supplies they need.

In 2016, the battery industry used about 47,000 tonnes of cobalt while non-battery industrial applications used another 47,000 tonnes. In 2017 battery industry demand was about 55,000 tonnes while non-battery industrial demand was 49,000 tonnes. By 2030, Bloomberg New Energy Finance believes global cobalt demand will exceed 325,000 tonnes per year, fueled primarily by growth in cobalt demand for electric vehicles and stationary batteries.

Global cobalt supply and demand balance

The following graph combines demand forecasts from Bloomberg New Energy Finance with supply forecasts from a variety of sources. The application classes are stacked in increasing order of price sensitivity.

Geopolitical cobalt supply and demand balance

While the refined cobalt supply and demand graph paints an increasingly grim picture for the EV and stationary storage sectors from 2020 onwards, it only tells part of the story. Since 2007 the market share controlled by Chinese cobalt refiners has rocketed from 24% to 50% and the overwhelming bulk of the market share growth has been in the battery sector. In 2017, a mere 20% of the cobalt refined in China (10,000 tonnes) was used for industrial applications. The remaining 80% (40,000 tonnes) was used by the battery industry. That means non-Chinese cobalt refiners served roughly 80% of industrial cobalt demand (40,000 tonnes) and only 20% of battery industry demand (10,000 tonnes).

The key takeaway from a geopolitical perspective is that China controls the overwhelming bulk of the refined cobalt available to the battery industry and automakers in Korea, Japan, North America and Europe will all be competing for the same 10% of global cobalt supplies that are refined by non-Chinese companies and available to the battery industry. When the music stops in 2020 and the cobalt market goes into permanent deficit, the overwhelming majority of non-Chinese party-goers will be left without seats.

New Japanese Cobalt Supply Chain Initiative

Two weeks ago, Japan's Ministry of Economy, Trade and Industry announced plans to organize a joint procurement organization to lock down stable long-term cobalt supply chains for that country’s automakers. The joint procurement organization will apparently be formalized by next March and its mandate will be to secure ethical cobalt supplies by signing long-term contracts with cobalt producers and potentially investing in new cobalt projects with support from the government.

On balance, I find this initiative quite worrisome. Japanese culture is very different from North American culture and their kieretsu system of business interrelationship encourages a degree of cooperation among corporations and government entities that Americans don’t understand. I won’t even try to predict how Panasonic and Sumitomo will respond if a government-sponsored cobalt procurement organization asks them to focus their mines, processing plants, battery factories and other resources on serving the needs of the Japanese auto industry first, but it’s not hard to see how that kind of dynamic could quickly morph into a force majeure that disrupts or destroys Tesla’s battery supply chain.

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

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Comments

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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.

miningpundits.com/.../ev-batteries-and-the-cobalt-cliff-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.