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

<< Read More: Tesla’s Cobalt Blues; Spin, Fake News Or Deception?  

  • In its Q2-18 shareholder letter, Tesla predicted that beginning in Q3-18 it will, absent a severe force majeure or recession, achieve sustained quarterly profits with continued rapid growth.
  • In Tesla’s Q2-18 conference call, Elon Musk predicted profits and positive cash-flow for every future quarter, unless there's a recession or force majeure that interrupts Tesla’s supply chain.
  • While Tesla may be able to manufacture and sell 7,000 cars per week, its battery supply chain can’t support higher production rates so continued rapid growth is impossible.
  • Since the DRC dominates cobalt mining, China dominates cobalt refining and non-battery cobalt demand is extremely inelastic, the structural force majeure risks in the cobalt market are daunting.
  • The Japanese have recently announced plans for a government-sponsored cobalt procurement organization for their automakers that could easily morph into a force majeure that disrupts Tesla’s battery supply chain.

The NCA technology used in Tesla’s cars is owned by Panasonic and Sumitomo Metal Mining.

In 2004, the head of Panasonic’s (PCRFF) battery research center approached Sumitomo Metal Mining (SMMYY) about jointly developing high-energy cathode materials for lithium-ion cells. The companies ultimately formed a venture to develop and jointly commercialize a novel lithium-nickel-cobalt-aluminum-oxide, or NCA, chemistry for lithium-ion batteries. The project took years of concerted effort and Panasonic introduced the first NCA cells to PC manufacturers in 2006. Twelve years later NCA still holds the energy density crown.

When Tesla was designing the Model S, it decided to upgrade its battery chemistry from the lithium-cobalt-oxide, or LCO, cells it used in the Roadster to the newer generation of NCA cells. The primary advantages of the chemistry upgrade were:

  • Increasing cell-level specific energy by ~20%;
  • Improving thermal stability and safety; and
  • Reducing cell costs.

Today, every Tesla EV uses NCA cells and it’s my understanding that Sumitomo:

  • makes an NCA-80,15,5 cathode powder, which is 9.2% cobalt by weight, for use in the 18650 cells that Panasonic manufactures in Japan for Tesla’s Models S and X; and
  • makes an NCA-84,12,4 cathode powder, which is 7.3% cobalt by weight, for use in the 2170 cells that Panasonic manufactures in Nevada for Tesla’s Model 3.

From Sumitomo’s perspective, the NCA venture with Panasonic is a showcase relationship that takes full advantage of Sumitomo’s core competencies in metal mining, smelting and refining, and advanced materials processing. Sumitomo is obviously proud to be the sole supplier of the NCA cathode powders Panasonic uses to manufacture batteries for Tesla. For more detailed discussions of the NCA venture with Panasonic, see Sumitomo’s CSR Report 2015 and its Integrated Report 2017.

Over the last four years, Sumitomo has completed three capacity expansions at its NCA cathode powder production facilities in Niihama City, Japan.

  • The first expansion announced in October 2014 and completed in December 2015 increased production capacity from 850 to 1,850 tons per month, or 22,200 TPY.
  • The second expansion announced in October 2016 and completed in January 2018 increased production capacity from 1,850 to 3,550 tons per month, or 46,200 TPY.
  • The third expansion announced in July 2017 and completed in June 2018 increased production capacity from 3,550 to 4,550 tons per month, or 54,600 TPY.
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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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Vasilii Pollock 1 week ago Member's comment

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

John Petersen 1 week 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 1 week ago Member's comment

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

John Petersen 1 week ago Author's comment

If its any comfort I'm baffled too.

Jack Lifton 1 week 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."

Howie Sandberg 1 week 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 1 week 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 1 week 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.