Images

Venture capitalist Steve Jurvetson (left), shown here on the roof of the Gigafactory with Tesla CTO JB Straubel (right), has invested in Elon Musk through SpaceX and Tesla. Image source: Steve Jurvetson/Flickr.

Five hundred thousand electric vehicles per year, a steady supply of household energy storage devices to be coupled with residential solar, and a doubling of global lithium ion battery production from current levels. That's the reality the Gigafactory now under construction by Tesla Motors (NASDAQ:TSLA) promises to usher in when it reaches full-scale production in 2020. As demonstrated by the company's nearly $27 billion market cap, investors overwhelmingly approve of the growth plans.

But why stop there? Elon Musk said he envisions a world with 200 Gigafactories to enable a full transition from gasoline-powered vehicles to full-blown electric vehicles. And although Tesla Motors hogs all of the headlines, other companies are contemplating building massive factories for lithium ion battery production. Some already have. That would create a pretty different world than the one we live in today -- and likely for the better, especially considering transportation accounts for 31% of America's carbon dioxide emissions.

Of course, that world would also need a lot of lithium. That could set off alarm bells for those already asking if there's enough lithium for just one Gigafactory, let alone 200 of them. Can global lithium supply keep up with Tesla Motors? Let's evaluate how the first Gigafactory will affect world consumption in the next few years.

By the numbers: Global lithium
It's important to frame this analysis as a question of annual supply, not total reserves. The world has plenty of lithium. In fact, the world could triple lithium production from current levels and still have 135 years of supply (link opens PDF) using known reserves, according to the U.S. Geological Survey, or USGS. Poke around Argonne National Laboratory and you'll encounter even more optimism. Researchers there maintain that since humans haven't put much effort into finding lithium, we're bound to find additional bountiful reserves. And although it's uneconomical today, recycling lithium batteries could one day provide a respectable revenue stream and cost recapture for manufacturers.

That's good news for the long term, but Tesla's first Gigafactory is just around the corner. What does global supply look like today, you ask? The world produced 36,000 metric tons of lithium in 2014, which went to the following applications:

G

Source: USGS.

Last year marked the first time battery applications -- phones, laptops, plug-in vehicles, electric bikes, and the like -- consumed over 30% of annual lithium production. (I'm using the term "consumption" even though lithium is fully recyclable.) A little math shows that 31% represented nearly 11,160 MT of lithium, which was up markedly from roughly 6,500 MT in 2010. Yet, while consumption in battery applications grew 73% from 2010 to 2014, total global production of lithium grew just 28%. The divergence in supply and demand has been reflected in prices paid for lithium raw materials over the same period.

No matter; the sharp increase in lithium prices hasn't sparked much pushback from customers (at least for now). Lithium may be a critical component of lithium ion batteries, but it has historically contributed just a few percent of the finished cost of an energy storage device. Of course, that begs the question: How much lithium does an electric vehicle battery need?

By the numbers: Lithium in car batteries
Not all lithium ion batteries are created equal, but all are rated in terms of the all-important kilowatt hour, denoted by "kWh". For instance, Tesla offers vehicles with 70 kWh or 85 kWh batteries. The Nissan Leaf sports a 24 kWh battery, while the Chevy Bolt from General Motors may come with a 60 kWh battery. The Chevy Volt, a plug-in hybrid, utilizes a smaller 16.5 kWh battery supplemented by its gasoline engine.

As you can probably see, the more kWh a battery boasts, the further the driving range on electric power -- and the more lithium contained within the battery. Several industry research firms maintain that 1 kilogram of lithium is needed to enable a 6 kWh battery, which is in-line with theoretical limits. That gives us the following table for reference:

Vehicle

Battery

Lithium Required

Chevy Volt

16.5 kWh

2.8 kg

Nissan Leaf

24 kWh

4.0 kg

Chevy Bolt*

60 kWh

10.0 kg

Tesla Model S

70 kWh / 85 kWh

11.7 kg / 14.2 kg

*Estimate. Source: Author calculations based on: Fox-Davies Research, signumBOX.

This simplifies our work quite a bit. Now you can simply multiply the amount of lithium required per battery by the sales figures for each specific vehicle to get a rough estimate for the total amount of lithium consumed by your favorite automaker. Before you whip out the calculator, though, let's consider the lithium demand for the first Gigafactory, since not all production will be allocated to electric vehicles.

By the numbers: Tesla's Gigafactory consumption
The Gigafactory will have an annual production capacity of 35,000,000 kWh, or 35 GWh, not counting an additional 15 GWh purchased from external customers. Using the work above we can quickly calculate the amount of lithium Tesla will need every year for a Gigafactory churning out products at full tilt, which is expected by 2020:

 Lithium Source

Annual Capacity

Lithium Required Per Year

Gigafactory, In-House Production

35,000,000 kWh

5,833 MT

Gigafactory, External Purchases

15,000,000 kWh

2,500 MT

Totals

50,000,000 kWh

8,333 MT

Source: Author calculations based on: Fox-Davies Research, signumBOX.

The numbers in the table above include 500,000 electric vehicles and over 10 GWh of household energy storage devices per year. Considering that total global demand for lithium from battery applications stood at 11,160 MT in 2014, as we saw above from the USGS, it appears that a Tesla Gigafactory running at full capacity in 2020 would pretty easily disrupt global supply. And here the word "disrupt" is not used with the beneficial meaning loosely tossed around Silicon Valley.

It gets worse when investors consider that the USGS estimates total global lithium production (link opens PDF) will grow to just 41,000 MT by 2017, which represents a 5,000 MT increase from current levels. Or the fact that the 8,333 MT of demand needed for the Gigafactory excludes production growth of other electric vehicles.

For instance, the Nissan Leaf grew sales to 30,200 in 2014. That consumed just 121 MT of lithium, but Nissan has plans to produce roughly 150,000 vehicles per year, which would represent 600 MT of annual lithium consumption using the current 24 kWh battery. That will increase further when Leaf owners are given the option to purchase even bigger batteries in the next few years. Throw in growth in the BMW iSeries, a slew of hybrids, the mass market Chevy Bolt, and perhaps even the Apple car, and it's difficult to imagine lithium supply ramping quickly enough in the short term.

What does it mean for investors?
While the world has plenty of lithium reserves, it would be difficult to bring online enough supply in time for Tesla's soon-to-be astronomical consumption in addition to sales growth from other automakers such as General Motors and Nissan. There could be new production plants brought online eventually that aren't accounted for in the USGS estimates, even some rumored to be in Nevada (where the Gigafactory resides), but many things have to fall perfectly into place to make Tesla's dream a reality by 2020.

Then again, I think its more realistic to question not the supply of lithium, but whether or not Tesla can actually sell 500,000 electric vehicles and over 10 GWh of household energy storage devices per year by 2020. In other words, Tesla's Gigafactory may not pressure global lithium supply because it may not reach full production anytime soon. We'll soon find out. And if you're waiting for the next 199 Gigafactories, I wouldn't hold my breath. 

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Maxx Chatsko has no position in any stocks mentioned. The Motley Fool recommends Apple, General Motors, and Tesla Motors. The Motley Fool owns shares of Apple and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.