With the rise of electric vehicles, the commodities that go into batteries, like nickel and cobalt, are becoming more valuable. Without getting too deep into the chemistry of a lithium-ion battery, a combination of elements make up the cathode portion of a battery, with lithium making up the anode. The larger the electrochemical potential difference between the anode and cathode, the higher the battery capacity. There are many types of ions that can be used in lithium-ion batteries, but nickel-cobalt-aluminum (NCA) is the recurrent battery composition that produces the highest capacity -- something consumers prefer in their electric vehicles (EVs).
The prices of these commodities have continued to rise, causing EV manufacturers to raise the prices of their vehicles as well. With more EV manufacturers ramping up production, a supply crunch could cause these prices to rocket even higher. Will this cause consumers to switch back to petroleum-powered vehicles or will EVs continue their rise?
Commodity prices are rising
While Tesla (TSLA -1.05%) has announced plans to use iron and phosphate in its standard range vehicles, chemistry limits the capacity of these batteries. Long-range configurations use nickel and cobalt instead, and their prices have risen significantly over the past decade.
Despite the rise in commodity prices, the cost to manufacture these batteries has dropped substantially.
The drop in battery prices reached an equilibrium point around 2020. So as long as the rise in commodity prices doesn't outgrow the manufacturing efficiencies increase, battery margins should stay in the same place.
Rising demand will have dire consequences
However, this seems unlikely. While Tesla has the clear lead in manufacturing EVs, many more players are ramping up production. General Motors (GM 9.38%) plans to produce 400,000 EVs throughout 2022 and 2023; by 2026, Ford (F 2.12%) will be producing 2 million EVs per year. For context, Tesla produced 305,000 vehicles in Q1.
That's a lot of battery demand for relatively little supply. In 2013, the world's nickel production peaked at 2.6 million tonnes and hasn't eclipsed that threshold since. On the cobalt side, the Democratic Republic of Congo produced 70% of the world's cobalt supply in 2019. Unfortunately, there have been numerous cases of atrocious working conditions and human rights abuses in the region related to cobalt extraction and processing, making any interaction with these businesses an uncomfortable one.
This isn't good news for battery production. With stagnant nickel production and the world's cobalt supply controlled by one nation, prices will likely continue to rise. Unless more companies get involved in the mining process, the supply problem won't be solved. One potential company that may get into mining is Tesla. Elon Musk himself tweeted about the potential of Tesla getting into lithium mining if prices don't improve. While this may seem a stretch, Tesla has successfully pulled off other business pivots.
When will battery prices reach the breaking point?
One indicator of the impact of commodity prices will be Tesla's gross margins. As it is a relatively developed, solely EV automaker (compared to the other companies still trying to get their EV production to full capacity), commodity pricing pressure will impact its margins. However, Tesla could raise prices on consumers to offset the costs of batteries, which is already happening.
In one year, the Tesla Model 3 base price rose from $37,190 to $48,190. The trend toward more expensive EVs has begun due to higher commodity costs, and unless more supply fills the markets, it could worsen.
Right now, the demand for EVs has never been higher, for multiple reasons like record-high gas costs and less maintenance over the vehicle's life. However, even with rising EV prices, this demand hasn't fallen. If the current trend continues, there will be a crossover point where high gas prices are cheaper than even more expensive EVs. I don't know when this will happen, but it will be a tough day for consumers.
Investors can rest easy about EV battery prices right now, as consumers are footing the bill. But it could get ugly in the next few years with multiple companies stepping up their production.
However, all is not lost. New battery technologies are emerging with different chemistries, which could reduce reliance on certain materials. The race is on to prove these technologies, as the current industry state will not be able to support mass EV production from every manufacturer on earth.