It's no exaggeration to say that investors are exuberant about electric-car maker Tesla Motors' (NASDAQ:TSLA) future. The stock is up about 600% in the past two years, almost 40% year-to-date, and it trades with a market capitalization of $25 billion -- nearly half of General Motors'. With just 22,500 vehicles sold in 2013 and 35,000 expected in 2014, the stock is clearly priced for growth expected well into the future. But first, Tesla will have to completely transform the entire global economy for cobalt, graphite, and lithium.
Tesla's biggest challenge?
In February, Tesla announced plans to build a Gigafactory, or a factory with the capacity to produce more lithium-ion than the entire world did in 2013. Tesla CEO Elon Musk hopes the factory will be built by 2017 in order to build battery packs for its planned lower-cost car it wants to launch that year. The annual production target for the Gigafactory? Five hundred thousand battery packs per year by 2020.
In other words, Tesla wants to become a major auto player as a manufacturer of purely electric vehicles. This aspiration is completely dependent on the successful completion of the Gigafactory.
Tesla's future is undoubtedly on the line, and Musk knows this. To ensure the timeline for the Gigafactory is met, Musk is taking extreme precautions: he plans to break ground in at least two different locations just to lower the risk that the project will run behind.
But the challenges Tesla will face go much deeper than deflecting permit delays. Writer Jon Xavier of the Silicon Valley Business Journal says the project, which is the largest manufacturing project planned in the U.S. right now, could be most challenging in regards to the task it faces in sourcing needed raw materials for its batteries at levels never done before.
It's a historically massive undertaking that could change the economics of the battery industry overnight -- something that becomes clear when you look at the gobsmacking mass of raw materials the facility must consume to reach Tesla's ambitious production goals.
Citing conclusions of an unreleased report by Industrial Minerals Data, he points specifically to three major challenges:
- Graphite: Tesla will need an estimated 126,000 metric tons of a graphite, or about one third of the world's current total supply of graphite.
- Cobalt: Tesla will need about 7,000 metric tons per year, compared to current global supply of about 110,000 metric tons of which only 45% comes from non war-torn areas.
- Lithium: Tesla's Gigafactory will require about a fifth of the world's annual supply of lithium. Making matters more difficult, Musk has committed to sourcing lithium in North America, where Xavier says there is currently only one mine.
The Industrial Minerals Data report, Xavier says, asserts that such material squeezes will result in price hikes.
"Bottom line," explained Xavier, "if the Gigafactory gets built, it will shift the global economy for these minerals by itself -- and there might be a materials squeeze if suppliers don't start ramping up to address that soon."
While its no surprise that Tesla has its work cut out for itself in building the Gigafactory and sourcing materials, examining more specific data on the overall market for some of the important materials Tesla will need for the Gigafactory highlights the large risk to success. Tesla will be highly dependent on rapid cooperation and involvement from an industry that has never had to do so on such a large scale before.
If Tesla does succeed in transforming these markets for raw materials, Tesla could benefit immensely from a first-mover advantage. But if price hikes and lack of cooperation turn out to be worse than Tesla expects, investors who own shares at today's forward-looking price could be in for some tough times.