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Tesla Model 3 Shines, But Lithium Price a Challenge

The glamour of the Tesla Model 3 premier this week created a huge surge in orders, but with commodity lithium prices used in Tesla batteries spiking 20 percent and expected to jump another 20 percent, inflationary costs may ruin Tesla’s electric car business.

Tesla moved up its online Model 3 sales launch, for the $35,000 vehicles that travel 200 miles on a charge, to March 31 at 7:30pm Pacific Time. Tesla dealerships featured long lines of buyers camping out for days in cold weather.

Tesla CEO Elon Musk tweeted yesterday, “You will see the car very clearly, but some important elements will be added and some will evolve.” That is classic “Tesla speak” for “we are showing a mock-up tonight, initial deliveries are late next year.”

Tesla’s goal has been to get mass product visibility and collect huge numbers of $1,000 deposits to help finance building the cars. Most gasoline-powered auto makers would be ecstatic to take deposits for future sales, because their commodity material costs have been falling.

However, former Director of the Office of Management and Budget under President Reagan and author of the viral Contra Corner blog, David Stockman, just published a report entitled “U.S. Commodity Prices are Cliff-Diving Due to the Fracturing Monetary Supernova.”

Stockman observes that two decades of “unhealthy and unsustainable economic deformation” from international central bankers’ money-printing facilitated a “$50 trillion gain in global GDP.” But that impact has now petered out and morphed into an epic industrial commodity price collapse. He highlights the price plunge for iron ore used to make automotive steel, which has plunged by 55 percent from $150 a ton to $65 a ton.

Tesla has invested about $5 billion in its car company and about $5 billion into its “Gigafactory” to build huge numbers of lithium ion batteries. But the company lost money every single quarter for the last decade. On a year-end, fully accounted basis Tesla lost $19,810 and $51,344 in negative cash flow for every vehicle it built.

Tesla’s profit plan is based on the mid-priced Model 3, with a 200-mile range on a battery charge achieving “positive economies of scale” volume savings. The key to that savings is driving down the cost of lithium ion battery power from $350 per kilowatt hour to $150 per kilowatt hour by 2024, according to Stratfor Global Intelligence.

Most lithium comes from South America’s Andes region, where substantial deposits can be mined more cheaply than those in other regions. Chile, as the major player, projects double-digit demand growth coming from spiking demand for electric vehicles, battery storage for electric grids and the rise of mobile robotics.

Stratfor defines lithium-ion batteries as the “industry standard” for commercial battery technology, in terms of storage capacity and lifetime. But Stratfor warns that for lithium, “global prices have increased by 20 percent between September 2014 and October 2015 and are expected to increase by another 20 percent before 2018.”

Tesla faces the unique risk that achieving huge Model 3 sales volume could cause “negative economies of scale” by driving the price of lithium up even faster.

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