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Tesla Motors Inc (TSLA) Could Cause Lithium Prices to Spike

Tesla Motors Inc (TSLA) Gigafactory

It has been a few weeks since Tesla Motors Inc announced their new electric vehicle, called the Model 3. The Tesla Model 3 is their first electric vehicle that is targeted at the mass market. Demand for the Model 3 has been very high, with nearly 400,000 potential customers paying the $1,000 reservation fee in just a matter of weeks.

Tesla plans to deliver the first Model 3 electric vehicles in late 2017, although analysts believe that delay is inevitable, given Tesla’s previous performance.

Tesla Motors Inc is building a Giga factory in Nevada, which will manufacture batteries for the Model 3. From reservation fees alone, Tesla has raised nearly $400 million (it is likely that much of this money will be invested to increase their production capacity.)

Tesla Motors Inc (TSLA) Gigafactory

Tesla increases demand for lithium on its own

Electric vehicles require batteries, which tend to be lithium based. Therefore, as Tesla Motors Inc (NASDAQ:TSLA) produces more electric vehicles, and therefore batteries, their demand for lithium will increase, thus increasing the price of lithium. OilPrice.com reported that lithium was the only commodity to gain value in 2015, and it seems that lithium could continue to gain value, as demand for the alkali metal could reach an all-time high. Tesla Motors CEO, Elon Musk said “In order to produce a half million cars per year…we would basically need to absorb the entire world’s lithium-ion production.”

Other Car Manufacturers Could Enter EV Market

If the Model 3 does prove to be successful, it is likely that other car manufacturers could decide to enter the electric vehicle market. Doubts have been raised regarding the profitability of the Model 3, which has a starting price of just $35,000. On Friday 15th April 2016, Fiat Chrysler’s Automobiles NV (BIT:F) CEO Sergio Marchionne told an Automotive News reporter “If (Elon Musk) can show me that the car will be profitable at that price, I will copy the formula, add the Italian design flair and get it to the market within 12 months. “

Therefore, if Tesla is able to sell that car at a profit, it is possible that other large automobile manufacturers may move in on the market. This would further increase the demand for lithium, further increasing its price.

Potential for Drop in Crude Oil Prices

If more & more car manufacturers were to produce electric powered cars, demand for petrol & diesel would fall, resulting in a reduction in demand for crude oil. In the case of powering vehicles, lithium batteries & crude oil products are substitutes for one another, so they are competing for demand. There will still be demand for crude oil, as its products have a number of uses e.g. fuels are used to generate electricity in power stations etc.

Lithium Upward Trend is Not Guaranteed

It does seem inevitable that more & more cars will be powered by electricity in the future, thus increasing the value of lithium (as explained above.) However, hydrogen powered cars & better biofuels present a threat to lithium’s appreciation. The drop in the value of lithium as a result of an alternative clean energy source (to power cars) could be huge, as lithium is mainly demanded for lithium batteries (it doesn’t have many other uses.)

As the stock exchange closed on the 15th April, a share in Tesla Motors Inc was trading at $254.51, up by 1.05% on the day.

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