Rising Battery Costs Pressure EV Manufacturers: Is Tesla Better Positioned Than Most?

The Russian invasion of Ukraine crisis has led to a spike in the prices of materials used in electric vehicle batteries, which account for the bulk of the cost of these eco-friendly vehicles.

As EV manufacturers contend with input cost inflation, many of them are choosing to pass on the increases to consumers by announcing vehicle price hikes.

An analyst at Morgan Stanley looked at how situation is evolving in China, which houses the major battery manufacturers.

EV Industry To Remain Under Pressure: Battery input costs are rising sharply, especially for  lithium carbonate, which has increased about fivefold from a year ago, analyst Adam Jonas said in a note.

The lithium carbonate spot price has escalated from 100,000 yuan ($15,700) per ton a year ago to 500,000 yuan per ton, the analyst said. More disconcerting: there is little relief on the horizon, he said. 

"Lower margins and/or demand destruction may be on the horizon," Jonas said.

Most battery manufacturers buy lithium carbonate at spot price and mostly do not have long-term contracts, the analyst said. The battery manufacturers will need to pass through inflation by raising prices by about 25%, he said, citing Morgan Stanley's China battery team.

This in turn will lead OEMs into raising prices by as much as 15%, Jonas said. 

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Bigger battery manufacturers such as CATL can negotiate discounts, and this, coupled with stockpiled lithium carbonate, could temporarily keep prices under $500,000 per ton, Jonas said.

Rising lithium carbonate prices have also served to erode the cost advantage that lithium iron phosphate batteries have over nickel manganese cobalt batteries, the analyst said. 

Implications For The Future: If EV demand continues to be strong, the lithium carbonate supply will remain very tight and its price may not budge this year, Jonas said, adding that increasing the supply of the material is a multiyear task. 

"Negotiations between battery cell makers, material suppliers and OEMs will determine what level of ‘sharing' of inflationary cost pressure we see," the analyst said.

Longer term, the analyst said he projects marked changes in battery technology/innovation, mass reduction and the geographic profile of the supply chain to address material volatility and supply chain sustainability and security.

EV giant Tesla, Inc. (NASDAQ:TSLA) is relatively better positioned to address the significant supply chain challenges, Jonas said. This is because of the company's scale and vertical integration, the analyst said. 

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Photo courtesy of Tesla.