Elon Musk says there’s big money to be made by turning raw lithium into battery chemicals, but shrinking profit margins suggest the mining end of the business might still be a better bet.
Musk last month described lithium refining as the hard part in the complex process of getting raw materials out of the ground and into Tesla Inc.’s cars. For those who can crack it, it’s a “license to print money,” he said.
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batteryAnd he was right: margins did spike earlier this year, as booming orders from carmakers drove a record surge in prices for the specialty chemicals produced by “merchant refiners” — companies that purchase and process material from lithium producers.
But the refiners’ profits can quickly wither if the cost of raw materials rises faster than the price of the lithium chemicals they sell. While China’s Covid lockdowns have weighed on demand for finished products from battery- and automakers in recent months, the price of mined raw materials has continued to surge.
As a result, profit margins at lithium plants have tumbled. Processors are still generating historically strong earnings, but margins have dropped by more than half from a March peak, according to Fastmarkets Ltd, which tracks prices for lithium products and other commodities.
The reversal is a reminder of how refiners — and the entire electric-vehicle supply chain — are at the mercy of the miners and their ability to bring on new production quickly enough to meet spiraling demand. Delayed supply responses are commonplace in other commodities markets, which is why the lion’s share of profits are typically made in mining, not refining.
“Merchant refining can be a pretty horrible place to be in any commodity market, because you can get squeezed at both ends,” said Peter Hannah, a senior price development manager at Fastmarkets. “I don’t think these margins will be a long-term feature of the market.”
Producers, meanwhile, continue to earn big. Chile’s SQM, the second-largest supplier, reported record quarterly profit late Wednesday and said it expects prices will remain high through the rest of the year.
While Musk’s comments have thrust lithium refiners into the spotlight, Tesla and other carmakers are increasingly alert to the risk of a long-term mine-supply crunch. Carmakers including Ford Motor Co. and General Motors Co. have been signing a flurry of long-term supply deals for battery metals in recent months with both miners and processors, as spiking prices underscore the risk that EV expansion plans could stall without access to adequate raw materials.
Read the full article here by Mark Burton, Advisor Perspectives.
