Lucid Motors And Rivian: Growth Plans Could Be Thwarted By A Raw Materials Shortage

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Supply chains person gained a batch of attraction complete nan past fewer years, particularly successful nan automotive sector. But arsenic astir automakers are now connected nan tail extremity of having to woody pinch parts shortages, I judge electrical conveyance (“EV”) makers are just connected nan cusp of a acold much significant, and enduring, shortage for artillery metals. While this will deed each automakers pinch EV targets, young EV manufacturers will apt beryllium deed nan hardest arsenic they struggle to find a spot astatine nan table. This article will activity to analyse this imaginable earthy materials shortage and what it mightiness mean for Lucid Motors (NASDAQ:LCID) and Rivian (NASDAQ:RIVN).

Lithium

The problem successful nan lithium marketplace is beautiful simple. Before EVs, lithium was really conscionable a specialty chemic added to immoderate glassware to broaden its scope of operating temperatures. This whitethorn shock you, but that wasn’t precisely a monolithic market.

In 2010, nan twelvemonth nan Nissan Leaf and Chevy Volt made their debuts, location were 28,100 tonnes of lithium, aliases 149,600 tonnes of lithium carbonate balanced (“LCE”), mined. In 2022, 636,000 tonnes of LCE were produced. That’s a 4.25x jump successful 12 years. Lithium accumulation was still only astir 202,300 tonnes LCE per twelvemonth successful 2016, meaning this monolithic maturation has really only happened successful nan past six aliases truthful years.

This benignant of utmost growth, particularly for specified a mini industry, is incredibly difficult to accomplish. Even now, nan excavation of knowledgeable unit is highly limited. While location are immoderate synergies betwixt lipid extraction and brine extraction, this doesn’t reside nan analyzable matter of producing battery-grade lithium compounds.

Contrary to celebrated belief, producing battery-grade lithium compounds is not a plug-and-play system. Every deposit has unsocial mineralization, which requires unsocial treatments to region various impurities. Battery-grade lithium carbonate is thing that is at slightest 99.5% pure, which isn’t precisely a elemental modular to meet.

For this reason, I don’t deliberation it’s adjacent to see nan lithium marketplace to beryllium a commodities market. Instead, I position it arsenic a specialty chemicals market. So we person a specialties chemic marketplace experiencing utmost growth, pinch only a fistful of specialists genuinely qualified to lead it.

The constricted size of nan manufacture besides makes financing caller projects incredibly difficult. Following a value roar successful 2017, wherever lithium carbonate prices reached a highest of $25,000 per tonne, nan marketplace fell into rut. Albemarle (ALB) halted production astatine 1 of its Australian mines successful 2019 and prices bottomed astatine astir $5,750 per tonne successful 2020.

For astir 3 to 4 years, nary 1 wanted to finance caller projects. The consequence was excessively high. Because EVs are now nan superior driver of demand, immoderate weakness successful EV request will importantly effect lithium demand. But pinch nan marketplace logging aggregate years of much than 100% growth, building an meticulous forecast is nigh connected impossible.

The last awesome rumor that nan marketplace faces is nan clip to accumulation for caller mines and description s of aged ones. The fig beneath highlights nan improvement timeline of a number of lithium projects astir nan world, exasperating nan effect of nan financing rumor that I antecedently discussed.

Albemarle

Forecasting request moreover 1 twelvemonth successful beforehand is an incredibly difficult exercise. To do truthful 7+ years successful nan early is borderline guesswork. Without nan assurance of financiers to make early investments successful establishing a beardown lithium supply, nan continued spot of nan marketplace has near suppliers trying to play drawback up. However, fixed nan agelong lead times to production, it seems highly improbable that suppliers will beryllium capable to drawback up for astatine slightest different 7 years.

This is corroborated by data compiled by S&P Global Market Intelligence. The investigation agency estimates that location are presently 53 lithium projects successful improvement that are past nan preliminary economical study stage. While that whitethorn look for illustration a lot, S&P notes that moreover if each 53 projects make it into accumulation by 2030, nan marketplace will beryllium successful a 605,000-tonne deficit. However, successful reality, nan agency expects conscionable 42 projects to make it to accumulation by 2030.

S&P Global Market Intelligence

The fig beneath highlights a request projection from Albemarle, building nan lawsuit for nan company’s estimate of an 800,000-tonne deficit successful 2030. That’s a 25% shortage, based connected its request estimate of 3.2 cardinal tonnes LCE, and 24.8% larger than nan full lithium marketplace successful 2022.

Albemarle

Given nan aforementioned agelong lead times to production, we tin foretell early supply, astatine slightest for astir 7 years, pinch beautiful precocious accuracy. Looking astatine nan early proviso information from S&P, arsenic good arsenic Albemarle’s request projections, a shortage seems almost wholly unavoidable. Nothing short of a complete illness of request would beryllium capable to forestall it, which is not precisely thing shareholders of Lucid aliases Rivian should beryllium hoping for.

Nickel & Cobalt

It whitethorn not beryllium instantly evident why nickel proviso could struggle to lucifer demand. After all, location were 3.3 cardinal tonnes of nickel mined successful 2022 and only 5% went into EVs. But nan disconnect present lies pinch nan value of nickel produced.

The immense mostly of nickel is utilized successful nan accumulation of stainless steel, which doesn’t ever require a peculiarly axenic product. But, successful bid to beryllium utilized successful EVs, nickel needs to meet Class 1 certifications, stipulating a purity of astatine slightest 99.8%.

Currently, 20% of nan world’s Class 1 nickel comes from 1 Russian company, Norilsk Nickel. While astir of their nickel isn’t really moreover utilized successful EVs, alternatively being utilized by different industries that require high-purity nickel, it’s still important to beryllium alert of what nan Class 1 nickel proviso looks like. At nan extremity of nan day, each consumers are competing from nan aforesaid excavation and, currently, this presents a looming geopolitical threat.

Even without geopolitical risks, however, nickel proviso will struggle to lucifer demand. While 46% of world nickel accumulation meets Class 1 standards, only 20% tin beryllium converted into nan nickel sulfate needed for artillery production.

That’s because overmuch of Class 1 nickel is ferronickel, which is awesome for stainless steel, but not really for cathodes. While China has begun to person ferronickel into cathode feedstock, nan c strength of this process has raised immoderate concerns. Considering each of this, it’s not excessively difficult to spot why many analysts are forecasting a semipermanent nickel shortage for EVs starting arsenic soon arsenic this year.

Rystad Energy

Cobalt is simply a wholly different beast. Goldman Sachs (GS), which has historically been 1 of nan astir bearish analysts successful nan EV metals industry, projects that cobalt proviso will beryllium nan astir constricted of immoderate different artillery metal. The slope expects that request will transcend proviso by a separator of 33% successful 2030, acold much than immoderate different artillery metal.

While I judge nan slope has importantly overstated early cobalt demand, contributing to a much utmost shortage successful this projection, you’d beryllium hard-pressed to find an expert that is assured successful nan semipermanent cobalt supply. But not only is proviso limited, it’s wrought pinch heinous quality authorities violations.

Over 70% of nan world’s cobalt comes from nan Democratic Republic of nan Congo (“DRC”), wherever labour laws are hardly enforced. This has resulted successful a workforce that is almost 15% child-based. These children are often fixed nan vulnerable occupation of navigating nan narrow, hand-dug, tunnels constructed by men moving for $0.65 per day.

More recently, nan beingness of uranium astatine galore of these mines has been linked to a number of miscarriages and terrible commencement defects. Other impacts of nan mines see pneumonia, asthma, aliases moreover lung crab from breathing successful particles of nan metal. Vomiting, nonaccomplishment of vision, bosom issues, aliases thyroid harm tin beryllium a consequence of consuming nan metal, which often useful its measurement into section waterways fixed nan complete deficiency of biology protections successful place.

Partly owed to this plethora of quality authorities violations, galore companies are now looking to root cobalt from different nations, specified arsenic Canada, but nan accumulation capacity conscionable isn’t location yet. Even if different nations are capable to create much cobalt resources, there’s nary getting astir nan truth that nan immense mostly of nan world's cobalt reserves are located successful nan DRC.

Battery Alternatives

When it comes to lithium, location simply is nary alternative, further exasperating nan looming shortage. While CATL, nan China-based leader of artillery manufacturing, has plans to statesman accumulation of a sodium-ion chemistry by nan extremity of nan year, much caller comments indicate that nan artillery will not beryllium independent of lithium.

In bid to execute nan scope requirements of nan mean consumer, CATL was incapable to wholly forgo nan superior power density of lithium. Instead, nan sodium-ion artillery will incorporate a substance of sodium and lithium. Furthermore, nan chemistry appears to beryllium positioned arsenic a low-end replacement to LFP for minimal-range metropolis cars.

LFP, aliases lithium ferro-(iron)phosphate, batteries are already nan fund action successful EVs, occupying nan bottommost of nan cathode chemistry costs curve. The cathode sacrifices scope for improved soul stability, but it’s really nan cost, not nan stability, that has made it truthful celebrated recently.

Therefore, arsenic you whitethorn imagine, this trade-off really only useful for entry-level EVs. So, ignoring nan truth that sodium-ion batteries aren’t moreover successful accumulation yet, neither Lucid aliases Rivian presently nutrient thing pinch a value tag beneath luxury.

Granted, some companies do scheme connected introducing cheaper models arsenic they summation scale. But sodium-ion batteries look to beryllium acold excessively range-limited for either institution to ever present them. Instead, nan exertion of sodium-ion batteries looks group to beryllium wrong nan niche Chinese marketplace of compact metropolis cars.

Fortunately, dissimilar lithium, location are alternatives to cobalt and nickel. The aforementioned LFP cathode is 1 specified action and it has been steadily increasing successful fame successful nan West, aft taking about 50% of nan marketplace successful China. This maturation is coming astatine nan disbursal of market-leading nickel-manganese-cobalt (“NMC”) and nickel-cobalt-aluminum (“NCA”) cathodes, exalted for their unbeatable power density.

The low-cost LFP chemistry is simply a awesome action for mass-market EVs, providing bully capable driving scope successful speech for a important costs reduction. While nan conveyance lineups of some Rivian and Lucid dwell of, exclusively, luxury vehicles, they do besides some person plans to yet manufacture cheaper cars. LFP could, therefore, beryllium a viable chemistry for their entry-level vehicles, adopting a akin strategy to Tesla (TSLA), which has introduced LFP cells to nan lowest trim levels connected its Model 3 and Model Y.

However, for higher trim models, it whitethorn beryllium much difficult for nan companies to find a viable chemistry. In an effort to trim reliance connected cobalt, and clasp immoderate of nan power density of high-nickel cathodes, a fewer companies are presently researching a manganese-based cobalt-free cathode. Volkswagen had primitively hoped to statesman commercialized accumulation of nan exertion this twelvemonth but, pinch fewer updates since their 2021 Battery Day presentation, it’s safe to presume that nan exertion has been delayed.

The chemistry, a manganese-nickel-oxide (“LMNO”), besides isn’t arsenic power dense arsenic NMC aliases NCA. And while it whitethorn beryllium capable to dress up for that pinch precocious voltage capabilities, nary of this matters unless it tin beryllium produced commercially. More importantly, arsenic acold arsenic Rivian and Lucid are concerned, this still doesn’t lick their lithium aliases nickel problems.

Manufacturing Impact

Even if we’re looking only astatine nan lithium market, which is wherever I spot nan biggest threat, things don’t bode good for Rivian and Lucid. A 25% shortage will unit EV manufacturers to discuss connected output. But, unluckily for our 2 startups, not each OEMs are playing pinch nan aforesaid cards.

General Motors, for example, has already secured each of nan artillery earthy materials it needs to nutrient 1 cardinal EVs per twelvemonth done 2025. After a caller finance successful Lithium Americas (LAC), it has now secured capable lithium for an further 2 cardinal EVs done 2041. Granted, General Motors has done a amended occupation than astir successful securing its artillery metallic proviso chain, but astir different manufacturers person started to instrumentality akin precautions.

Over astatine Lucid and Rivian, attraction remains connected ramping production. Don’t get maine wrong, that’s an important extremity to execute on, but if location aren’t immoderate earthy materials astir by nan clip they get it figured out, it mightiness not matter.

It’s not arsenic though either institution is oblivious to this issue, but they simply can't spend to fork complete nan hundreds of millions, aliases moreover billions, of dollars that much established automakers are throwing astatine this problem. Especially erstwhile they some proceed to pain rate (Lucid, Rivian).

Even nan OEMs that aren’t pouring money into mines astatine slightest person nan bargaining powerfulness that tin only travel pinch decades of experience, manufacturing millions of vehicles. That, again, is thing that neither Lucid aliases Rivian have.

So nan 25% lithium shortage won’t effect each automaker nan same, immoderate whitethorn not moreover request to trim production. But successful bid for that to beryllium true, others will beryllium forced to return nan brunt of nan burden. Lucid and Rivian look poised to do conscionable that.

Nickel and cobalt shortages could unit them to present cheaper models earlier they’re fresh to do so. Or, much accurately, earlier either institution is producing astatine a ample capable measurement to do truthful profitably. With shortages for some metals apt to statesman by 2024, it seems highly improbable that either institution will beryllium successful a position to respond.

Last August brought nan latest hold to Lucid’s electrical SUV model. The car, which was initially slated for a 2023 release, now whitethorn not deed nan streets until 2025. With nan company’s much affordable models expected to travel only aft nan SUV’s debut, location really looks to beryllium nary chance that Lucid tin present much affordable models wrong nan adjacent fewer years.

Rivian is successful a spot of a different boat. While they excessively will struggle to get genuinely affordable EVs connected nan roadworthy wrong nan adjacent fewer years, Rivian has already committed to an LFP strategy. The institution has introduced standard-range versions of its R1T and R1S models, which commencement astatine $73,000 and $78,000 respectively, and will beryllium disposable starting successful 2024. For its transportation vans, nan institution has already started utilizing LFP cells.

While it’s still unclear really celebrated these standard-range batteries will be, seeing arsenic accumulation has not yet begun, I person mixed feelings astir them. While I deliberation it’s bully that Rivian has begun to instrumentality LFP, reducing its dependence connected nickel and cobalt, I besides deliberation that a 260-mile scope successful a $73,000 conveyance is simply a difficult sell. It conscionable doesn’t consciousness luxurious.

Take the Chevy Bolt, which offers 260 miles of scope for conscionable $27,495, aliases Tesla, which has refused to connection its Model S and Model X vehicles pinch LFP batteries.

Sure, nan Rivians person a batch much bells and whistles than nan Bolt, but that still doesn’t needfully warrant nan vehicle’s $73,000+ value tag. In immoderate case, while Rivian whitethorn beryllium somewhat amended equipped to grip a nickel and cobalt shortage than Lucid, neither institution looks remotely prepared to upwind a tight lithium market.

Business Impact

For some companies, nan best-case script would beryllium that they are capable to dramatically overpay for their earthy metals, frankincense avoiding cutting production. The fig below demonstrates nan effect of higher earthy materials prices connected nan wide value of manufacturing a artillery cell, albeit pinch immoderate outdated prices. I’ll beryllium utilizing this to quantify nan effect for Lucid and Rivian.

Storage Lab

Let’s attraction connected lithium, arsenic it’s nan only metallic that there’s really nary avoiding and I judge it will person nan tightest market. In nan supra figure, an estimate of $7 per kg is utilized for lithium hydroxide. Currently, lithium hydroxide prices are ~$70 per kg connected nan spot market. Following nan supra estimates, lithium prices person truthful accrued nan costs of batteries by 21% for NMC cells, aliases 46% for LFP cells (including lithium hexafluorophosphate).

For those of you that opportunity these prices are unsustainable, I agree. That’s why it’s important to understand nan quality betwixt spot prices and statement prices. Look astatine Allkem (OTCPK:OROCF), which reported an mean income value of $46,706 per tonne of lithium carbonate during nan last 3 months of 2022. During that period, spot prices peaked astatine $87,384 per tonne and ne'er fell beneath $74,664 per tonne, which was deed connected October 1st (the first time of nan period).

So did Allkem do a bad occupation trading its lithium? Not astatine all. It conscionable sold astir of it successful bulk, creating a deviation from nan spot prices. That means, moreover successful tight markets, automakers pinch semipermanent proviso contracts person a spot of protection against precocious lithium prices.

Because Rivian and Lucid do not person immoderate semipermanent proviso deals, and are improbable to beryllium capable to put any, they will apt beryllium forced to acquisition their lithium adjacent to, aliases at, spot prices. This will hamper nan companies’ expertise to move a profit and support competitory pricing arsenic they effort to present much affordable models.

In 2022, lithium proviso was successful a deficit of conscionable 5,000 tonnes, aliases .78%. If spot prices of ~$70,000 tin beryllium sustained successful that environment, I really don’t deliberation it’s overmuch of a agelong to presume that they tin beryllium sustained if location is an 800,000-tonne deficit, aliases 25% shortage. As such, some companies will apt person to raise nan prices of their vehicles down nan statement to support profitability.

To make matters worse, this tight marketplace whitethorn besides make it harder for vehicles produced by Lucid and Rivian to suffice for nan $7,500 taxation in installments arsenic outlined successful the 2022 Inflation Reduction Act. To do so, astatine slightest 40% of critical materials successful nan artillery request to beryllium originated from nan United States, aliases countries that it has a free waste and acquisition statement with. This 40% period will emergence to 50% successful 2024; 60% successful 2025; 70% successful 2026; and 80% successful 2027 and beyond.

Additionally, astatine slightest half of nan vehicle’s artillery components request to beryllium manufactured successful North America. This besides has a maturation clause, moving up to 60% successful 2024 and 2025, yet reaching 100% successful 2029. With around 60% of lithium chemicals presently coming from China, and nan immense mostly of caller projects group to travel online successful Argentina, it will beryllium incredibly difficult for either institution to meet this first standard.

China, Argentina, Indonesia, and nan DRC, do not person a free waste and acquisition statement pinch nan United States, meaning nan artillery metals from location will not thief automakers suffice for nan afloat taxation credit. This problem will only beryllium exacerbated upon nan preamble of little costly models. With higher earthy worldly prices, Lucid and Rivian won’t beryllium capable to sorb nan effect of nan taxation in installments wrong their pricing exemplary either.

These 2 problems will harvester to trim some companies’ competitory spot and expertise to support profitability. Unfortunately, arsenic I’ve already noted, this looks for illustration nan best-case script for some companies. The much dire, and likely, script is that some companies will yet beryllium forced to limit production.

Financial Impact

Lucid’s existent rate position (as of September 30) sits astatine $2.755 (including $1.491 cardinal of U.S. treasury securities). Including a $1.5 cardinal equity raise successful December, nan company’s rate position is astir apt person to $3.521 (following analyst estimates). That’s not excessively bad; it should bargain them astatine slightest different twelvemonth aliases so.

According to estimates provided by FactSet, Lucid is expected to pain done different $3.93 cardinal done 2024. So, moreover without immoderate further roadblocks, Lucid will almost surely request to raise much capital.

There's besides nan $1.991 cardinal successful semipermanent indebtedness to consider. This indebtedness stems from a $1.75 cardinal bond offering from 2021, now worthy $2.013 cardinal successful liabilities, and it comes owed connected December 15, 2026. This introduces nan consequence of insolvency, upping nan stakes a bit. Granted, bankruptcy doesn’t look terribly likely, but avoiding it will travel astatine nan costs of important shareholder dilution.

Moving connected to Rivian, we spot a spot much utmost situation. While nan institution has much rate connected hand, $13.272 cardinal (as of September 30), it’s besides burning it astatine a overmuch faster rate. Analysts expect nan institution to pain done an eye-watering $10.096 cardinal done 2024, connected apical of an further $1.924 cardinal successful nan last 4th of 2022. While there’s nary indebtedness to interest astir here, that fierce pain complaint would time off nan institution pinch $1.252 cardinal to commencement 2025.

This whitethorn beryllium an moreover worse position than Lucid, which is astatine slightest showing signs of reducing its pain rate. Lucid whitethorn moreover station a 4th aliases 2 of profit successful 2025, whereas Rivian will almost surely neglect to do so. Still, I’m not judge being nan amended of 2 bad options is really thing to celebrate.

Keep successful mind, we haven’t moreover started to facet successful nan effect of earthy worldly shortages. Now, this effect is simply a spot difficult to quantify fixed nan multitude of different scenarios that whitethorn look but, astatine this point, it should beryllium abundantly clear really anemic some companies’ financial positions are.

I besides want to accent really captious nan semipermanent maturation communicative of some companies is. While portion of this intends beingness growth, arsenic successful higher accumulation measurement and caller facilities, it besides intends that investors expect nan companies to yet commencement churning retired large profits. What other would $17+ cardinal valuations imply?

That’s wherever I deliberation nan existent rumor lies. I don’t deliberation either institution will go insolvent. And, while not immune from immoderate reductions, I don’t deliberation either institution will beryllium forced to wholly cease production. But I do deliberation that some companies will neglect to meet gross and profit targets, resulting successful valuations that are acold excessively high.

This is cataclysmic for companies trying to waste a communicative of growth.

Investor Takeaway

For some Rivian and Lucid, investors thin to constituent toward nan semipermanent outlook to warrant their sky-high valuations. But I judge this assets consequence is grossly under-accounted for, particularly because it could wholly derail immoderate maturation plans that either institution whitethorn have. Execution consequence is already high, and this further furniture of consequence makes some companies’ valuations unacceptable successful my opinion.

While I still believe that Lucid is really nan only EV shaper that is making meaningful improvements to nan electrical drivetrain, I conscionable don’t deliberation that’s capable to warrant continuing to ain nan company. Long-term investors should beryllium incredibly concerned astir nan implications this shortage carries for nan early of Lucid Motors and its capacity to scope its eager targets.

As for Rivian, there’s small astir nan institution that impresses maine beyond its expertise to fastener down a proviso statement pinch Amazon (AMZN). But moreover that whitethorn extremity up causing much harm than bully if Rivian continues to person trouble scaling and reaching costs targets. For investors connected nan obstruction of either company, fto this beryllium nan last nail successful nan coffin keeping you away.