Australian lithium miner Piedmont Lithium announced a revision of its lithium mine supply agreement with electric car maker Tesla, which may force the latter to buy lithium battery raw materials at a higher price.
Piedmont Lithium confirmed in a statement that it would increase its supply of lithium concentrate to Tesla by 125,000 tonnes from the second half of this year to the end of 2025. However, unlike previous agreements that locked in prices, Piedmont Lithium’s new deal with Tesla will be subject to a floating mechanism, meaning that it will be priced according to market fluctuations.
Cowen & Co analyst David Deckelbaum said: “The change in the supply agreement between Piedmont Lithium and Tesla is ‘significant’ because Tesla has historically purchased battery materials at a fixed price. As more contracts move to variable pricing, Tesla’s lithium costs will inevitably rise.”
As the biggest buyer of the many startups in the lithium mining industry, Tesla wields huge sway in setting the terms of deals, often locking in long-term supply agreements at fixed prices. But continued price increases for key battery materials such as lithium, and aggressive efforts by traditional automakers to secure supplies of those raw materials, are gradually changing the landscape.
The price of lithium has soared 1,200% in the past few years as supplies struggle to meet buoyant demand. This has had a major impact on manufacturers, who have been forced to raise prices. Average prices for lithium-ion battery packs will rise 7% in 2022, according to BloombergNEF, the first price increase since the group began investigating in 2010.
The previous supply agreement between Piedmont Lithium and Tesla was reached more than two years ago, when lithium prices were at historic lows as the pandemic depressed demand for electric vehicles amid ample supplies.
Cowen & Co analyst Decker Baum said a new supply deal with Tesla should generate attractive margins for Piedmont Lithium. Based on current spot pricing for lithium hydroxide, the deal could add $550 million to Piedmont Lithium’s annualized cash flow, he estimates.
Yesterday, Tesla’s stock price closed down 12.24% at $108.1 per share, the biggest one-day drop since September 2020. Analysts lowered their stock price targets after Tesla missed vehicle delivery expectations in the fourth quarter of 2022.
At the same time, after announcing a revised supply agreement with Tesla, Piedmont Lithium’s stock price rose more than 14% at one point, but closed down 2.73% to close at $42.82 per share.