What Weighs More: A Pound Of Feathers Or A Pound Of…Lithium?

Elon Musk’s announced new foray into lithium extraction comes at a time of falling prices and excess capacity – a perfect time to secure long term supply.

Riddles are designed to challenge a person’s ingenuity at problem solving, and Elon Musk is a genius at solving problems. The infamous childhood riddle of “What weighs more, a pound of feathers or a pound of lead?” comes easily to mind when thinking about the challenges of securing enough materials to make modern EV batteries.

Lithium, not lead, is the headline metal of the moment, after Tesla TSLA announced two deals wherein it secured lithium mining rights across a large tract of land in Nevada as well as signed a five year lithium supply deal with a small east coast producer. Tesla will certainly need to secure other raw material components for its batteries, and will likely do so, but why step into the lithium markets now when supplies are seemingly plentiful and prices are cheap?

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Billionaires are billionaires for a reason, some buy low and sell high, and some create value by producing what people need. Elon Musk is doing both of these things right now – he’s producing EV battery powered electric vehicles for which there is tremendous need and demand, and he’s buying lithium via strategic positioning within the lithium industry while prices are depressed.

Many lithium mining projects have been slowed or outright delayed due to dramatic recent lithium price declines, which means future supplies could become constrained if the pace of EV battery production, and therefore the pace of demand for lithium, picks up faster than the actual rate of production for lithium itself can increase.

This makes the timing of Musk’s lithium moves a bit like Warren Buffet’s long awaited return to deal-making this past summer when Berkshire Hathaway BRK.B acquired Dominion Energy’s D natural gas storage and transmission facilities during a time of very depressed natural gas prices. Indeed, Buffett’s deal appears to have occured at the bottom of a major natural gas price cycle, and Musk’s actions now could be signaling a low point in lithium prices as well.

To be sure, lithium markets can’t compare to those of natural gas in terms of size, liquidity, and transparency. Any price moves in lithium will likely take longer to manifest themselves than those of natural gas, but Tesla’s actions in the lithium markets this past week are a signal that the greatest minds in the industry are paying close attention and taking the actions necessary to secure their future success in a world where supply and demand fundamentals dictate next steps, or at least give clear signals as to how to solve the riddle at hand.

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