Tesla’s Lithium Prices Rise as Supplier Amends Agreement

(Bloomberg). Tesla Inc. is now willing to pay more for lithium, which powers its electric vehicles. This was after a supplier modified their deal in the face of a steady price rally.

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Piedmont Lithium Inc. has announced that it will supply an additional 125,000 metric tons lithium concentrate to the EV company starting in the second half this year, through the end 2025. According to a Tuesday announcement. Unlike prior agreements where prices are locked in, Piedmont’s deal with Tesla relies on a floating mechanism based on market prices, according to the statement.

The change in the supply agreement between Piedmont and Tesla is “significant” because the EV giant typically has fixed prices for the materials it needs for batteries, according to analyst David Deckelbaum at Cowen & Co. “As more contracts shift toward variable pricing, Tesla’s lithium costs inevitably move higher,” Deckelbaum said in an email.

Tesla, as the sector’s largest buyer, has had enormous power to set terms. In many cases, they have locked in long-term supply agreements at fixed prices. But a relentless rise in prices of key battery materials including lithium and legacy automakers’ aggressive efforts to secure those metals are gradually changing the landscape.

Read more: Tesla’s lithium supplies are in danger as rivals revved up mining deals

Over the last several years, lithium prices have risen 1,200% as supply has not been able to keep up with demand. That’s hurt manufacturers, which have been forced to raise prices. BloombergNEF reports that the average cost of a lithium battery pack rose by 7% in 2022. This was the first increase in prices since 2010, when the survey began.

The previous pact between Tesla and Piedmont was made more than two years ago when lithium prices were at an all-time low. This was just as supply was plentiful.

Tesla shares dropped 13.3% to $106.76 at 11:51 AM in New York. This was the largest drop since September 2020. The decline came as analysts reduced their forecasts for share prices after Tesla missed its car deliveries expectations last quarter. Piedmont dropped 4.2% after initially benefiting from the amended agreement news.

The new supply pact with Tesla “should deliver highly attractive margins” for Piedmont, according to Cowen’s Deckelbaum. Based on the current spot price for lithium hydroxide, Deckelbaum estimated that the deal could increase annualized cash flow of the Belmont, North Carolina-based firm by $550 million.

The metal for Tesla will now be sourced from Sayona Mining Ltd.’s North American Lithium project in Quebec— it was originally going to come from Piedmont’s North Carolina project, which is still in the pre-permitting phase.

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