Tesla’s change of battery chemisty has wider implications and may not be easy, says UBS

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Tesla Inc (NASDAQ:TSLA)’s stated intention to change its electric car batteries to a lithium-iron-phosphate (LFP) chemistry should, say analysts, save the company money and add momentum to wider adoption by the automotive industry, but will not be easy.


Boss Elon Musk’s intention to change the cathode chemistry to LFP from lithium-nickel-cobalt-aluminium (NCA) for all standard range vehicles globally “could lower battery system cost and serve as metals price hedge” against rising nickel/cobalt prices, UBS said in a note on Friday.


READ: Tesla revenues and profits still go up a gear despite supply chain headwinds


“Tesla’s decision to go global with LFP will lend further momentum to traditional OEM adoption for entry-level/mass market vehicles.”


However, UBS’s basic materials analyst team does not anticipate large market share swing towards LFP due to supply constraints.


Currently, China accounts for almost all global LFP battery and upstream materials capacity, and for the LFP market to expand in the near-term outside of China there would need to be an acceleration in exports, the analysts said.


LFP battery cell prices are around a 26% discount to the lithium-nickel-cobalt-manganese (NCM 811) that is common across the industry.


However, import tariffs in the EU and US, together with transport costs, “narrow the arbitrage opportunity”, while exceptionally strong China LFP demand (LFP has a 48% market share in the country’s EV makers), means UBS sees the exportable LFP capacity as being limited through to the end of 2024.


With several car manufacturers agreeing battery supply deals, the “co-location and materials onshoring trend is clear”, said UBS and so will need to see investment committed to LFP battery capacity in the US/EU in order to significantly move the dial for LFP outside China, and that would still take 3-4 years.


“Given that 1) we see LFP’s cost advantage as transitional and 2) rapid evolving battery technology there might be limited appetite for committing US$3-4bn on greenfield capacities with long lead times to commercial production,” UBS analyst Tim Bush wrote.

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