Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
A recent pullback in commodity prices will aid Tesla Inc’s bruised margins only in the second half of the year, signalling more near-term pain for the electric-car maker which has been cutting prices to prop up sales.
Chief financial officer Zachary Kirkhorn said on Wednesday that battery material prices have been a big drag for the past two years and Tesla was “still kind of at the maximum of pain for commodities in our cost structure.”
The comments dampened hopes that this year’s tumble in prices of commodities would provide relief to Tesla, whose margins fell to a more than two-year low of 19.3% in the first quarter, missing the average market estimate of 22.4%.
Tesla has slashed prices six times in 2023, a move that Wall Street analysts expect will amp up competition with incumbent automakers such as Ford Motor Co and startups including Lucid Group Inc.
So far this year, prices of battery metals such as cobalt and lithium – the most important ingredients in EV batteries – have declined around 50% and 40%, respectively. Nickel has lost about 20% this year and is down nearly 50% from a peak in March 2022.
Analysts attributed the lag in benefits from lower battery-material prices to long-term contracts, especially for lithium, which is bought at rates that vary from spot prices.
But minerals research firm Benchmark Intelligence said the contracts could get revised due to the declining prices.
“EV manufacturers have a huge amount of power in these contract negotiations, so we do see contract structures getting revised especially now that prices are decreasing,” said Daniel Fletcher-Manuel, Benchmark Intelligence’s head of prices, data & indices.
Lithium prices have eased following a ramp-up in mining output and a slowdown in EV demand due to rising economic uncertainty and a planned subsidies halt in China, the world’s biggest and fastest growing market.
The slide has even sparked rare discounts from Chinese battery giant CATL, a Tesla supplier, and analysts said prices could fall further as EV demand declines.
Rystad Energy sees the global market deficit of lithium shrinking to around 20,000 to 30,000 tonnes of lithium carbonate equivalent (LCE) this year, from 76,000 tonnes LCE in 2022.
“It’s worth mentioning that the price of lithium has dropped significantly,” Musk said on a post-earnings call.
That would be beneficial for Tesla as the company ramps up output from its mega factories in Austin and Berlin.
Tesla shares fell 7% in early trading and also dragged stocks of automakers from Europe to the United States as Elon Musk said the company will prioritize sales growth over profit.
(By Aditya Soni and Akash Sriram; Editing by Saumyadeb Chakrabarty)
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