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LFP battery switch proves wise with Russian nickel cut

Updated: Sep 25, 2022

If the price of nickel goes from US$20,000 to US$50,000, this adds US$1580 in costs to the typical 60 kWh electric vehicle battery pack, and the price of the metal briefly touched US$100,000 due to the sanctions levied on Russia. Tesla’s move to bet on cheaper iron-based LFP batteries for its Model 3 and Model Y looks rather smart now.

Last spring, Elon Musk explained his preference for the cheaper lithium ferrophosphate (LFP) batteries that are now in the new Model 3 and Model Y batches over traditional Nickel-Cobalt-Aluminum (NCA) packs with the following prophetic revelation: “I think probably there is a long-term shift more in the direction of iron-based lithium-ion cells rather over nickel… And this is actually good because there’s plenty of iron in the world. There’s an insane amount of iron. But nickel, there’s much less nickel, and there’s way less cobalt.”

Fast forward to today’s war raging in Ukraine after the Russian invasion, and nickel prices have touched stratospheric heights indeed. The resulting sanctions levied against Russia as one of the main producers of nickel saw the metal’s price tag triple since the conflict began to more than US$80,000 a ton from just US$24,000 on February 25. The exorbitant nickel price rise shows no sign of abating and, according to research firm CICC, even if it stabilizes around the US$50,000 mark, this will mean the equivalent of US$1580 added to the cost of a typical 60 kWh battery pack for each new electric vehicle.

Granted, LFP batteries have their own challenges. They perform slightly worse in the cold as many new Tesla 3 owners in Canada learned the hard way recently when they were left stranded with dead 12V packs. Tesla just issued an LFP battery calibration update that should remedy the issue, though. Moreover, LFP packs have slightly lower energy density than NCA ones hence a shorter range for the same capacity. Still, they can be charged to 100% often without issues if you are not on a road trip and in a hurry, whereas charging NCA batteries to more than 90% leads to quicker degradation. The biggest advantage, however, now seems the ubiquity of the raw materials that go into making Tesla’s LFP batteries, as the Russian nickel prices painfully proved in the span of just two days.

Meanwhile, Samsung, which aims to become the world’s largest battery maker by 2030 and open a big factory in the US, is now securing nickel supply for extended range EV batteries at 40% of the metal’s current price, reports Korean media. It turns out that Samsung SDI has signed a commodity swap contract with Australia’s QPM for 60 million tons of nickel at a low preset price at least through next year. This gives it the right to purchase 3122 tons at US$12,700 by next March, for instance, while the Friday closing price of the metal was US$32,150 and nickel briefly touched US$100,000 price after Russia’s invasion of Ukraine, both significant producers.

Tesla has also signed similar hedging contracts, reports Bloomberg, via a “multiyear supply deal with mining giant Vale SA,” so it will evade the nickel price spike relatively unscathed, too. This seems to have been a deliberate strategy by Tesla that is now giving it a competitive advantage. Elon Musk is on record urging nickel miners to extract more a few years back. “Tesla will give you a giant contract for a long period of time if you mine nickel efficiently and in an environmentally sensitive way,” he said in an earnings call at the time and the nickel price hedge with Vale is now coming at a very opportune time.

To address the rising cost of EV battery materials, President Biden just called in the powers of the wartime Defense Production Act (DPA) that give the government a wide-ranging authority to retool the supply chain. The argument is that energy and transportation are a matter of national security and they both fall under the DPA’s scope after Russia’s invasion of Ukraine caused an exorbitant spike in the price of fossil fuels, commodities, and materials.

Biden’s directive is to “strengthen our clean energy economy” and “use the Defense Production Act to secure American supply chains for the critical materials that go into batteries for electric vehicles and storage of renewable energy.” On a more practical note, the DPA directive will allow the Secretary of Defense Lloyd Austin to aid American miners of nickel, lithium, graphite, cobalt, and other battery-critical materials to produce faster and more efficiently.

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