As if the year-long persistent plight of computer-chip supply shortage was not enough, another larger scale shortage is likely to soon further cripple the automobile industry. Amid all the turmoil that the world is facing since the beginning of this year, there are three essential materials that are quietly threatening to go out of stock and debilitate the auto industry.
A Bigger Shortage Looms Large
We are aware of how most automobile bellwethers are consistently shifting to electric vehicle (EV) production in order to remain relevant in a changing auto industry. The raw materials that are essential to EV production include cobalt, lithium, and nickel, all of which make up the core of an EV battery.
Now, all three of these metals have been quietly facing the threat of supply shortage, because of the intense demand for them. Early in March, Nickel prices soared more than 100% as demand for EVs spiked more than ever due to the spurt in fuel prices and uncertainty around fuel supply from Russia. Moreover, the domestic demand surge for Nickel was also boosted when U.S. President Joe Biden announced his intention to rapidly shift the automobile industry to EVs to reduce dependence on Russia’s fossil fuel.
Moreover, earlier this year, Credit Suisse analysts predicted global lithium output (estimated at 588,000 tons and 736,000 tons in 2022 and 2023 respectively) to fall short of demand (estimated at 689,000 tons and 902,000 tons in 2022 and 2023 respectively).
Also, the demand projected for cobalt is expected to be rather out of reach for supplies by 2030 if not already so by 2025.
Rivian CEO’s Warning
These fears were stoked recently when the CEO of Rivian Automotive (NASDAQ: RIVN), RJ Scaringe, warned of an impending shortage of EV battery supplies that will hurt the auto industry more than we think.
“Put very simply, all the world’s cell production combined represents well under 10% of what we will need in 10 years,” said Scaringe, saying that it means that 90% to 95% of the supply is yet to be realized.
Scaringe gave us a clearer picture of the hurdles that await the auto industry. He pointed out that the shortages will be felt across all levels of the hierarchy including mining of the metals, material processing, and battery manufacturing. Aiming to meet the burgeoning demand for EVs while struggling to produce enough batteries is expected to be the toughest issue.
What is more worrying is that the current hitch of semiconductor shortage, which is hitherto proving to be disruptive to the auto industry, is relatively insignificant compared to the magnitude of the expected shortage of raw metals. “Semiconductors are a small appetizer to what we are about to feel on battery cells over the next two decades,” said Scaringe in this regard.
The CEO’s thorough projections conformed to rival automaker Tesla (TSLA) CEO Elon Musk’s tweet from earlier this month expressing his concerns about the “insane levels” of lithium prices, a result of growing demand and declining supply. Musk indicated that Tesla “might actually have to get into the mining & refining directly at scale” to navigate this crunch.
Several companies, such as General Motors (GM), are actually jumping the mining bandwagon by partnering with mining corporations to ensure access to the three primary metals. Despite the efforts, research firm Benchmark anticipates that less than 50% of the factories will produce enough batteries to supply global carmakers like General Motors and new entrants such as Rivian.
Other automakers are in the process of producing their own battery-cells, in order to reduce dependence on battery-making companies and avoid the rush later.
How Rivian Plans to Navigate the Issues
Rivian has a lot of hard work to do to revive its beaten-down stock, and a long way to go to keep up with the pace of its competitors. Its shares have lost about 60% of value year-to-date. Last month, the company trimmed its EV production outlook for 2022 to half of the original expected volume, leading to a further drop in share prices.
And now, Scaringe’s comments led to a further decline of 6% on Monday. Rivian had just started producing vehicles, and managed to churn 2,425 total vehicles as of March 8, 2022. A silver lining to the company’s near-term prospect is its pre-orders for 80,000 SUVs and pick-up trucks, as well as a big order from Amazon (AMZN) of 100,000 electric delivery vehicles.
Nonetheless, the dire straits that the auto industry as a whole is headed to is making investors expect the Rivian stock to remain volatile for the foreseeable future, taking into account other factors like tremendous competition and chip shortage.
How successful Rivian will be in navigating these obstacles depends on how quickly and efficiently it can ramp up its production volumes and rake in more revenues. However, its status as a startup with low starting volumes of production is expected to make this step difficult.
Piper Sandler analyst Alexander Potter maintained a Buy rating on the stock in his research note yesterday. Nonetheless, he cut the price target to $112 from $130. The analyst gives us hope, saying that the company “is best-positioned to replicate Tesla’s success.”
Wall Street analysts are cautiously optimistic about the company, with a Moderate Buy consensus rating, based on nine Buys, five Holds, and one Sell. The RIVN stock prediction points at an average price target of $71.92, indicating an upside of 86.32% as of 10:37 a.m. EST, Tuesday.
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