Tesla, citing environment, to use North American materials for battery plant

A rendering of Tesla's planned gigafactory to be built in the Southwest.

Photo credit: TESLA
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HOUSTON (Bloomberg) -- Tesla Motors Inc. plans to source all the raw materials for its proposed $5 billion U.S. battery factory in North America.

The Silicon Valley company won't look overseas for the graphite, cobalt and other materials needed for its so-called Gigafactory, said Liz Jarvis-Shean, a spokeswoman.

"It will enable us to establish a supply chain that is local and focused on minimizing environmental impact while significantly reducing battery cost," she said.

The move comes amid heightened interest in curbing graphite pollution and a widespread corporate sensitivity about avoiding the use of industrial minerals from troubled parts of the world.

China's government, for example, has begun to shutter mines producing graphite, a major ingredient in lithium ion batteries, over air-quality issues, Bloomberg News reported March 14.

Tesla, which manufactures the $71,070 Model S, says the "vast majority" of the graphite it uses right now comes from Japan and Europe and is synthetic, not mined.

The Palo Alto, California-based company prefers the synthetic variety, Jarvis-Shean said.

Natural graphite mined in China accounts for most of the material used in batteries worldwide, according to London-based Industrial Minerals Data. China, the biggest graphite producer, is closing dozens of mines and processing plants even as global demand soars.

High costs?

The Tesla purchasing strategy is unique in the battery industry, according to Sam Jaffe, an analyst at Navigant Research. To make it work, analysts who follow the industry say Tesla may need to turn to graphite mines in Canada that have yet to be built.

For cobalt, they say Tesla may have to go beyond existing Canadian output and look at prospective supplies in Minnesota and Idaho.

"It's very patriotic of them to do that, but it costs, and already the costs of these electric vehicles are quite high," said Edward R. Anderson, chief executive officer of Tucson, Arizona-based TRU Group Inc., a consultant.

Tesla's plan will cut the per-kilowatt hour cost of its batteries by more than 30 percent and reduce "logistics waste," Jarvis-Shean said.

The company is targeting the costs and pollution associated with transportation in the metals industry, Navigant's Jaffe said.

Graphite, cobalt and other commodities often travel thousands of miles from mines to processors and then on to manufacturers and consumers.

Gigafactory's size

The Gigafactory is important for commodity markets because of its sheer scale. While Tesla has yet to select a site in the western United States for the plant, plans that were first revealed in February envision the production of enough rechargeable lithium ion batteries each year by 2020 to power 500,000 Tesla vehicles.

The factory would singlehandedly double world output of lithium ion units.

Sourcing the materials on that scale in North America may disrupt commodity markets, said Stuart Burns, co-founder of London-based pricing and analysis company Metal Miner.

"It really depends on how quickly Tesla ramps up their production and to what extent they are working with the supply chain already to ensure the capacity is in place," he said.

The factory is so big that without more cobalt supply there will be a global shortage, according to Burns. Right now, about half the world's cobalt is mined in the Democratic Republic of Congo, a war-ravaged nation whose mining industry has been beset by allegations of corruption.

Congo's cobalt

Tesla says it gets its cobalt from the Philippines, where Sumitomo Metal Mining Co. started up a nickel-cobalt mine last year.

There are only a few other viable new sources of cobalt, while global demand is rising 5 percent or more each year, said Stephen English, a cobalt trader at SFP Metals in London. "There are still a lot of cobalt units untapped in the Congo," he said.

But mining investors in Congo face power shortages, a lack of basic infrastructure and political instability. Congo remains the world's most destitute nation, according to the United Nations Development Programme's measure of health, education and income.

"The country's mineral wealth, its most valuable assets, are being milked for a very small number of people," said Daniel Balint-Kurti at Global Witness, a London-based non-profit group that investigates the exploitation of natural resources.

Conflict minerals

While neither cobalt nor graphite are regarded as so-called conflict minerals, Tesla's purchasing strategy has parallels with efforts to eliminate the use of materials produced in war zones such as eastern Congo, Balint-Kurti said.

This year U.S. electronics manufacturers such as Apple Inc. and Intel Corp. are being forced for the first time to disclose whether they use minerals mined in war zones.

The United States hasn't mined cobalt since 1971 and has 301 tons remaining in a government stockpile, according to the U.S. Geological Survey.

Tesla may look to Idaho, where Formation Metals Inc. is developing a cobalt mine. The Vancouver-based company needs to raise $120 million to complete the project, said Rick Honsinger, a spokesman.

Formation plans to approach Tesla about using its "ethically sourced" cobalt to avoid the political risks of Congolese metal, he said.

Just 2 percent of graphite is mined in Canada and none in the United States, according to U.S. government data. In 2012 the United States produced 141,000 metric tons of synthetic graphite, made by super heating petroleum coke, a byproduct of oil refining, according to the USGS.

Cleaner process

Another five or six graphite mines are needed to meet demand from rising battery production, said Gareth Hatch, founding principal at Technology Metals Research.

Several projects in Canada will help boost supplies in the next few years, even though prices are still likely to rise, he said. Producing graphite in North America would be a cleaner process than in China, where enforcement of environmental regulations is lax, Navigant's Jaffe said.

Telsa's biggest impact in the United States and global economy may eventually be in "changing how businesspeople operate, how they make their decisions, and how they approach problems," he said.

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