The rising cost of raw materials, which has been exacerbated by Russia’s invasion of Ukraine, might put a crimp in the plans of Tesla (TSLA.O) CEO Elon Musk and other car executives to introduce more inexpensive electric vehicles.
According to Gregory Miller, an analyst at industry forecaster Benchmark Mineral Intelligence, rising prices of nickel, lithium, and other materials threaten to slow and even temporarily reverse the long-term trend of falling costs of batteries, which are the most expensive component of electric vehicles. This would impede the widespread adoption of the technology.
And this is on top of a supply chain that has already been slowed by the COVID-19 epidemic as well as a global chip scarcity.
Growing raw material prices, according to Miller, have the potential to delay the timeline for cost parity between electric and internal-combustion vehicles, which could impede the widespread adoption of electric vehicles. Miller was referring to internal-combustion engines, which currently dominate the market.
Inflationary costs for essential battery components could stymie the growth of electric vehicle sales.
According to him, this year could see the first increase in the average price of lithium-ion battery cells on a year-over-year basis.
The situation in Ukraine has only heightened the stakes, causing nickel and aluminium prices to hit record highs on Monday as investors were increasingly concerned that exports from Russia, the world’s largest producer, could be hampered. Lithium prices have also risen, more than doubling since the end of the previous year, as supply has fallen short of surging demand.
According to Benchmark Mineral Intelligence, the world’s largest nickel miner, Nornickel, generates around 20% of the world’s supplies of high purity class 1 nickel, which is utilised in electric vehicle (EV) batteries. Russia is also a major supplier of aluminium, which is used in the production of batteries.
On the other hand, rising oil prices, which reached their highest levels since 2008 on Monday, may serve as a counterweight, stimulating greater interest in electric cars (EVs) following years of rising demand for gas-guzzling sport utility vehicles and pickup trucks.
Prices for electric vehicles are rising, as seen by increases in the past year by Tesla and startup Rivian Automotive (RIVN.O), and this is important because mainstream consumers are not willing to pay a significant premium for a technology that many have not yet completely embraced.
According to research firm Cox Automotive, the average electric vehicle sold for about $63,000 in January in the United States, which is approximately 35% higher than the overall industry average for all vehicles, which was little more than $46,000.
According to a Cox survey, while consumers are less concerned about being stuck without power on the side of the road, price remains a big source of concern.
“Anything that increases the expense of EV adoption will be detrimental,” Cox analyst Michelle Krebs stated.
According to the International Energy Agency, electric vehicles accounted for approximately 9 percent of total worldwide car sales last year, and consulting company AlixPartners predicts that percentage will rise to approximately 24 percent by 2030.
According to a survey conducted in 2021 by OC&C Global Speedometer on customers in the United States, China, and other countries, more than half of consumers are not willing to pay $500 more up front to purchase an electric vehicle, despite cheaper operating expenses.
As a result, automobile manufacturers may find themselves in a bind if they wish to attract general buyers rather than the high-end clientele to whom they are currently catering.
As a result of supply chain issues, Tesla has hiked the price of its least costly Model 3 sedan by 18 percent, to $44,990, since the beginning of December 2020. Musk also stated in January that Tesla will not be producing the $25,000 car that was promised during 2020 battery day, claiming that he has too many other commitments at the time.
Some electric car sellers in the United States have taken advantage of vehicle shortages to raise their prices, prompting warnings from automakers such as Hyundai (005380.KS) and Ford (005380.KS) (F.N).
Rivian attempted to impose a 20 percent price increase on its electric trucks and SUVs last week in order to offset increasing parts prices, but when confronted with a response that included the threat of sale cancellations, the company withdrew the hike for customers who had already made orders.
In addition to Lucid Group Inc (LCID.O), another electric vehicle startup, has not yet hiked prices, but Chief Financial Officer Sherry House stated in February that the business was “certainly investigating price” in order to offset higher supply chain expenses.
Lithium price increases in China have put pressure on manufacturers of entry-level electric vehicles such as Great Wall’s (601633.SS) Ora EV and Wuling Hong Guang’s Mini EV, who have less room to push through a higher price tag as a result, according to investors.
The pressure is particularly great for start-up businesses.
As Brett Smith, technology director at the Center for Automotive Research, put it, “If you’re a little company, you don’t have the capacity to urge your suppliers to give you a lower price.”