Tesla's release of details on its proposed Gigafactory to make lithium-ion cells for its future electric cars sent waves through the lithium market, with stock prices for narrow-moat producers Rockwood Holdings (ROC) and Sociedad Quimica y Minera de Chile (SQM) reacting positively. Tesla's announcement does not change our view that lithium prices are likely to see pressure over the long run, as we think supply through the end of the decade will be more than sufficient to meet one of the strongest demand profiles for any industrial chemical. Operating from a low-cost resource base in Chile, Rockwood and SQM have the ability to invest in their economic moats if Tesla can bring its third-generation car, the Model E, to the market at a price and driving range that lead to increased adoption rates.

Tesla expects its Gigafactory to have capacity to build 500,000 pure-electric vehicles, or EVs, by 2020. Tesla builds pure-electric vehicles as opposed to other vehicles that include electric powertrains, including hybrid electric vehicles, or HEVs, and plug-in hybrid electric vehicles, or PHEVs. There's no doubt that Tesla's executing on its ambitious plans is a positive for global lithium producers, as Rockwood estimates that a pure-electric vehicle uses roughly 25 kilograms of lithium--more than 7,000 times the amount needed to produce a cellphone battery. For the Tesla Model S, lithium use has been pegged at closer to 40 kg per vehicle. That said, pure-electric vehicles are growing off such a small base that the impact on lithium demand--at least to the end of the decade--is somewhat limited.