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How Elon Musk’s Tesla delivered a body blow to these ASX stocks

Image source: Tesla

Elon Musk’s “Battery Day” turned out to a dud that dragged down not only the Tesla Inc (NASDAQ: TSLA) share price, but those of ASX lithium stocks too.

The Galaxy Resources Limited (ASX: GXY) share price crashed 9.7% to $1.16, Pilbara Minerals Ltd (ASX: PLS) share price tumbled 7.3% to $0.32 and Orocobre Limited (ASX: ORE) share price lost 2.1% to $2.54 during lunch time trade.

The Mineral Resources Limited (ASX: MIN) “only” fell 1.7% to $25 thanks to its sizable iron ore operations that’s providing diversification benefits.

In contrast, the S&P/ASX 200 Index (Index:^AXJO) retreated 1.1% at the time of writing.

Tesla leaves ASX lithium miners behind

Lithium miners are coping a bigger beating after Elon Musk outlined plans for the next generation of batteries to power Tesla’s cars.

The new batteries will not only use less lithium, but Tesla will also start its own lithium mine and will improve recycling so it doesn’t need to mine as much.

That wasn’t what investors were expecting Elon to espouse. They thought he would outline plans to lower the cost of batteries, the largest cost component in an electric vehicle (EV). Lower prices will in turn drive increased demand for EVs and lithium.

Lower cost batteries to use less lithium

Well, he did have plans to cut the cost of batteries. Just not in the way the market thought.

“According to CEO Elon Musk, Tesla developed a new technology to extract lithium from hard rock using sodium chloride (table salt), which can lower their current lithium expenditure by 33% and at the same time make it more environmental [sic] friendly,” said Morgan Stanley in a research note.

“They will source spodumene from their own mine in Nevada without intermediaries. This means not only more supply, but also potentially lower costs that could spread across the industry.”

Setback for the lithium price recovery

This is exactly what lithium producers do not want to hear. Worries about an oversupply of the mineral are already depressing prices for the commodity.

What’s more, Elon said there is excess supply of lithium and that there is enough of the material in Nevada to convert all vehicles in the US to electric vehicles.

The outlook for lithium prices is looking pretty sombre even though the worst may be over.

“Prices have to stay below marginal cost of production for longer to adjust to the supply and prevent new capacity from coming online too early,” added Morgan Stanley.

“Lithium prices may have bottomed but we do not see a recovery any time soon.”

Better ASX stock to buy

The marginal cost of production stands at around US$7 to US$8 a tonne. That’s where the price of lithium will be stuck at for a while if the broker’s prediction is on the money.

Investors wanting upside exposure to the EV revolution might be better off betting on nickel miners like the IGO Ltd (ASX: IGO) share price. Elon’s new batteries require more nickel for higher energy density.

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Brendon Lau has no position in any of the stocks mentioned. Connect with me on Twitter @brenlau.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Tesla. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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