The Cost of Minor Metals: The Real Driver Of Green Car Selling Prices and KIller Of Profits

Implications: The very well compensated, well dressed, and well fed long serving executives of General Motors and Ford are lamenting at the North American (so-called) International Auto Show, in the economically and physically devastated (former and fading) Motor City of Detroit, that they are worried about the consumer reaction to the cost of going green. What they do not want to mention is that these costs are almost all based on their own malfeasance as managers. They ignored, until it was too late, the commodity metal supercycle as it was unfolding all around them plain as the dials on their Presidential model Rolexes. Also no one was considered a team player who questioned decisions made by financial managers on the development time for scientific and engineering breakthroughs, which the financial managers did not understand.

Analysis: It is disheartening to watch the roll-out of so many concept cars and so many cars-of-the-future in Detroit, because if past performance is a guide then the Detroit three are just as clueless to future costs as they were when the present was the future just a few years ago. This means that they don't really know which of these concepts they will ever be able to build, because they cannot predict which technologies will work out and which critical raw materials will be available to them next week, much less in future years.

The perfectly reliable,SAFE, and useful nickel metal hydride batteries used today in 100% of all mass produced hybrid cars and trucks, we are told, are only a stopgap, apparently for the last 10 years(!), while the executives who already are Rolex wearers await the advent of mass producible, safe, reliable lithium technology based batteries, which will give the next generation of cars using electric power for propulsion in some form a greater range and 'better performance.'

Of course, the key phrase in the above paragraph turns out to be "mass producible.' The original lead acid battery took around a century for its development-of course, I admit, this battery system was invented at he beginning of the industrial revolution when there were far fewer engineers and scientists and funding was nonexistent, but the first gasoline motor cars used them only for heating a wire to ignite the fuel in the cylinder. It was "Boss Kettering" in 1912 who thought of the idea of using an electric motor, powered by a lead acid battery, as a 'starter' motor in a car; it was the 1912 Cadillac, which, if everything worked, one's driver did not need to handcrank to start, and even a young man or a daring lady could drive this car without fear of not having the ability to crank start it; it was a revolution.

As recently as 2002 the price of lead metal was $0.17 per pound, and one hundred and twenty-five  years of development had given us a safe, reliable, long lived, high power density rechargeable storage battery, which could be drained at 12 volts and 300 amperes, equal to about 4 1/2 horsepower repeatedly to start a car and then bounce back to full capacity just from the charging current delivered by an onboard DC 'generator,' now an AC device called an alternator.

Both the independent battery makers, such as Exide, and the in-house operations of the American OEM automotive industry had taken all of the domestic fat out of the building of lead acid batteries by 2000, and their inability to differentiate their products lead directly and indirectly to bankruptcies; they also missed the new markets completely where they lost out to local low labor cost producers in emerging markets. 

Today, only 7 years later, lead is selling for as much as 10 times what it was in 2000 and America is almost totally dependent on foreign sources for new lead and gets most of the lead metal it uses to make batteries, which construction accounts for most of the lead consumption in the US, from the recycling of old batteries.

GM missed out on leading the green revolution in cars by dropping its battery powered all electric EV1 after a long test of 1000 vehicles primarily in California convinced GM's marketing department that the general public wouldn't buy the car, which used nickel metal hydride batteries to get a range of around 100 miles on a charge. 

Toyota's engineers saw lemonade where GM's saw lemons, and Toyota rapidly brought to market a hybrid version of the EV1, which used a small gasoline engine to augment the battery pack and, with the lighter weight of the nickel metal hydride batteries as compared to lead acid batteries they were able to make a smaller car than the EV1, but still a four passenger vehicle, with a range of 240 miles. This car, the Prius, grew from a production of a few thousand vehicles in 1999 to a production level of 25,000 vehicles per month today, in 2008.

Essentially everyone but GM who added hybrids to their product mix in the years between 1999 and 2007 licensed the technology and bought the components from Toyota, so that, by 2008 more than 1 1/2 million hybrids had been sold, mostly in the US.

GM, in the meantime, developed its own hybrid powertrain in-house and was playing catch-up, but by 2007 GM was delivering hybrid versions of cars, albeit in small numbers, also. Some of GM's hybrids were superior to those of Toyota and its licensees, in particular the Saturn Aura hybrid, but sales of this vehicle have been slow to get off the ground, because of poor and low levels of marketing by GM.

Toyota is reluctant to increase hybrid production and GM is holding back on marketing more hybrid models for the same reason: Everyone is waiting for the 'next generation' battery, which the engineers have promised to deliver 'soon.'

Meanwhile, the OEM American car companies are also holding back because of a problem now being faced by Toyota: Nickel metal hydride batteries, which are universally used in hybrids today are:

1. Safe,
2. Reliable, and
3. Their cost of raw materials, at least the principal one, nickel, can be hedged, because it is an exchange traded metal.

One big problem for NiMH batteries is that no recycling technology now exists for easily and selectively selectively recovering the raw materials used in order to make replacement batteries without having to buy new metals.

This is a huge problem about to be faced by Toyota, because it did not take into account,as neither did GM or anyone else, of the possibility of a commodity supercycle or resource nationalism and environmental activism all combining to drive the prices of the component metals of the battery sky-high while restricting the supplies of some of the key metals to only those favored by, or able to negotiate successfully with, Chinese and Congolese suppliers.

The NiMH battery pack for the Prius, which was originally made in troy, Michigan, cost less than $1000.00 per hand made unit in 1999. Today the same battery pack made in Japan costs more than $8,000.00. This increase is due entirely to the increased cost of nickel, the rare earth metals, and cobalt, mainly during the five years between 2003 and 2008.

The rare earths are so-called minor metals; they are not exchange traded, and due to activist environmentalism they are no longer produced in the USA, which in 1994 supplied 34% of the world's needs for rare earth metals from just one mine in southern California's Inyo County. Cobalt comes mainly from the DRC, the Democratic republic of the Congo; it is not today mined in the US. Nickel comes from Russia, Canada, Cuba, Polynesia, and Australia. One nickel mine, the first one opened in the US since World War II, has just begun operation in Michigan after fierce opposition by environmentalists. Cobalt is also considered a minor metal.

It is not at all clear and most unlikely that any of the world's users of NiMH batteries for cars are charging the consumer for the actual costs for the batteries. I believe that the accounting trick used is to assume that the battery will be returned and recycled for both its major and minor metal values. Toyota's day of reckoning for this hypothesis is upon it as the warranties on the earliest Priuses expire. There is today no publicly known plan by any car maker at all to recycle these materials, and I believe that soon they will have to take a charge against earnings or develop a universal recycling technology.

Toyota claims that its prius uses only 60 pounds of nickel, 30 pounds of rare earth metals, and 3 pounds of cobalt. If that's true then the existing fleet of hybrids has sequestered 45,000 tons of nickel, 22,500 tons of rare earth metals, and 2,500 tons of cobalt; this represents as much as $3 billion dollars of specialty metals.

The management of both Toyota and GM, mainly, but in fact everyone else as well, have bought into the idea that the scientific fact that batteries based on lithium cells will theoretically have the highest energy density possible of any metal, because lithium is the lightest metal. It is assumed that the technical impediments to making a lithium battery large enough to power a hybrid, a plug-in hybrid, or even an all electric battery powered car can be overcome. This may be true, but the first thing that battery developers learned was that the best system for this, power wise, lithium cobalt has the unfortunate habit of overheating in use and a significant fire danger has been noted with batteries using this technology, which are today in wide use in laptop computers.

The OEM automotive managers having backed themselves into a corner by promising a technology that may take years more to perfect to a safe, reliable, contained costs, recyclable form. They continue to back track and talk of 'safer' lithium technologies, and promise or show vehicles using hand built one-off batteries as cars of the future. That may be true, but they may be of a distant future indeed.

Compromise is a dirty word in the OEM automotive industry, and rather than admit that it is the wisest to go slowly on lithium technology the OEM car makers are acting like national governments; they are simply throwing money at scores of battery developers each of whom has solved the problem.

If it turns out that the fire safety problem of lithium cobalt systems can be solved then, since there is no shortage of lithium, the problem will be where do you get the additional 35,000 tons of cobalt required annually from thereafter to meet Toyota's prediction of 2 million hybrids per year by 2012? 

If lithium cobalt is not the answer and it is another system how long will it take for that new system's long term reliability, safety, cost, and recycling all to be approved and certified? Also, what metals will be needed and where will they come from, never mind how much they may cost by then?

Confusion and short term thinking are the hallmarks of the OEM automotive industry's approach to batteries for power train use. Nothing is going to improve until long term strategies are in place and until that point no one will be able to predict the costs of future power trains or how to manage the risk of supply of the critical minor metals they will need.