The growth of electric vehicles has heightened concerns about China's current dominance in lithium-ion batteries. So as part of the Inflation Reduction Act, the US government is spending money and providing tax credits to companies that are attempting to build up a domestic supply chain. So what are the real challenges to expanding America's battery-making capacity, both in terms of financing and operations? On this episode, we speak with Dr. Chris Burns, the founder and CEO of Novonix, a battery materials company with a focus on synthetic graphite manufacturing. He explains his company's role in the battery supply chain, the economics of domestic manufacturing, and how it employs the government's policy endeavors in its work. This transcript has been lightly edited for clarity.
Key insights from the pod:
What is Novonix? — 5:51
Where does graphite come from? — 6:36
The geographical distribution of natural graphite — 8:53
Graphite availability vs. processing capacity — 10:26
Why China got a head start in graphite processing — 11:37
Environmental considerations — 13:20
The impact of US government efforts to build out batteries — 16:29
Tesla and battery manufacturing — 19:11
What does public money do that private money can’t? — 21:48
Figuring out long-term demand — 24:04
Near-term factors affecting the industry — 26:27
How does price feed into capital availability? — 29:38
Political continuity and industry growth — 32:21
Working with the DOE and the loan application process — 34:50
Response outside the US and China — 37:04
What Novonix is building right now — 38:53
Labor availability and growth — 41:25
Will we ever not need graphite? — 46:52
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Joe Weisenthal (00:20):
Hello and welcome to another episode of the Odd Lots podcast. I'm Joe Weisenthal.
Tracy (00:25):
And I'm Tracy Alloway.
Joe (00:26):
Tracy, I feel like a few years ago there was a lot of talk about, okay, this EV battery boom is coming and we don't have yet the raw materials, the basic commodities necessary to supply all the demand for that.
Tracy (00:41):
Yes. I would say even before a few years ago. Do you remember there was a time, I guess it must have been early 2010s or maybe even before then, when rare earths were all the rage and everyone was talking about like ‘Oh, put your money in rare earth. The clue is in the name. There aren't that many of them. There won't be enough to go around.’
And then that kind of came and went. But then you're right, it resurfaced in recent years because of course we do have this pressure or a desire, depending on your viewpoint, of shifting to electric vehicles, which require batteries, which require a whole bunch of materials to actually make them.
And there was a lot of hand-wringing over whether or not there would be enough of these materials to go around, where the materials actually come from. That was a big point of contention and concern. If you're dependent on one source, i.e. China, to get all the stuff you need for battery making, then what happens when China starts to restrict those materials, which is, fast forward to 2023, exactly what we saw happen.
Joe (01:46):
Yeah, that was a great summary. There's a lot here for us. This story touches on a lot of our themes. Because one of the things we talk about is that there's a sort of the replacement of one set of commodities and oil and gas, etc., with a brand new set of commodities that are also potentially going to be quite scarce.
There's also just a question of what catalyzes investment, because as we know when it comes to raw materials, there is a lot of upfront cost and the future is wildly uncertain in terms of how much we'll need and how much demand there will be. So we've talked with Jigar Shah, for example, of the Department of Energy's Loan Programs Office multiple times on the podcast about why, for example, when it comes to sort of new energy investment, traditional private sector financing vehicles maybe aren't up to the task completely, why there are other market mechanisms or non-market mechanisms that might be necessary, uncertainty about demand supply, what is even the future of battery technology, right?
Because there are competing visions of what the batteries that will power EVs will look like, and whether it's solid state or lithium ion or something totally different. So how do you catalyze an investment with so much upfront cost, so much uncertain return at a time of a highly uncertain future?
Tracy (03:07):
I find that an absolutely fascinating question because, again, these are things that a lot of people would argue we actually need, but are they being naturally incentivized by the market to actually have more of them? Or do they come through government initiatives such as the Department of Energy and the Loan Programs Office? Or do they maybe come from the companies themselves?
You know, we've seen Tesla move to build up its own supply of the things it needs for batteries. So there are all these interesting questions of how this stuff actually gets financed. And also just to take a step back, I have a bunch of questions about what this stuff actually is, because I see I see words like ‘graphite,’ and ‘manganese’ and things like that thrown around, ‘germanium,’ and like, okay, I get that they're used for making batteries, but I don't really know the specifics. So I would love to know more about that.
Joe (04:00):
One of my worst moments when I was a TV host several years ago was when I was interviewing one of our reporters here at Bloomberg and I just blurted out, like she was talking about cobalt prices, and I was like, ‘What is cobalt?’ And I felt so bad because like, I'm making your reporter answer this basic question, but she nailed it.
Tracy (04:19):
She told you like the elements..?
Joe (04:21):
Yeah, she nailed it, but I felt so bad. Because I didn't mean it as like a gotcha question. I was like, ‘I know what is oil, but what is cobalt?’ Anyway the other thing to mention too, you know, you mention how, okay, there was all this talk about do we have enough? Right now, there's a double whammy, I feel like in this space because actually a lot of spot prices for some of these alternative commodities have actually plunged in the last year. Also, there's a big theme that EV sales maybe aren't taking off quite as fast as expected, or at least for the legacy automakers still figuring out their groove. Maybe hybrids are going to be the thing for the moment
And then finally, higher interest rates and the effect that that has on supply. And that's a big theme we talk about, which is, okay, in theory we want more supply of all the things to make goods cheap, but if higher interest rates impair investment in CapEx-heavy things, what does that do to supply? So I think, like we said, there is just a lot of meat here for us to chew on, so to speak.
Tracy (05:17):
Lots of questions, not least among them, what is graphite and rare earth minerals, anyway.
Joe (05:23):
Let's dive right into it. Someone who is a perfect guest, involved in this space and can hopefully answer every one of our questions due to first hand experience. We're going to be speaking with Dr. Chris Burns, he's the founder and CEO of Novonix, a battery materials and technology company. Previously, he spent two years at Tesla, so someone right in the thick of it. Chris, thank you so much for coming on Odd Lots.
Chris Burns (05:45):
Thanks for having me. I'm really excited to dive into these topics.
Joe (05:49):
Well, why don't we start, what is Novonix?
Chris (05:51):
So Novonix is a battery materials and technology company and we've been focused for 10 years on longer life battery technologies and now on this movement to localize the supply chain. And we're going to talk about graphite and why that was one of these critical materials and minerals that we need to electrify vehicles, energy storage systems, and why we needed to develop the right types of technology to do it here in the US.
Tracy (06:15):
So I'm going to start with a really basic question then, which is where does graphite come from? I feel like we're in a high school science class or something. And you also make synthetic graphite, so I understand where that comes from, but what is the process for actually making synthetic graphite and what is the role in the battery supply chain?
Chris (06:36):
Sure. So, let's back up and say where is graphite used, right? So in the lithium ion battery you have a positive electrode and a negative electrode. And [in] the positive electrode are these materials like nickel, manganese, cobalt, NMC, lithium ion phosphate, LFP, these types of terms you may hear. And the negative side of the battery is almost always graphite. So it represents about 40% of the volume of any battery is actually graphite.
And it's where the lithium ions actually go and get stored to store the energy and then get released during discharge. And so it has been a foundational part of lithium ion batteries since the early nineties when they started. And you can use graphite in two forms in lithium ion batteries – natural graphite and synthetic graphite. And so natural graphite, to answer your question, comes from the earth. It is carbon that is formed into perfectly layered graphite that has entered that state because of being under time and pressure in the earth's crust.
Tracy (07:31):
So it's the same as the stuff that you would get in a pencil, almost like coal. In fact, I think some of it comes from coal, right? Or you can harvest it from coal?
Chris (07:39):
So on the synthetic side you can make graphite from different carbon rich precursor materials. So on the natural graphite side, you dig it out of the ground, you change its size, its shape, and then you purify it typically through heavy acids and you can put a surface coating on it, and then it's ready to go into a battery. And on the synthetic graphite side, it's a very similar process, but instead of starting with graphite, we actually start with other carbon rich precursor materials.
And one of the most common is petroleum coke. Another is coal coke that's used in China. And so you take these materials, you change their size, their shape, and instead of purifying them, we actually heat them to really high temperatures, about 3,000 degrees celsius, and it changes the atomic structure into graphite, and then it's ready to go into a battery. So we develop technology really focused on that high temperature process.
Joe (08:30):
For natural graphite, how is it distributed around the earth? And I imagine there's a difference between how it's sort of geologically distributed versus in practice where it's actually extracted. Because I seem to recall from the old days in rare earths, there's always people like, ‘Well, they're not actually rare earth, they're just only some places where they allow it, or they have much mining due to pollution,’ etc. So where is the graphite and where do we get our graphite?
Chris (08:53):
So for the battery industry, you know, specifically a lot of the graphite mining opportunities are in Australia, in Africa, in China. And of course there's a lot of projects looking to be developed in Canada, right? Canada's going to be a great partner to North Americans electrification here because of the resources they have. So there's a lot of active mining of graphite today, really all over the world.
But I think something you guys talked about in the intro is where are we dependent on getting the materials? But it's equally important to talk about where we are dependent on processing those materials? Because we talked about the word ‘commodity,’ right? But none of these, by the time they're ready to sell to a battery maker, an LG, a Panasonic, are commodities anymore. They are specialty materials made through a spec.
And right now, even if let's say natural graphite can be sourced more globally, all of the processing is in China. And that's our bottleneck. And that's what we need to change. Not just where we get the raw materials, but where we upgrade those raw materials.
Tracy (09:51):
Oh, this is interesting. So this makes a lot of sense because you see these headlines like billions of metric tons of rare earths or whatever discovered in, I think there was one in Turkey recently, and in Sweden and in Wyoming, which feeds into my new get rich very slowly strategy of buying land out west and hoping that it just comes with a bunch of graphite. But anyway, so supply is not the issue here. It's the processing capacity. Because we are making these new discoveries, I don't want to say on a regular basis, but there have been quite a few.
Chris (10:26):
Yeah. I think that's a critical distinction that really where we focus, we're going to have an abundance of materials. And I think two things about that, we will continue to discover new resources, right? Whether it's lithium, whether it's nickel, whether it's graphite.
And then we also will have recycling start to play a significant role in bringing some of these materials back into the supply chain. You know, over the coming years. So when you take the long-term vision, the cyclical economy for lithium ion batteries, when you think about what mining is, you're trying to harvest these minerals from very low concentrations, right? 2 to 15% of what you dig out of the ground is graphite in a mining project. Nickel is very much lower than that. But when you harvest them from a battery, you already have the elements you want in concentration. So it's very efficient. But until we start having a lot of those batteries reach end of life, it can't feed a huge amount of the supply chain.
Tracy (11:21):
Why has China seemingly developed the processing capacity before a lot of other countries? They seem to have a headstart in this. Was this just the nature of their proximity to the actual supply and the fact that they were willing to, at least for a while, dig it out of the ground?
Chris (11:37):
Well, I think it's less about the materials and more about the processing. Because for example, China on the graphite side has started signing offtakes to buy all of this natural graphite from projects that are outside of China. Back to the financing discussion, people need offtake, right? And so if China's the only place you can get your offtake, then...
Joe (11:55):
Does offtake, sorry, does that just mean sales?
Chris (11:56):
Supply agreements? Yeah.
Joe (11:58):
But in other words, like a committed order book. You know that you have an end buyer.
Chris (12:01):
Exactly, right. And so, especially for large capital mining projects, you need to have these. And if China's the only market that's buying, then you go to China and you sell your products. But then the question is really not how did they develop the resources, but how did they develop the process technology?
And I think this really goes to, you know, kind of unfortunately, one of these classic stories of offshoring technology. The key lithium-ion battery materials that I just talked about, NMC ,was invented and patented here between labs at Dalhousie where I did my PhD and, and Argonne National Lab. Lithium-ion phosphate. Developed here, right?
But when it came to starting to commercialize and scale batteries, we said, ‘it's too expensive to make these materials in the US. Let's make them in China.’ And then very quickly China started to develop more and more technology, more and more processing around all of those materials.
Tracy (12:59):
So I take the point about expenses and offshoring, but how much of it, if any, was environmental concerns? Because you mentioned giving materials an acid bath to purify them. I don't necessarily think of that as a particularly environmentally-friendly activity. So I just wonder if that played into that calculation at all?
Chris (13:20):
So I think when we started offshoring technology, it was to drive the cost down. And then when the end market continued to put pressure on costs, then that allowed for, let's say, shortcuts to be taken in jurisdictions like China, where environmental controls are not as rigorous. So there are concerns about how they handle acid waste streams in our sector.
I talked about this very high temperature process. So there are concerns about how they build their plants to do this today in terms of the emissions that come from those sites, and the power intensity of those sites. And so this idea of a clean car and a dirty battery became very topical kind of five years ago.
And this is one of our big challenges as well. We want to reshore the supply chain, which means we need to do it with the right technology, but that also comes at a cost. And so back to financeability and back to government incentives and all of these programs, we're trying to balance a lot of pieces of the puzzle here in order to develop not just materials independence, but that process technology independence.
Joe (14:20):
I want to ask one more question about China's dominance in refining aspect. When you say like, ‘Okay, it was cheaper to do it in China,’ and I think of being able to do something cheaper in China, like your mind goes first to labor costs, etc. How much is it labor and how much at this point is it about lower cost labor? Like when you think about the various costs that go into refining, how much is labor, but how much is also at this point just scale and expertise and learning by doing? Because it seems like, yes, labor is probably cheaper in many aspects in China, but also like once you've been doing something for a long time, you just get good at it in a way that someone starting from a standing start might not expect to be good at it for years, even if you could somehow hold labor cost constant.
Chris (15:08):
I think that's exactly right. You know, it went there to have some benefits in costs that you see in labor, you see in capital intensity, things like this that are, let's say, more obvious. But that was 20 years ago, right? And over those past 20 years, now they've developed scale, efficiency.
And I mean, they've had subsidies throughout that way to incentivize their industry to become the dominant force here, right? And so that's the balance between why it went, but then also now why it's challenging to compete. Because they didn't just take technology, you know, copy US technology or anything like this. They've now advanced that technology to be the leaders in the world.
Joe (15:59):
Okay. Let's talk about the effort to bring more of that capacity to the US. So what is happening? You know, I know when the Inflation Reduction Act went through, one of the big things, Senator Joe Manchin said was ‘I'm very concerned about our dependence on raw materials from China.’ So that became an incentive. From your view of the world, what has the Inflation Reduction Act, if any, what is the effect of that in terms of catalyzing domestic capacity?
Chris (16:29):
I think it's critical. And you know, we started our anode materials group in 2017. A little before all of this wave. Because I had just left Tesla where this problem statement became pretty obvious, right? This idea of localization, this dependence on China and graphite specifically, was an area that I was focused on.
And so we had been saying for a long time, the government has to play a role here because we have challenges competing dollar for dollar with China, for all of those reasons you just talked about. Whether it's their lower cost structure or now their advancement in technology. And so the government has now come in and when you look at, and we'll take graphite as this specific example, the policies in place, we have the Inflation Reduction Act where we can qualify for things like 45X advanced manufacturing production tax credit...
Joe (17:15):
But what does that say? Spell that out specifically what that means.
Chris (17:17):
So that is a 10% of our cost of goods back to us in tax credits on an ongoing basis. Or we can apply and potentially be eligible for 48C, and 48C is 30% of your capital investment on a clean energy project back in tax credits. So these are programs that are worth hundreds or hundreds of millions of dollars in tax credits.
We were, of course, the recipient of a hundred million dollars grant under the infrastructure law package. That's a great thing. We have an application with the Loan Programs Office, and graphite has been identified as a critical mineral in all of the policies. And it also is in the section 301 tariffs, the 25% tariff from China. There's an exemption on that tariff right now.
But when you say, ‘Is the government playing their role?’ Look at those policies, right? They're doing what they can, but we need to make sure that all those policies are harmonized, and really going to — something you talked about in the intro — catalyze not just the development of technology, but the investment in scale. That's the big challenge that we face right now.
Tracy (18:17):
So speaking of investment, I have at least two questions specifically related to Tesla. So number one, when you say you worked at Tesla, how many people ask you if you know Elon Musk? Notice that I did not in fact ask that question, but I rephrased it slightly.
And then secondly, why not just develop this particular business within Tesla? I mean, we have seen Tesla start to go this, well, maybe vertical integration is too strong a word, but it is striking deals with specific suppliers for the materials it needs for batteries. So clearly this is of interest and concern for them. Why not just develop the company within the auspices of Tesla? And maybe this gets a little bit to the idea of like natural market forces and investment versus those that are incentivized by the government.
Chris (19:11):
Sure. So, no, I don't know Elon and almost everyone asks, but I think when you think about Tesla's strategy, I think there's two things. You know, the first kind of obvious statement is you can't do everything right?
Joe (19:26):
I don't know, Elon seems to make a pretty good run for spaceships, Neuralinks, tunnels, satellites.
Tracy (19:34):
That flame thrower.
Joe (19:35):
The flame thrower. He’s making a good run of it. Twitter. Anyway, keep going.
Chris (19:38):
Well, that's the house of Elon, not the house of Tesla.
Joe (19:41):
True.
Chris (19:41):
So, but again there's so much investment that needs to happen in every vertical of the supply chain. Lithium, nickel, graphite, you know, electrolyte development, separator materials, every single piece. And so you, you kind of can't fight every war, right?
And so when you do look at what Tesla has done, and what the industry is focused on, what was the first metal that everybody got critically focused on? Lithium. Then everybody started talking about nickel. Graphite has forever been kind of the forgotten critical mineral, right? And it's because actually graphite is what ‘prevents’ in many ways, air quotes there, the battery from being more energy dense, from holding more energy and lasting longer on a single charge. But it's also the only material that can hold those lithium ions and give them back thousands of times like we need for these long life applications like vehicles and energy storage.
So you talked a little bit about solid state batteries, right? And you hear these terms, ‘silicon anodes.’ So people are always hoping, let's say, that new materials are going to displace our reliance on graphite and open up an opportunity to have higher energy density batteries.
But that's not really the case. And we certainly see now that energy density isn't necessarily the problem to solve for for vehicles, right? Range. You know, Tesla built 400 mile cars and Lucid has a 500 plus mile car, but a lot of people are going to lower energy density batteries. They want the right range and the right cost. And that's why graphite is going to be so important. But that meant it got overlooked for a lot of years.
Joe (21:13):
You have a hundred million dollars grant from the Department of Energy. You mentioned that you currently have an application for the Loan Programs Office. We mentioned in the beginning, we've interviewed the head of that office multiple times. We've heard from Jigar Shah, at the Loan Programs Office, about why public money is important in this area, why it solves a problem or fills a hole that the private sector isn't ideal for. How would you describe it from your perspective? What is the sort of, maybe market failure is the term, etc., but what does the public money solve that private money can't in this view?
Chris (21:48):
I don't think it's that private money can't solve [it], but it supports the investment economics. I mean, it's that simple. We have a problem statement where we are trying to compete with China on costs. Now there will be premiums relative to China costs to localized supply, whether it's because they're more environmentally friendly or the incentive programs available under IRA.
But we do have to be competitive on a cost basis. Because people don't want to see the cost of electric vehicles go up. They want to see it come down, right? But we also want to ensure the supply chain. So there's a natural tension in that dynamic. So the injection of government capital to lower our cost of capital, whether through grants or loans, helps improve the economics when we need to bring private sector investment into these projects. So it's a critical role that has to be played, but it's not the single solution, right?
The government can't pay for all the plants to be built for all the supply chain projects. And I think they're doing a great job, frankly, in balancing how to get public capital out the door and into the hands of companies while doing it in a diligent manner. Of course, we've seen a lot of hype in batteries over many cycles, right? From the early 2010s where there was a big kind of VC hype cycle, to the SPAC market, and a lot of companies coming public on these growth aspirations. So they have to be responsible with taxpayer dollars, but they also need to get it done and get it working. And that's the thing Jigar really focuses on, is he wants to see these projects built, right?
Tracy (23:13):
So one criticism of this sort of government-led investment, or area of concern, might be a polite way of putting it, but it is the idea that, okay, you, you can lend money to finance these things. You can pour billions of dollars into the creation of this capacity, but if at the end of that you don't have a dependable customer for what's being produced, you haven't really solved your problem, at least in the long term. What are you seeing in terms of the government on, I guess, the demand side? Is there anything they can do there? Can they put in place like permanent offtake agreements, or is that going too far? Or how do you balance that actual side of the equation – away from the initial investment – the ongoing consumption demand?
Chris (24:04):
Yeah, that's a really good question because you do see jurisdictions that have governments play a role in offtake, right?
Tracy (24:11):
China.
Chris (24:12):
Right. And so these say ‘You will make this product and I promise it will be bought and therefore you can go get investment.’ There's a huge challenge with that, of course, which is these materials are not actually commodities. And so for us, for example, we're developing materials for a lot of the leading cell manufacturers. We just signed the supply agreement with Panasonic last week.
Tracy (24:38):
That goes to Tesla ultimately, right?
Chris (24:40):
That's one of their EV partners. Yeah, their biggest EV partner. But the material that we'll make for Panasonic will look different than the material that we make for, let's say, LG or Samsung or CorePower or any of the other people that we work with. And so it's really hard for the government to come in and just say ‘Hey, we'll buy it because graphite is graphite,’ because that sentence doesn't hold up.
Joe (25:00):
You mentioned that, you know, there's numerous like battery hype cycles over the years and I always think this can't be real, but in 1883, there's a famous Thomas Edison quote: “Tthe storage battery is, in my opinion, a catch penny, a sensation, a mechanism for swindling the public by stock companies.” So literally like 140 or 141 years ago, Thomas Edison was warning that battery companies were all frauds and it was hype.
And I believe over the years, many people have lost a lot of money on the next amazing battery. Okay, so you mentioned the concerns about the end buyers, but right now, and we mentioned it in the intro, there's a number of near term sources of anxiety, right? Maybe EVs aren't going to sell as well in 2024 as people thought they would in 2022. There seem to be still some concerns, still some issues with commercialization, concerns about charging networks, and maybe they're not going to quite take off as fast.
There is the recent plunge in spot prices for a number of important commodities, although I don't know what's happening in graphite, maybe you'll tell me. And then there are other sources of concern. You mentioned some people believe that we'll be able to do it without graphite and maybe we don't really know what the dominant form of technology is going to be. And then there's higher interest rates, and higher interest rates affect investment decisions. Plunging spot, concerns about demand, higher interest rates. Talk to us about, yeah, maybe long-term is all batteries, but what these short-term things do to the investment impulse?
Chris (26:27):
Sure, I'll try to hit all five of them there, but no, you're exactly right. All of those things play off of each other, right? And yes, are we potentially going to miss the adoption curve numbers for 2024 that were forecasted in 2022? Well, yes, we probably are. Does it mean that this market isn't growing with double digit growth rates for the course of this decade? No, it doesn't because it will see that type of growth.
And so in my mind, all of these come back to the customer and the product, right? Because in order to build the investment strategy, you have to show what we've been talking about – these supply agreements, who's going to buy these products and on what terms, right? Because for example, we need to rebuild the way some of these materials are contracted in North America.
So you talked about lithium and nickel, these spot prices that have come down, those only have some impact on the actual long term agreements that are in place for these materials because many of those have caps and collars that kind of control the adjustments because these are traded metals. So they can have influence from speculation in the market. Not actually just basic supply demand dynamics, right?
Graphite's not a traded metal. And therefore it's really contracted in China, battery graphite, on a quarterly basis or an annual basis at longest. So we're having to rethink how we do commercial contracts so they're financeable. And then it's back to the customer and longevity of technology. So LG invested in us last year, LG Energy Solution, signed a joint development agreement that essentially marches out the qualification schedule for their product and then it's intended to trigger an offtake with a 10-year term, riht?
So you want to talk about ‘Is this technology here?’, are the big companies, the LGs, the Panasonics of the world, they need these materials for the long haul, but if those don't translate to agreements, firm offtakes for us, then the financing is hard. And this is why the government can't just throw money to solve building production capacity. Because before you can build production capacity, you have to develop the tech and the products. And those, unfortunately, take a long time to develop and qualify in this sector. And you've seen that through these hype cycles. And I love that Edison quote.
Tracy (28:42):
How much does price feed into the financing side? So the idea that at the moment there is a limit on processing capacity, there is some scarcity. So we can have prices be relatively high and that might be attractive for private capital. But on the other hand, the more you build out processing capacity, the more efficient you get at this, you would expect prices to come down.
Although, I'm also thinking out loud here, but Joe, do you remember the conversation we had with Bob Brackett at Bernstein? This conversation is actually reminding me a lot of that discussion. But he mentioned this thing called Jevons Paradox, which is that the more efficient you get at producing a commodity, the more you end up using it. So the market kind of grows along with your capacity. So that's a very long-winded way of saying, I'm curious about how price is actually interacting with investment at the moment.
Chris (29:38):
Well the price has to underpin the investment, right? You have to have to be able to demonstrate the returns in these projects. And that's why it's taking time to build structures that allow us price mechanisms for security over the long term. Because when you think about this competing dynamic of, okay, there's scarcity and material, so cost can go up, there's efficiency and production and scale, so cost can come down and you know, what you just talked about there – it is certainly the case as you use more of a commodity and lithium-ion batteries is a great example. They used to be over a thousand dollars a kilowatt hour. Now they're a hundred dollars on the order of per kilowatt hour, because we've gotten more and more adoption and now that's opened up new markets like vehicles and energy storage systems, which is going to drive more and more adoption.
But I think it goes back to how to balance that paradox with the customers. Because, let's take for example, this proposed 10-year term with LG. Neither of us want to be out of market, right, in 2035 where we're pricing graphite, but what's the market price of graphite going to be in 2035?
So the way we think about this is, when you can develop, improve your process technology and your products, these are not simple customer transactions, these are long-term partnerships. We need to work with these companies, if their goal is to have localized supply, they know they need to be in partnership with us. Not simply look at us like an auto supply chain where there's 10 companies and you can drive eight of them bankrupt as long as you keep two alive, right?
Joe (31:20):
Let me ask you about another source of uncertainty. You know, I was listing all these things about near-term EV takeoff and rates and all this stuff. In China, you could have the government announce a five year plan and then five years later it's still Xi Jinping in office and he can announce a continuation of the five year plan and probably five years later he'll still be in office and it can continue.
This is not a political question, but the US, obviously political system, does not work with that sort of consistency. And it is not entirely implausible that a year from now we have a different president who has a different view and different energy goals. The loan program itself has expanded like a puffer fish under Biden. It was sort of this backwater for many years because of the Solyndra problems. And then now it's gigantic, but it's certainly conceivable that its own lending capacity could be curtailed dramatically again. How does policy uncertainty over the medium term affect investment decisions in the short term?
Chris (32:21):
Yeah, uncertainty is the enemy of investment, right? And so it does put questions on the table of how reliant you are on these potential government programs. So for example, we talked a little bit earlier about some of the tax credit opportunities, like 45X. If the ability to get 10% of your cost back is the difference between you being an investable project and a non investable project, then an investor may sit on the sidelines and wait to make sure that that program is not going to be altered.
But I think when you take a step back from that level of detail, I think regardless of the upcoming election, the long term goal has much similarity between the parties, right? We want to reduce our reliance on China. Maybe there'll be a difference on whether the electric vehicles get the incentives that they do now specifically.
But when you think about the things that have happened in this sector, the Section 301 tariffs were put in to price the Chinese products coming to the US differently, to incentivize US production under Biden. You know, we went into a capital investment cycle of stimulus spending. So I think we unfortunately need to take a view on this industry that's outside of the political cycle, but that's challenging. But I think there's a lot of synergy in the mission between the parties. There's just a difference in the toolbox that they choose to use to get the work done.
Tracy (33:47):
I want to, I guess, fact check one thing, or get your view on this, but whenever we talk to Jigar Shah over at the DOE, he always talks about how when it comes to private investment of new and wacky technology, in some respects, there is a reluctance on the part of banks, for instance, to gamble on this or to take a big risk on technology that they're probably not experts in.
Whereas something like the Loan Programs Office, they have a bunch of people with a lot of scientific background, a lot of experience, who I guess have the expertise to be evaluating whether or not these things are realistic or promising. Has that been your experience? Or what is the difference between working with something like the DOE, the Loan Programs Office, versus working with private investors? Like do you get different types of questions? Do they show different types of concerns or interests when they talk to you?
Chris (34:50):
I think at the end of the day, the LPO is still a commercial financing vehicle, right? And so the diligence process looks similar to that of the banks, but they do bring in a lot of great experts to make sure they are comfortable with the technology, the customers, the engineering reports, the site plans, all of those level of details. I think the fundamental difference is kind of simplistic. They are not in it simply for the return profiles that the banks or private capital are looking for, which are much higher.
They're in it because they have, let's say, kind of mandates and strategies around certain sectors that they want to see be successful. Doesn't mean that they can go put a loan behind any project because they have to go through that commercial diligence. But their goal is to bring that, let's say, first slug of capital in at a lower cost of capital and de-risk it for the other private forms of capital to come in alongside of it in the project.
Joe (35:45):
Out of curiosity, what does the application look like? I don't know, in my mind, I imagine a college application...
Tracy (35:51):
You have to write a personal essay, ‘What graphic graphite means to me.’
Joe (35:55):
But what is that in practice? What does it look like, applying for one of these loans?
Chris (36:00):
It's really just an enormous process. It's an undertaking from the pre-application phase, working with the team to understand the project, the site, the engineering. The pre-diligence on what the project can bring. And then really where things ramp up is in the diligence phase. Before you get to this kind of infamous conditional commitment where they put terms in front of you, this is when they start bringing in all the external advisors and going through all of the engineering reports, customer offtake. And so yes, there's the personal essay component of course, but it's more commercial...
Joe (36:34):
Wait, is there? I was like ‘oh...’
Chris (36:35):
But it's more commercial diligence of, ‘Let's see the data room, and let's understand every inch and every corner of this project so we know what we're getting involved in.’ And the team does a great job to do that.
Tracy (36:46):
So we've been very focused on the US market for obvious reasons. I know we talked about China initially, but what are we seeing from other countries in terms of response? Are other countries trying to build out the same capacity or similar capacities that the US seems to be doing?
Chris (37:04):
I think you're seeing this idea of shifting all of our, let's talk at the cell manufacturing level first – you're seeing the idea that we need to move our cell manufacturing globally outside of just China, right? And whether that's expansion in countries like Korea and Japan, or also into Europe for example, similar to the US, but I think the reality is right now we're in a time where, again, these are all capital heavy investment programs, so people have to go where the incentives are strong.
And so for cell manufacturing specifically, the 45X credits offer a huge amount of money per kilowatt hour relative to the cost structure of the battery if you are building in the United States. So if you had to make a decision to build your next multi-billion dollar plant in the US or in Germany, let's say, or somewhere in Europe, that incentive is a big difference between the economics of those plants.
And so the policies under Biden and the investment and the incentive opportunities are pulling a lot of that investment to focus on the US first. But I think we need to see this trend continue in other jurisdictions because everyone faces the same simple problem statement of this energy transition. And the battery manufacturing and supply chain still has this huge reliance on China. And that has concerns no matter what jurisdiction you are, simply because you don't want to be so reliant on a single source and people are so sensitive to it after watching what happened with chips.
Joe (38:29):
So actually, I realize we haven't actually asked this question, but what are you building right now specifically? And can you sort of give an overview or a simple penciled out version of what the costs are of your investment? What kind of refining plants do you have or are planning to build? And I don't know, do this sort of like, we're at a bar and you're explaining it to me on a napkin. What are you building right now?
Chris (38:53):
Sure. So we have a 400,000 square foot mass production site in Chattanooga, Tennessee. We bought it, it was a former GE facility where they were building nuclear turbines. So in that facility we will bring in petroleum coke, by rail or by barge or by truck. And we'll go through what we talked about earlier.
We'll change its size, its shape, we'll grind it up, we'll change its structure, we'll heat it up in our proprietary high temperature furnace systems and then we'll bag it and ship it off to folks like Panasonic. And so it is a manufacturing plant with heavy equipment inside to process these powders. And so graphite is a fine powder, like 20 micron particle size. So very small. And at the end of the day, we're selling these materials, in the price range of seven to $10,000 per ton.
So you hear about some of the spot prices in lithium and nickel and tens of thousands of dollars per ton. So these materials sell on the order of seven to 10,000 per ton. We can make them on the order of six to eight depending on the cost and the specification targets. Like I said, everybody wants a different material, but this first plant is going to cost us another three or $400 million to build out. And that's plant number one for 20,000 tons.
And to put things in perspective, about a thousand tons of graphite produces about a gigawatt hour of batteries. So you start hearing about 40 gigawatt hour plants, if those use all graphite, they need about 40,000 tons. So LG has announced 200 gigawatt hours to build in the US, Panasonic has announced 200 gigawatt hours to build in the US. Tesla has talked about going to terawatt hours of scale. So these are million plus tons of demand and it's taking us this amount of time, this amount of capital, to get the first 20,000 tons out of the gate. And that's the scale challenge.
It's one of the reasons you do see so many former Tesla people at the helm of different companies in the supply chain now, because back in, let's say the 2012 to 2015, ‘16, ‘17 era, as Reno was coming online, Tesla was one of the only places you could be in the US that really understood that scale issue. And therefore everybody got to look at some little problem statement, quote unquote, little problem statement, like graphite and it's a huge business opportunity. And so people went out and chased all of these different problems because, kind of to your question earlier, Tesla couldn't play whack-a-mole with that many.
Tracy (41:25):
Just in terms of scale and capacity, I'm kind of curious, hearing you lay out the description of the plant, is labor a constricting factor for you at all, or for other processors? Because I take the point about, this isn't necessarily a commodity in the traditional sense, but when we're talking about using coke to heat it up and process it and do things like that, it sounds a lot like a sort of heavy, difficult industry.
But on the other hand, we are talking about making something that is quite sophisticated and is intended to help with the clean energy transition, and is obviously very closely linked to battery technology and things like that. What's the recruitment process like for you right now and what's the pitch to people for working in this particular industry?
Chris (42:15):
So I think there's phases of the recruitment challenge, right? The first is in the technology development and then in the scale, and then in the ops. Because again, when you think about this idea of onshoring not just production capacity, but technology development, there are not people in this country who have run battery graphite plants. They only really exist in China.
So you can't just go out and hire people who have done this before, right? So you have to home grow a lot of that IP, a lot of that knowledge. And that takes time. And that's why again, people are chasing the idea that the government's going to give me a hundred million dollars and I can go build a plant. But that's only a solution to one tiny little sliver of the problem statement of technology development.
But then now we're into that scale out phase where we need more engineering resources and we can tap on a lot of great industries that we have built in this country and kind of redeploy assets. And then in operations, you know, we do see labor restrictions, if you look across the market. And it all comes back to what these growth curves are. But I think there's a lot of opportunity to re-skill labor from other industries into these, because at the end of the day, there is a huge operating and strong labor base in places like Tennessee where we operate.
Tracy (43:27):
What industries do you draw on in terms of engineering and then also like production, where are the overlaps?
Joe (43:29)
I was just going to, we had the same question.
Chris (43:35):
Sure. So, you know, specialty chemicals are a big one. Because we are talking about, how are we going to optimize large scale processing of specialized material with very exact parameters, right? So it's really incredible when you think about it. We start with, you know, chunks of petroleum coke that could be on the order of sizes of marbles, right? And we have to, at the end of the day, know how to exactly control them down to the micron scale, and their size and their shape and their structure and how they stick together and their perfect surface coating and all of these things.
But these types of material science problems have been solved in other industries for other applications. So specialty chemicals, certainly automotive, and automotive when we talk about the manufacturing side, retooling and re-skilling our workforce to these clean energy projects. And of course we do look at oil and gas and the refining industry as well for running large scale operations. So Phillips 66 is our largest shareholder. And you know, we look at opportunities to say, are there any displaced workers in the future of those industries that we need to re-skill.
Joe (44:40):
Yeah, I was actually going to ask about that Phillips 66 relationship. Are there like either internal know-how from the legacy sort of oil and gas industry that does get or can sort of with some work be reapplied to some of these areas?
Chris (44:55):
Yeah, absolutely. And I mean their expertise has kind of been built to a certain level. They make these very premium quality coke products in the UK and here in the US and they supply some of those into China for the battery market. But then again, they want to work with specialized partners to help take those further.
Joe (45:15):
One last thing from me, I kind of mentioned it before, but maybe it got lost in one of my rambling questions. The interest rate environment, does it affect you? Do you feel it? Does it change how things pencil out, etc.?
Chris (45:28):
Yeah, it just changes the math, right? And it changes the calculus that investors are looking for in the private capital and the returns. And so again, it comes back to, we need to be able to have our customers and our partners understand that we need offtakes that are going to generate the return profile that investors need, given still the risk – supply chain risk, government incentive risk, scale out risk, ops risk, that these projects still have. And so that just means that we need to ensure the contracting structures meet the expectations of investors, not in a 0% interest rate, but in our current interest rate environment.
Tracy (46:04):
I have just one more question and I'm thinking how to phrase it, because maybe it's not that applicable to graphite per se, the forgotten commodity as you put it earlier. But people talk a lot about technology being superseded, especially in battery production. So the idea of solid state batteries and things like that. Is there a world in which we no longer need graphite to the extent that we currently need it? And if so, is that something that factors into your business plans currently? I guess what I'm trying to ask is everyone who's in the battery making business in one way or another, are they all trying to prepare for the next big technological development? Or is everyone trying to develop expertise in what is needed right now?
Chris (46:52):
Well, the kind of cheating answer is both, right? You know, they need to make the materials that we need today and they also need to have a roadmap so that over 10, 20 years, the leaders in this industry, the Panasonics, the LGS of the world, are still the leaders in this industry, right? And they don't get passed by new technology.
But to go back to the question of ‘Will we never need graphite?’ No. We will always need graphite because it is the only anode chemistry that can last thousands of cycles. And I think a key concept that we started focusing on, and it's relevant for vehicles, but it becomes even more relevant for grid energy storage, is the idea of not just dollars per kilowatt hour, right? How expensive is my battery to buy, but dollars per kilowatt hour per life or per cycle. Because why would I pay 10% less for a battery that only lasts half as long if I need it to last longer.
And so that that differentiation in anode chemistry, to have the long cycle life, is why there will always be applications that require graphite. And I think what we're going to see is new technologies are going to open new doors. So you're going to see things like solid state batteries go into military, go into aviation, go into fields that, because graphite is a little bulky relative to these other materials and these other chemistries, they are not as well suited for.
So you're going to see new doors opened by new technology more than you're going to see it replace old technology. And I think again, when you look at the first Sony cell commercialized in ‘91, it was a lithium cobalt oxide cathode and a carbon-based graph anode, right? And today most of the batteries are nickel, manganese, cobalt, so just a little variant on that, and graphite. So it's been 30 years and we haven't really seen a substantial change. We've just made all of those materials that much better. So they're cheaper, they last longer, they store a little more. And we've gotten it to now support these new industries.
Joe (48:47):
Dr. Chris Burns, CEO of Novonix, thank you so much for coming on Odd Lots.
Chris (48:51):
Great. Thank you guys so much for having me.
Joe (48:53):
That was great. That was a lot of fun.
Tracy (48:54):
That was great. You made graphite interesting. But on a serious note, actually, I think I understand how batteries work now, so that's a plus.
Joe (49:02):
Yeah, that was great.
Tracy (49:04):
And a minus. Boom! Sorry.
Joe (49:19):
Tracy, I thought that was very helpful. And you know, we talk a lot about these topics in sort of the abstract, and to hear someone in the space literally having to build this big facility of hundreds of millions of dollars in Tennessee and look for offtake agreements, look for sales and think about how they're going to get the core commodities in, was extremely helpful for certainly mine, but I suspect both of our understanding of the space.
Tracy (49:44):
Absolutely. It's sort of solidified a lot of stuff that I guess we've spoken about kind of theoretically in conversations with people like Jigar Shah. And I don't mean to suggest he only speaks theoretically, like he gives some really great examples, but it's interesting to hear it from the other perspective. From a company that is in fact on the receiving end of some of this public support and what it actually does for them and how it gets deployed. Deployed being very much the trademark of the DOE.
Joe (50:16):
Yeah, no, totally. Exactly. And you know, there are many interesting things there too. You know, it is interesting as he noted that 10 years ago or seven or eight years ago, it probably was only people at Tesla and a few other places that sort of appreciated the raw math that we're all talking about these days of like, ‘Okay, like if we want to have a domestic battery industry, how much scale are we going to need, etc.’ Probably a lot of people haven't been thinking about it that long. So it's interesting, just the idea that like, look, at some point people are going to start getting anxious about how much we rely on China for some of this stuff. And so that wasn't codified into law until 2022, but obviously people were talking about it, and betting that there would be a sort of nearshoring, or you know, domestic reshoring of batteries for several years before that.
Tracy (51:05):
Well, this is the other thing I was thinking about, which is that we're very used to talking about the US cutting off strategically important technology for China. But of course part of the China response to that happening has been to cut off exports of rare earths. And in the context of China, we're always talking about the potential for that to backfire. You know, like, okay, China doesn't have access to advanced semiconductor technology anymore, or it has less of it than it used to, but maybe they'll just develop their own capacity faster.
And I kind of think this is almost the opposite side of it, where, okay, China has cut off the US more or less, or diminished their exports from these vital materials that are needed for the clean energy transition for batteries and EVs. Does it end up speeding up the US project to build out capacity? It feels like that's kind of the direction that it's heading. And especially if supply isn't actually the limiting factor, as Chris was pointing out, but if it's actually the processing capacity.
Joe (52:10):
Yeah, it raises a lot of interesting questions. Your question about hiring talent was very interesting because again if you don't have the industry, you don't have the people that know how to build these places. And it's a good reminder that manufacturing, maybe the initial impulse to offshore manufacturing was sort of cheap manpower, right? How much does this person get paid per hour? But at this point...
Tracy (52:35):
And regulatory shortcuts.
Joe (52:36):
And regulatory shortcuts, environmental probably a big one, but then over time that just turns into a larger stock of people who know how to build something well, which is really hard to overcome.
Tracy (52:48):
I suddenly had a vision of, what was that conversation with like monkeys jumping from tree to tree–
Joe (52:53):
The complexity. Ricardo Hausmann. Yeah, exactly. The adjacency, the adjacent industries. That's why your question is so good. Like what are the adjacent industries, where these skills can now be transferred to something more higher value add, etc. Great conversation.
Tracy (53:10):
That was surprisingly fun. I'm graphite pilled now. Alright. Shall we leave it there?
Joe (53:17):
Let’s leave it there.
You can follow Dr. Chris Burns at
@DrChrisBurns
.