Tesla's US$5 billion nickel supply deal won't reduce its reliance on China or advance its new EV tax credit eligibility

Tesla has signed a five-year, US$5 billion deal with local nickel miners to secure cathode material supply for the lithium batteries in its performance cars, informed the Coordinating Minister for Maritime and Investment Affairs of Indonesia during a CNBC interview. Tesla has "started buying two excellent products from Indonesia," he advised, possibly referring to the production of the nickel processing firms in Morowali on the Sulawesi island.

That's not the first time Tesla is trying to hedge its nickel bets, as its annual sustainability report revealed long-term supply contracts with other mining giants like the Brazilians from Vale. Expensive metals like nickel and cobalt are needed for the cathode of performance electric vehicle batteries as they provide longer range and higher energy output, so Tesla needs them for cars like the fast Model S.

After Russia started the conflict in Ukraine, however, nickel prices shot up drastically, forcing Tesla to adjust the pricing of its vehicles despite the nickel hedges with Vale and, now, with Indonesian mining and processing companies. While securing Tesla's future supply of nickel at steadier quantities and price can only benefit Elon Musk's electric car company, it still won't fit the new battery material supply chain requirements needed for the US$7,500 in new electric car tax credits that Senate just passed with the climate bill.

It turns out that the what looks like a US$5 billion deal with Indonesian mining and processing companies on the face of it, may actually still be a deal with Chinese companies. Local media is reporting that Zhejiang Huayou Cobalt and CNGR Advanced Material are actually behind Tesla's deal for nickel, cobalt and manganese supply from Indonesia. Both have mining and processing operations in Morowali, and both recently announced multi-year contracts with Tesla for ternary cathode material precursors.

Indonesia and Australia have the highest nickel reserves and the island nation recently banned the export of nickel ore in order to spearhead the development of an EV battery industry with higher added value like refining and cell assembly. This may have forced Tesla's hand in dealing with the Chinese companies that hold the nickel smelting lines in Morowali, while the eventual battery factory investment it has promised the Indonesian government is still in the talking and planning stages.

In any case, the big nickel supply deal will reportedly do nothing to wean Tesla off its battery supply chain dependence on China that needs to be addressed if it wants its cars to qualify for the new government tax credits that will run until 2032.

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