Tesla Motors Inc (NASDAQ:TSLA) shares soared to a record high in late February after the company announced plans for its ambitious Gigafactory. But the stock has declined about 13% since early March. The Gigafactory would double the worldwide production of Li-ion batteries. Ever since the project was announced, Japan’s Panasonic Corporation (ADR) (OTCMKTS:PCRFY) (TYO:6752) was Tesla’s most anticipated partner in the project. The Japanese company is the primary supplier of Li-ion batteries for the Model S.

Tesla Gigafactory

Panasonic has been reluctant to invest in Tesla’s project

However, Panasonic Corporation (ADR) (OTCMKTS:PCRFY) (TYO:6752) president Kazuhiro Tsuga said last month that Gigafactory has much higher risk than its current partnership with Tesla Motors Inc (NASDAQ:TSLA). That’s why Tsuga hasn’t yet committed to the huge battery project. Had Panasonic agreed, things could have been a lot easier for the Palo Alto-based company because Tesla would easily have access to Panasonic’s supply chain. But the Japanese company’s lack of interest in the $5 billion battery project has raised concerns.

Tesla Motors Inc (NASDAQ:TSLA) has announced that it will invest $2 billion in the project estimated to need a total investment of $4-$5 billion. Other potential partners haven’t yet voiced their stance on the project. The Gigafactory will produce enough battery cells for 500K vehicles per year. The factory will be spread over 1000 acres, and will create about 6,500 new jobs.

Tesla to procure raw materials only from North America for Gigafactory

Tesla Motors Inc (NASDAQ:TSLA) is also facing supply chain-related challenges. According to Gemstone Equity Research, the company is finding it hard to procure battery making materials at a price that will help it make batteries at the lowest possible cost. The Li-ion batteries used in Model S need graphite for the formation of anodes. China is a dominant producer and processor of natural and synthetic graphite. In response to a Bloomberg report about dirty rain in China, Tesla said that it will use only North American raw materials for its Gigafactory.

Now a big concern is whether North America is sufficient to meet the needs of Gigafactory as it will reportedly have a capacity of 50GWH. According to Bloomberg (table below), an electric car needs 50 kilograms of graphite, compared to just 15 grams needed for a mobile phone. Demand for graphite and rechargeable batteries is rising rapidly. And the recent crackdown on graphite mines and processors by China is likely to push up graphite prices.

Tesla

Though these things may not affect vehicle prices, Gemstone Equity Research says that it will definitely increase the battery costs. Therefore, Tesla Motors Inc (NASDAQ:TSLA) will once again find it difficult to cut battery prices by 30% by 2017, as it has planned. Currently, the Elon Musk-led company procures synthetic graphite from Japan and Europe. One way to achieve its battery cost reduction is to procure natural graphite instead of the synthetic version, which has a relatively higher price tag.

Tesla Motors Inc (NASDAQ:TSLA) may source graphite from Canada, but the country won’t be able to meet its needs for cobalt. The company currently gets cobalt from the Philippines. Formation Metals Inc. (TSE:FCO) is currently developing a cobalt mine in Idaho. In the future, Formation Metals may supply cobalt to Tesla.

Lithium prices can’t be controlled

And then the batteries need lithium. There is no scarcity of lithium, but its consistent price rise is a big concern. Global markets are currently witnessing an oversupply of lithium. But when the Gigafactory becomes operational and achieves its full capacity, it will consume about 17% of global lithium supply. Lithium prices have been increasing at 5%-10% annually, and that’s something Tesla Motors Inc (NASDAQ:TSLA) has little control over.

Tesla Motors Inc (NASDAQ:TSLA) shares inched up 0.94% to $217.48 in pre-market trading Wednesday.

Full Disclosure: Vikas Shukla does not own Tesla shares, and he has no plans to invest in the stock in the foreseeable future.