MOBILITY

EV BATTERY SUPPLY CHAIN

Trends, risks and opportunities in a fast-evolving sector

Global electric vehicle demand has risen rapidly over the past five years and the increase in sales will be exponential over the next decade. Electric vehicle battery supply chains are under immense pressure to scale and keep pace with the heightened demand.

BY FITCH SOLUTIONS*

Fitch Solutions forecasts global electric vehicle (EV) sales to reach over 26.7-million units in 2030, representing yearon-year growth of 379% from 2021. More importantly, the annual global demand for EV batteries, in terms of total global capacity, is expected to reach 1 925GWh by 2030, an increase of 688% from 244.7GWh in 2021.

In response to this demand, automakers have been pressured to adapt their model line-ups and associated supply chains (especially as it pertains to EV batteries and their sub-components) to ensure that they are best placed to capitalise on this elevated demand outlook over the coming decade and beyond. EV demand has also been bolstered by the global drive towards decarbonisation. Many auto manufacturers have established clear targets that aim for either total or partial electrification of their fleets.

Commitments were made by some automakers at the COP26 conference, including GM, Ford, Mercedes, BYD, Volvo and JLR, which all committed to entirely zero emissions new car and van sales by 2040. Governments have also driven global demand for EVs, as EV adoption is a critical component of governments’ climate targets.

Disruptions caused by pandemic-related shortages and price spikes in the commodities used in lithium-ion batteries (LiBs) have created bottlenecks and heightened competition among automakers to secure necessary stocks of these components. EV supply chain resiliency will be a chief concern in the near term as it will be essential for automakers to employ a range of strategies at the upstream, midstream and downstream stages if they are to secure sufficient materials and components necessary to meet their electrification targets.

USD/Wh capacity

Annual averages based on comissioning year Illustrative trend

Announced capital costs per unit of new EV and energy storage battery manufacturing capacity, 2010-2019.

www.iea.org

Commissioned EV and energy storage lithium-ion battery cell production capacity by region, and associated annual investment, 2010-2022.

www.iea.org

Broadly, ongoing structural shifts in global supply chains have presented key challenges that have politicised the EV battery supply chain. Factors such as Covid-19 exacerbating anti-globalisation sentiment, geopolitical tensions between the United States and China, changes in consumer tastes and preferences, and rising wages in China have presented major political and structural challenges to EV battery supply chains.

These challenges are particularly overt at the upstream level. The rise in EV demand has spurred competition among EV and EV battery manufacturers to secure access to the critical raw materials (CRM) used in LiBs, most notably lithium, cobalt and nickel. In particular, the access to lithium, cobalt and nickel supplies are characterised by several supply chain risks.

These risks mostly centre around EV battery manufacturers’ dependency on a concentration of mining and refining sites in a relatively small number of countries. According to data from BNEF, China has control of 80% of the world’s raw material refining capacity, 77% of the world’s battery cell production capacity and 60% of the world’s EV battery component manufacturing.

Vehicle and battery manufacturers are also facing ESG-related risks as the mining methods in certain countries, such as the Democratic Republic of Congo (where 70% of the world’s cobalt mining takes place), have been criticised because of human rights concerns and unsustainable mining practices. As a result, the entire EV battery value chain manufacturing landscape, from CRM extraction to battery and EV manufacturing, will change significantly in the coming years, as developed markets aim to reduce their ESG-related supply chain risks and their dependency on China, which dominates parts of the upstream and midstream supply.

Companies have taken various actions to secure their EV battery supply chains. A particular trend is that EV automakers are investing heavily into the localisation of their supply chains. This is evident in the midstream where, as of November 2021, there is a total of 145 EV battery factories that are either operating or undergoing construction across 28 markets. This includes 51 construction projects in Europe, totalling 1 230GWh, and 29 in the US at 488.2GWh. These projects are key enablers in the localisation of EV battery supply chains; by offering automakers a nearby supply of LiBs, local gigafactories will reduce firms’ dependency on foreign suppliers and the string of downside risks ingrained in global supply chains.

Localisation is also occurring upstream with automakers and EV battery manufacturers employing various strategies to develop local supplies of CRMs near manufacturing sites.

Governments are driving localisation by enacting policy that aims to consolidate domestic supply chains. Notable examples include the Joe Biden administration’s USD6-billion stimulus package for EV supply chains and the EU’s “European Battery Innovation” project, which will provide about EUR2.9-billion in subsidies to build the bloc’s domestic EV battery manufacturing capacity and reduce its reliance on Asia for LiBs. Consequently, localisation will be a leading trend in EV battery supply chains over the next decade.

Renewable energy will become a major pull-factor for EV battery manufacturers in the near term. Battery manufacturing is a capital and energy-intensive process – it therefore behoves firms to produce in markets with abundant access to affordable renewable energy in order secure funding (given the growing

A particular trend is that EV automakers are investing heavily into the localisation of their supply chains.

importance of ESG) and to ensure the sustainability of EVs. Consequently, the primary pull-factor for EV battery manufacturers (outside of government support) is expected to shift from labour cost/availability to renewable energy cost/availability and sustainability. This is because automakers and their large commercial clients have put in place their own sustainability strategies which will add increased pressure on their component suppliers to become more sustainable. This will include sourcing more ethically produced materials, using renewable energy and reducing the carbon footprint along their own supply chains.

A final key trend in EV battery supply chains is EV battery recycling. Recycling presents several upside risks to the EV supply chain. By enabling automakers to re-use the CRMs in EV batteries, recycling offers an affordable, reliable and local supply of CRMs, which tapers automakers’ exposure to supply chain risks and reliance on the mining industry for regular supplies of expensive metals. Recycling is also an attractive process, particularly to governments and private sector firms, as by diverting LiBs away from landfills recycling contributes to an organisation’s sustainability efforts.

A recent autos investment round-up on battery recycling shows how this industry is expected to experience exponential growth over the next five years, given that a wide array of actors is investing heavily into the sector, including automakers, LiB recycling start-ups, battery manufacturers, as well as chemical recycling, energy and mining firms. It is predicted that the industry will grow exponentially over the next decade given its ability to mitigate some of the risks that are currently hampering EV battery supply chains.

www.fitchsolutions.com

HIGHER METALS COSTS TO NEGATIVELY IMPACT MARGINS

Electric vehicle (EV) battery prices will remain high in 2022 because of elevated battery metals prices due to increased demand amid the race to electrify the global vehicle fleet. As battery metals remain one of the largest contributors to the cost of battery manufacturing, higher prices in 2022 will squeeze the profit margins of manufacturers and automakers alike as more EV models are deployed. Higher input costs are expected to result in upside risks for battery prices in 2022 as long-term agreements with mining firms for the supply of key metals are entered into at substantially higher prices compared to 2020.

Over the longer term, developments in the increase of battery recycling will lead to a more favourable battery metals supply outlook as a “closed-loop” environment offers better pricing mechanisms amid more metals being reused in newer EVs going forward. It is forecasted that global EV sales will rise by 40.3% in 2022 as demand remains elevated amid the need to decarbonise the global vehicle fleet.

In the meantime, the shift towards more cost-effective Lithium Iron Phosphate (LFP) battery chemistries to tame the rising costs associated with nickel-rich chemistries is likely. The global share of EVs that use LFP battery chemistries should rise from 21.1% in 2021 to 30.3% by 2025. Higher costs of nickel-rich battery chemistries, such as the nickel manganese cobalt (NMC) and the nickel cobalt aluminium (NCA) chemistries, will necessitate the shift towards the more cost-effective LFP chemistry. The demand for battery grade nickel will far outstrip supply as automakers ramp up EV production. As a result, NMC market share will decline from 51.1% in 2021 to 45.3% by 2025.

Going forward metals retrieved from recycling operations will result in the NMC chemistry gaining a foothold once again from 2026 (with a market share of 45.9% rising to 51.4% by 2030) as this chemistry option offers higher energy density levels offering better range capabilities for EVs.

Automakers in China are already making the shift towards more cost-effective LFP chemistries while the likes of Tesla have indicated that it will offer the more affordable chemistry type for its entry-level EV models globally.

The move towards cell-to-pack battery structures that remove the need for battery modules will also be more broadly implemented by automakers to ensure that rising costs are limited to the battery cell level and ensure automakers can deploy more EVs amid heightened demand globally. Some of these developments have already gained traction as Ford recently announced that it will utilise cell-to-pack designs as well as LFP battery chemistries to further reduce costs.

While automakers will look to keep prices of fully-built EVs constant to raise EV adoption globally, countries without any meaningful consumer-focused incentives will be vulnerable to higher battery costs going forward. Countries in the developing world with lower EV penetration rates (EV sales as percentage of total vehicles sold) will be affected should original equipment manufacturers pass on higher prices when compared to more developed EV markets such as China, Europe and North America. This is due to relatively higher incomes in these latter markets and the prevalence of incentives to cut down the initial purchase prices of EVs.

Countries that have little to no support will be vulnerable to further increases in already higher purchase costs of EVs relative to internal combustion engine (ICE) powered vehicles. It is anticipated that automakers will deploy mild and plug-in hybrid models for lower-income markets to cushion consumers from higher EV prices due to high battery costs.