Can you expand on the increasingly strategic role of battery metals in geopolitical and supply chain realignment?
If anything has become clear in recent years, it’s that the line between economic security and national security has blurred and many of the battery metals, which are foundational to next generation tech, are caught in the crosshairs. It has been interesting to see both governments and the private sector come to an awakening around the vulnerability of supply chains and race to catch up in the name of “reshoring” or “friendshoring”. Legislation like the Inflation Reduction Act (IRA) or the CHIPS Act in the US, or legislation in the EU is designed to accomplish the rebuild through a process akin to shoving huge investment sums into a bazooka and aiming at critical pieces of the supply chain including refining and cell manufacturing. Not to be outdone, the capital markets and public sector are answering the call here with over US$200B in announced investments in the US alone in the wake of the passage of the IRA.
It is encouraging to see this activity, however, the irony is that so much investment so quickly could put enormous stress on raw material demand and inject volatility into prices as we have seen with lithium, cobalt, and nickel in recent years. You essentially have three large economic blocs (North America, the EU, and China) pursuing a finite amount of raw material and intellectual firepower to achieve domestic economic and foreign policy goals. It’s difficult to see how these stresses ameliorate anytime soon, so a longer-term view is likely to help investors sleep at night.
What role do you see for governments? Are they following through on plans to grow their domestic industries and regionalize supply chains?
There is major debate in certain circles as to the proper role of governments in this transition. Thus far, the response in the form of investment and production tax credits as well as low interest loan capacity has reset the bar and has served as a backstop for private sector investment along the supply chain. Governments typically have a terrible track record when it comes to “picking winners”, so the structure of government-led investment is crucial to avoiding a scenario where taxpayer funds are misallocated. We will see failures, so it’s a reminder that economics matters most and careful due diligence is warranted.
Another form of government intervention here involves the threat of resource nationalism. This can take many forms (higher taxes or royalties, asset expropriation), but given higher prices for critical metals such as lithium or nickel, we are likely to see more, rather than less, government involvement in supply chain construction given the geopolitical realities and the consequences for local politicians not getting their “fair share” for their constituents.
OEMs are becoming more involved in the upstream to ensure that they maintain access to key metals. What trends or partnerships are we seeing here?
Western OEMS are late to the game, and they are trying to catch up through massive investment along the supply chain. The Big Three OEMs here in the US (GM, Ford, and Stellantis) have collectively pledged billions of dollars in upstream and midstream investment along the battery supply chain with the twin goals of trying to satisfy ESG requirements and qualifying for lucrative tax credits linked to the IRA. This is welcomed and better late than never. However, the one point in the supply chain that is most critical, can’t be rushed: mined and refined battery metals. With typical timing for a greenfield mine to be discovered, explored, permitted, and built ranging from 10 to 15 years, how much sense does it make to be building cathode and anode facilities as well as cell and battery pack manufacturing facilities, if you’re still vulnerable to the price swings of the critical raw materials that underpin these factories? To be sure, not all battery metals are created equal and all affect battery economics differently. That said, the cyclicality of these raw materials underpins the price volatility I mentioned earlier.
Another trend to watch concerns access to and development of battery technology. If OEMs do need Chinese battery technology to compete, this could also limit domestic growth of electric vehicles (EVs) given the political sensitivities of using technology developed by a strategic adversary in a domestic supply chain. Conversely, will foreign adversaries allow their state-of-the-art tech to be used in foreign markets? Fortunately, it appears that the battery technology ecosystem is alive and well in North America with companies such as Nano One and Mitra Chem attracting significant investment.
Where is investment flowing right now?
From a commodity perspective, lithium appears to be the main beneficiary of investment, both from the public and private markets. Notable examples include GM investing US$650M in Lithium Americas (TSX:LAC) and Stellantis investing US$90M in Argentina Lithium and Energy Corp (TSXV:LIT). Further downstream, investment continues to flow to the cathode active material (CAM) segment of the supply chain with companies such as Umicore announcing plans for a new CAM production facility in Ontario, Canada with the help of roughly C$1B in subsidies to construct a facility capable of producing 35GWh of CAM. The IRA has almost fundamentally rewritten battery production economics and so I think it’s safe to assume that you’ll see more announcements similar to the ones I mentioned where companies can leverage both the public markets and government support in the form of production or investment tax credits in North America to rapidly build and scale green energy industrial capacity.
Given the supply deficit of lithium-ion batteries, what is your view on the outlook for EVs?
It’s hard to be anything but long-term bullish about EV uptake. While China continues and will continue to lead the world in EV sales and in EV penetration, growth in other major economic blocs including the EU and US should provide a healthy base from which to grow throughout this decade and beyond. Some of the recent data I have seen puts China’s EV penetration rate at around 35%. As a reminder, China’s original goal was a 20% EV penetration rate by 2025. This has been upgraded to 40% by the same date and, barring some sort of economic calamity (which is not out of the question), the 40% EV penetration rate in China is likely to be achieved ahead of schedule.
Perhaps a more interesting question to consider is what will the mix of lithium-ion battery chemistries look like in 2030? In recent years, conventional wisdom said that given western consumer issues around range anxiety and the need for fast charging, nickel-heavy cathodes such as NMC or NCA would be dominant and lithium iron phosphate (LFP) chemistries would be relegated to fixed route transport such as busses or grid-scale energy storage. The advances in battery architecture and accompanying energy density from Chinese players such as BYD, CATL, and SVOLT have forced the market to rethink its expectations around the future mix of cathodes. If original consensus placed nickel heavy cathodes for transport at perhaps 70 to 80% of the market by 2030 and beyond, that ratio bow could see LFP with 40 to 50% market share during the same timeframe. This has as much to do with battery economics and security of supply of raw materials as it does with energy density.
Demand destruction from high and volatile prices will come at a certain point, but we are far from that as battery technology continues to evolve. We also shouldn’t ignore chemistries that can substitute or compliment lithium-ion in transport with sodium-ion being perhaps the most immediate example. Though timing is a question mark, most estimates I have seen grant sodium-ion an 8 -10% market share by 2030.
Your recent work has focused on alternative technologies, such as battery recycling. Can you tell us more about this and how different technologies will affect the supply and demand balance of battery raw materials?
I have always been bullish on the need for technology to augment supply and in so doing, minimize the risk of any sort of structural supply shortages of raw materials. Two of the most-discussed technologies along the lithium-ion supply chain today are direct lithium extraction (DLE) and battery recycling. While we could likely conduct a full Q&A on each topic, suffice it to say that both technologies have attracted ample financial capital in recent years, underpinning the hope and promise they provide in helping to plug any structural raw material shortages. That said, I think it’s unlikely that either technology would have a material effect on battery metals supply before later this decade, and with respect to recycling, I think that impact could be felt further into 2030. This isn’t a question of the immaturity of the technology in either case (pyrometallurgy and hydrometallurgy have been around for centuries) but we need to build and scale the necessary infrastructure and technology first. For this reason, virgin raw materials will be the majority of new battery metals supply for the foreseeable future. Additionally, a more certain view on true battery gigafactory production capacity will be necessary to avoid pitfalls involved in excess production capacity and misallocated investment.
