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Battery-makers turn to blockchain as sourcing rules get stricter – Circulor CEO


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Battery-makers turn to blockchain as sourcing rules get stricter – Circulor CEO

Concerns over sustainable sourcing of electric vehicle battery materials, particularly in light of EU "battery passport" legislation and sourcing requirements in the U.S. Inflation Reduction Act, are driving the latest wave of supply chain traceability efforts.

➤ Using blockchain technology in supply chain tracing systems helps provide "immutable" records of metals' origin and processing, which is especially useful for products that require complex processing and long supply chains.

➤ Supply chain traceability requirements will become more common in sourcing agreements between metals producers and end users.

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Doug Johnson-Poensgen, founder and CEO of Circulor Ltd.
Source: Circulor Ltd.

As electric vehicle manufacturers sign sourcing agreements with metals producers to capture the tax benefits of laws like the Inflation Reduction Act in the U.S., some are also seeking to improve the transparency of metals supply chains.

To do this, supply chain participants are turning to blockchain technology, which creates a unique digital identifier and tracking system for raw materials, which they say can provide an effective means of tracking a material from when it is mined through to its use in an EV battery.

London-based Circulor Ltd. develops blockchain track and trace systems for industrial supply chains, including the minerals used in EV batteries. In February, the company said it will partner with lithium supplier Sociedad Química y Minera de Chile SA, or SQM, on lithium supply chain traceability. SQM was the second-largest global lithium producer in 2021, according to S&P Global Market Intelligence.

S&P Global Commodity Insights spoke with Doug Johnson-Poensgen, founder and CEO of Circulor, about the trends and challenges in tracking metals supply chains. The following conversation has been edited for clarity and length.

S&P Global Commodity Insights: What trends have you seen concerning metals supply chain traceability efforts, and how would you describe the state of those initiatives today?

Doug Johnson-Poensgen: Traceability has evolved over the last five years from a concern around responsible sourcing to one more around sustainable sourcing. The reason for that is that the manufacturing of EV batteries is supposed to be better for the planet, not worse for the planet.

That has evolved into the creation of digital product passports for batteries. Europe, at the end of last year, brought into legislation regulations which will require passports that track, per battery, where the raw materials came from and what the carbon footprint is of each battery.

Under the inflation Reduction Act in the U.S., much the same information is required to trigger things like the 30D consumer tax credit, which will mean that auto manufacturers will have to show who [in the supply chain] touched what, where, and when.

Traceability has moved a very long way in the last five years or so from individual raw material traceability to what is now effectively a product passport that covers the 12 principal raw materials within an EV battery. And that's now starting to extend beyond batteries ... it's increasingly accepted that it is possible to track raw materials through a complex international supply chain, where they undergo physical and chemical transformation and amalgamation with other materials on their journey from rock into something like a car.

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How does Circulor track raw materials, and how does the company use blockchain technology as part of its traceability efforts?

The purpose of traceability is essentially to create a digital thread that follows the physical flow of materials. To do that, you need to first off be able to create a reliable digital twin for a physical commodity ... a reliable digital identity that is attached to a blob of material, including the attributes of that material and where it has come from.

At every step of the supply chain, the input ingredients are completely different from the output product. You're trying to [track] goods in, to start of production, through an industrial process, to end of production, to goods out.

Now, where does the blockchain come into it? A blockchain is a distributed ledger, or multiple copies of the same information. The key attribute of a distributed ledger relevant to a supply chain is the ability to notarize and time stamp transactions. You don't want history to be rewritten about what's gone on with raw materials and where they've come from and who worked on them. So an immutable record where you can't change what was recorded at the time is very helpful, particularly when the elapsed time between a rock, a mine site, and a car could be measured at six to nine months.

What are the major challenges that come with tracking raw material supply chains using these blockchain-based methods?

Some of them are related to willingness, and some are related to getting quality data into the platform.

Let's talk about willingness. First, transparency in the deeper tiers of supply chains is a relatively new concept. The idea that a tier four supplier would declare what they'd inherited from their suppliers — where stuff came from — has always been a concern in most supply chains, because people don't want to be disintermediated, or cut out and someone better found.

As we've gone on this journey with car manufacturers in Europe, where they have imposed obligations for greater transparency, we have found participants in the supply chain who are very nervous about the idea of submitting themselves to that level of transparency. That's not normal, currently, in supply chains. But [under] the Inflation Reduction Act and European battery regulations, that's exactly what is going to be required. So there's obviously a choice about whether or not you want to participate and have your materials find their way, for example, into Europe or North America. That's the first challenge.

The second challenge then is, how do you get the right quality of information without a human being involved in the process? I tend to trust data that comes directly from machines rather than having the opportunity for a human to manipulate it. If you're thinking about an industrial process, there's obviously a lot of data being collected by production management systems and quality management systems. Then one can take a subset of that data that is able to reliably connect input ingredients to the output product. But actually setting that up within a manufacturer takes a little bit of education and a little bit of time.

After that, you're able to start to stitch together the participants in the supply chain and you're able to provide insights about what's going on in those supply chains to every level of participant. They never had [these insights] before ... [and] there's a network effect as others join and benefit from each other's previous work.

You've mentioned battery passports, which create a need for materials suppliers to collaborate with end users like automakers on supply chain traceability. In places where battery passports are not required but automakers and minerals producers are collaborating on supply agreements, like in the U.S., have collaborations generally been coupled with their own supply chain traceability requirements, and do you expect those requirements to become more common going forward?

Absolutely. If you're going to do a direct supply deal for more sustainably produced mined nickel, for example, and if you're going to pay for more sustainably produced nickel, you want to be confident that what you actually receive for your batteries is the same stuff and that the midstream participants between the mine and the car haven't destroyed the relative sustainability benefits of the raw material.

I expect a lot more of this, particularly when you look at things like the battery regulations, where people want to be confident that they've sourced things responsibly, or the Inflation Reduction Act, which has tax credits for manufacturers where, for example, raw materials refined within the U.S. that find their way into components in the U.S. allow both the downstream manufacturer and the upstream producer to benefit from a manufacturing tax credit.

S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.