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INSIGHT: Regionalization of battery supply chains advances, but challenges persist

Highlights

Europe, US beefing up battery metals supply chains

Seen unlikely to overtake China's capacity anytime soon

Increasing investment in so-called battery gigafactories in the West is a natural step towards regionalizing supply-chains, but it will take more than just funds to topple China's dominance in the battery industry.

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China accounted for 77% of global battery manufacturing capacity in 2020, according to S&P Global Market Intelligence. But supply bottlenecks resulting from the pandemic and a subsidy-driven surge in electric vehicles sales in Europe in mid-2020 raised concerns over the world's supply dependency on a single country.

These factors helped boost investments in battery capacity in Europe, and the difference in battery capacity between Europe and China should narrow substantially by 2030.

Click here to see full-size infographic

Despite a number of planned gigafactories, some remain skeptical that Europe will have enough capacity to meet demand.

Bo Normark, industrial strategy executive at EIT InnoEnergy, a European Union-funded promoter of decarbonization strategies, told S&P Global Platts that, taking into account Europe's "Fit for 55" package under the Green Deal—which aims at a 55% net reduction in emissions—he was not sure there would be enough battery production capacity to meet demand.

"If you go about 12 months back, we were looking at 3,000 GWh [of total capacity] by 2030 and today we are looking at about 3,000 GWh by 2025 and maybe 6,000 GWh by 2030... when we were looking at 3,000 GWh by 2030, then I think we were pretty okay. Today... I'm not so sure," Normark said.

He added that it must also be taken into account that the current plans for building new battery factories were on the optimistic side, as not all would be completed—some would fail and many would be delayed.

In addition, these new projects don't cover the full battery supply chain. About 40%-50% of what is being invested in Europe, for example, is directed to battery cell manufacturing only, according to Wolfgang Bernhart, partner at consultancy Roland Berger. Other midstream stages in which key components are produced, such as the cathode, are not attracting the same amounts.

"For Europe, in order to localize supply chains, Eur15 billion to Eur20 billion would be required for the cathode, anode and precursor stages," Bernhart said, adding that another Eur35 billion to Eur60 billion ($40 billion to $69 billion) would be required for the mining of raw materials such as lithium, nickel or graphite. "The biggest challenge to complete the localization of supply chains is the economics."

Normark agreed there are increasing concerns about raw material supply and refining capacity, with these being the weak link in Europe's battery supply chain.

Although mining and refining these raw materials is the most expensive part of the chain, money alone is just not enough: some geographies are simply more abundant in resources than others.

"In many cases there are limited sites. In other cases there are sites, but concentrations might be low, or they might be byproducts, or contaminants make it uneconomical," said Sam Jaffe, managing director at UK-based Cairn Energy. "And [mining] permits are very difficult to obtain, especially in the US and Europe."

The time required to develop mining assets into battery-grade processed material is also a significant problem.

"You have from between three and typically seven years from when exploration starts until you are able to deliver lithium hydroxide," Bernhart said. And although battery megafactories have been receiving huge investments, the enthusiasm is not as high in the case of raw materials, which could lead to a shortage of key inputs such as battery-grade lithium and nickel-sulfate in the coming years.

Benefits

Overcoming these barriers would yield Europe and the US significant benefits in their position as the battery industry rapidly gains relevance in the coming years. Jaffe said automakers and battery manufacturers are localizing their supply chains for economic reasons, among other targets.

In Bernhart's view, this "minimizes political risks, price risks, and creates jobs locally."

Moreover, there is a drastic reduction in the shipping risks, said Adam Panayi, managing director at consultancy Rho Motion. "The semiconductor issue is a foretaste of what can happen in the EV industry if there is no localization," he said.

Shorter supply chain distances also reduce cost and lead times—and this is one of the reasons why China developed its battery industry so successfully, Jaffe said.

"Not just [that] they have it within the same country, the entire supply chain is located within a 500km radius from Shenzhen and Dongguan, essentially there is a localized area and you are never travelling more than a couple hundred kilometers," he said.

Jaffe believes the same model could evolve in Europe and the US, perhaps in regions around Germany or from Quebec to Ohio, for an optimized logistic strategy particularly for cathode. "Logistic strategy didn't exist in the battery industry until China started to dominate it," he said, stressing that logistics cost is the most important factor—more so than energy or labor—to bring overall costs down.

Environmental aspects

Stricter environmental regulations in the West compared to China are also cited as an important reason for the regionalization of the battery supply chain—but are also a major challenge.

"European automakers have an obligation to try and make their supply chain as accredited as possible; from an ESG perspective, one good way to achieve [this] is bringing it local," said Rho Motion's Panayi. "They are investing billions of dollars [in the EV revolution], they can't afford to have ESG issues, so it's a protection to their investment."

This is critical when it comes to the mining and processing of battery metals. He recalled that most of the world's battery-grade lithium hydroxide conversion takes place in China, and graphite processing is an "extremely dirty business, while Europe has different standards on air quality [compared to China]."

"The other element is that the desire for green, environmental sources of battery materials is very strong, and adds another layer of complexity to this situation," Jaffe said. "Now you not only need a mining asset in your continent, but you also need one that is environmentally friendly."

China to remain #1

Amid western efforts to catch up with the Chinese battery industry's dominance, new projects are also popping up in China—and the country is likely to remain the world's biggest battery manufacturer.

"China is the biggest market for batteries," Jaffe said. "They are the most aggressive in subsidies for EVs, and most consumer electronics are made in China, and they have a large stationary storage market."

"The buildout of new capacity is enormous in China, [I expect] 161 GWh to be built in 2022, which is 40% of their capacity today," Jaffe said. "There's no fall down by any means."

He expects battery manufacturing capacity to be on the rise in China at least until 2027 or 2028.

According to S&P Global Platts' data, around 10GWh should be able to manufacture roughly around 150,000 EV batteries. This means Asia Pacific, including Australia, with announced battery capacity of around 1,296 GWh by 2030, should be able to produce approximately 19.4 million EV batteries.

So while investments are higher in Europe at present, there's still a long way to go. The difference between China and Europe continues to be so great that Europe will still remain behind in terms of battery capacity.

"I don't think Europe will catch up, simply because the Chinese demand is bigger—we will have 15 million EVs in China in 2030, which is still more than the forecast 12 million EVs in Europe including plug-in hybrids," Roland Berger's Bernhart said.

Chinese battery demand will keep growing significantly—but even if European demand grows faster, China will still be ahead by the end of this decade, Bernhart said.