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Battery raw materials (BRM) are essential to electric vehicles (EV), but they also represent significant risk for the EV market. Battery makers and automakers will need to understand, anticipate and mitigate BRM risks in a systematic way to win in a hotly contested market. Fastmarkets’ BRM risk matrix is a framework to manage risk, providing a holistic view of risks and how they evolve in the 2022-2025 and 2025-2030 time frames.
The electric vehicle is the future for automakers; it is taking on the role of flagship vehicle in a carmaker’s portfolio and represents a critical future revenue stream. But risks lie in wait at the very heart of the EV – the battery.
From supply deficits to price volatility to geographic concentrations to ESG concerns, battery raw materials represent a strategic risk for automakers.
Fastmarkets’ BRM risk matrix outlines 10 key risks as they stand now and how we believe they will change in the 2025-2030 time period. We’ve separated out the risks for clarity but recognize and speak to their interdependence.
The Fastmarkets’ BRM risk matrix gives planners and decision-makers a holistic, systematic way to measure risk. We will update the risk matrix in six months’ time, or sooner if market events warrant.
The risks are as follows, with numbers corresponding to their placement on the matrix below. Click on a risk to navigate to its description.
Discuss the risks facing the EV market live with our experts on May 4, 2022. This webinar will dig deeper into the supply, demand and price risks facing the market.
Lithium, cobalt and other BRM prices have surged in the last 12 months as battery makers and automakers have ramped up production and competed for supply. As a result of rising battery raw material prices, one of the world’s most widely produced battery chemistry compositions, NCM 622, is theoretically 150% more expensive than at the start of 2020.
By far the biggest driver of this trend has been lithium chemicals; prices rose by 400% in 2021.
Between 2022 and 2025, we expect price increases to slow but volatility to continue. Automakers are likely to turn to futures contracts to hedge price risk and smooth out financial results.
2025 to 2030
Although high prices may not themselves slow EV growth, they are likely to affect design or financials. Economies of scale are unlikely to be in place to counter high prices. High costs may eat into margins, compel decisions on battery composition, or get pushed to consumers. And if automakers sacrifice range and performance on economy EVs to reduce costs, they risk dampening demand.
2021’s manageable shortages will become tomorrow’s acute shortages unless production becomes more efficient and new supply comes online.
Graphite production is expected to increase in China and Mozambique to address the 36% increase in demand in 2022 (from 437,000 to 594,000 tonnes). Production has increased in current lithium mines and new mines are scheduled to start up. Direct lithium extraction (DLE) is expected to drive production gains. Covid-induced staff shortages are abating.
However, at the same time, the recent shutdown of a lithium project in Serbia complicates a clear, predictable increase in supply.
The 2025 to 2030 time frame will be defined by supply and will depend on the increased yield from current sources and the ability to get new sources online. We expect investments in technology to make a significant difference because the market is attractive to investors seeking to increase their stake in the low-carbon economy and the operational, environmental, and technical challenges are solvable. New sources are a different story; we address local and recycling supply risks in sections 3 and 5 below. The combined risks may stall EV production for automakers who are unable to gain sufficient leverage on supply.
Local supply is key to meeting surging demand. It can also reduce risk from geopolitical uncertainty and streamline supply chains. But ESG concerns may complicate the rapid build-out of local supply. The challenge is that local supply is a patchwork of sources that must navigate local laws and regulations and represent new environmental challenges and opposition. Habitat, cultural lands, and water contamination are just some of the ESG considerations complicating current or planned projects.
In the short term, there is likely to be friction between national-level interests or mandates to hit carbon reduction targets and local ESG concerns. This is playing out in Portugal, where they have devolved permit decisions to the local level.
We expect risk to lessen in 2025 to 2030 as the urgent need to reach CO2 targets informs permitting decisions and the increased volume of local opportunities enables supply to come online. However, if local supply is limited or the time to bring local supply online is long, it will exacerbate expected supply deficits.
Raw materials are geographically concentrated, placing acute pressure in limited areas. This has a significant impact on BRM supply chains. There are continued concerns about artisanal mines in the Democratic Republic of Congo (DRC), the new Chilean constitution, and decisions to stockpile resources in China.
Covid-19 wreaked havoc on supply chains across the globe; its impact on BRM supply was magnified through the lens of geographic concentration. This was felt most in places such as South Africa, where a nationwide lockdown meant delays at borders and bottlenecks at the port of Durban. And Australia, where production was stopped or slowed during periods of strict lockdown.
We expect the likelihood and impact of risk to lessen in 2025 to 2030 as new, more evenly distributed supply reduces geographic concentration. However, risks driven by new Covid variants, conflicts, further resource nationalism or other local issues will continue to have an outsized impact on the market.
Recycling creates new supply, reduces the carbon intensity of the supply chain, and diversifies away from riskier markets such as the DRC.
The question is not whether recycling will materialize; it is how fast it can scale up. The circular EV economy requires investment, infrastructure, and enough aged EVs and scrap batteries to meet demand.
If the average EV lifespan is 8 to 10 years, battery pack “scrap” may enter the market too slowly. Material shortages can suppress EV growth and give an advantage to those who have better leverage on supply.
Recycling will play a larger role in supply from 2025 to 2030, driven by government legislation and emerging commercial ventures such as the recent partnership between Battery Resources and Honda, or the agreement between Neometals and Stelca. The likelihood of risk declines but the risk impact rises because of growing pressure across all supply sources.
Public charging infrastructure will need to scale up rapidly to serve the growing EV fleet. This requires significant investment in charge point devices, site preparation and installation.
We expect government and commercial entities to accelerate the roll-out of charging infrastructure as EV penetration grows and complementary retail opportunities arise. However, charging deserts can significantly dampen demand; they contribute to range anxiety and discourage adoption outside populous areas.
Today, a meaningful portion of trade is locked into long-term contracts, temporarily sheltered from price volatility. Although this is helpful to reduce the impact of price increases on players downstream, it has limited the ability to fully realize value upstream and may discourage investments when incentive-level prices are limited. These investments are critical to drive up supply levels to meet expected demand.
Read more about why the most common lithium pricing mechanisms don’t serve the strategic aims of the EV market here.
We expect indexing to spot prices to take a larger share of trading in the 2025-2030 time frames, supporting a larger base of incentive-level prices and reducing investment risk.
Large-scale indexing can drive up the realized cost of materials, batteries, and ultimately the EV itself as more in the supply chain use (elevated) spot prices. When spot prices have risen as sharply as they have, that means higher BRM prices have turned the tide against reaching $100/KWh – creating affordability barriers to mass adoption.
We expect indexing to take a larger share of trading such that higher prices will flow downstream. In the 2025 to 2030 period, we don’t expect economies of scale to offset price increases fully. Higher costs can eat into margins or complicate affordability – especially for economy vehicles – or pressure automakers to make performance sacrifices that could make the vehicle itself less attractive.
The next generation of EV buyers is likely to be more socially and environmentally aware and discerning – and sufficiently active on social media that one credible assertion of greenwashing can impact an automaker’s reputation.
While the electrification of transport reduces emissions from fossil fuels, BRM mining and production raise social responsibility and environmental concerns that can’t be ignored. The lithium market has seen many examples, from Tibet’s concern in 2016 to Chile’s in 2019, and the current stand-off at Thacker Pass in the US. Automakers are vested in cleaning up supply chains; nonetheless, one can imagine that positioning EVs as “clean” or “green” can lead to damaging greenwashing claims.
Reputational risk is far more consequential between 2025 and 2030. EVs will be the centerpiece of automakers’ brands and watchdog groups will be organized to expose perceived greenwashing. We expect a steady improvement in cleaning up supply chains as technical innovations, a clear sense of brand consequences, more advanced tracing capabilities and investments combine to make a difference.
Russia’s invasion of Ukraine, which contributed to the London Metal Exchange’s suspension of nickel trading as the three-month price surged by 111% in a day, underscores the extraordinary interdependence of global BRM markets. The threat of geopolitical tensions, plus the concentration of resources, creates an unpredictable and potentially acute risk to a market that is already facing a broad range of persistent geopolitical risks.
Between 2025 and 2030, the likelihood of risk remains unchanged, but we expect that more supply sources combined with greater geographic diversity would lessen the possible impact of conflicts. However, the strategic nature of BRMs may increase the level of resource nationalism or measures to protect the battery markets, creating new tariffs or tensions that complicate the global supply chain.
The success of EVs is a key determinant of whether individual automakers can thrive, survive or fall behind in the next 10 years. Battery raw materials will play a central part in that dynamic.
Much has been written about BRM risks. We wanted to take the critical next step and provide a working, living framework – Fastmarkets’ BRM risk matrix – to help battery makers and automakers proactively and systematically understand, anticipate, and mitigate risks. This gives planners and decision-makers the insights and tools to navigate complex and turbulent waters and ultimately compete and win in the EV market.