The emerging European battery supply chain

The European Commission (EC) describes the auto market as ‘crucial’ to the European economy because it represents 7% of the European Union’s GDP and 6.1% of total employment. 

The electric vehicle (EV) segment of the auto market is growing, with its market share doubling in Europe from 5.7% to 11.9% in 2020. 

We discussed Europe’s emerging battery supply chain in a recent Fastmarkets webinar, including Fastmarkets’ experts William Adams and Charlotte Radford who were joined by industry experts Robert Baylis from Johnson Matthey, Stephanie Clement de Givry from Société Générale and Ryan Hanrahan from Wave International. 

Read on for the highlights of that discussion or you can catch up on the full 60-minute webinar here.

As one of the biggest global producers of motor vehicles, Europe wants to capitalize on the growth of the EV market and maintain its position. Therefore, making a profit from EV growth is a high priority for both governments and market participants in Europe.

The Covid-19 pandemic exposed the risks of a long battery supply chain. It also showed the dependency Europe has on other countries, therefore, regionalizing the battery supply chain became a strategic priority. 

The beginnings of regionalization
The European auto market was already shifting toward electric vehicles before the pandemic, however. European EV sales had slowed in 2018 but picked up again in 2019, with pre-pandemic forecasts expecting the trend would continue into 2020.

But then Covid-19 struck.

Yet, despite the pandemic, European EV sales in 2020 grew by 140% year on year, which is 63% more than forecast.

Government incentives and initiatives were key to driving EV growth so countries with the biggest incentive packages, such as France and Germany, were able to achieve the largest growth.

The pandemic had a major effect on the European economy. In response, the European Commission (EC) announced a €750 billion recovery fund, allocating 37% for green initiatives, while the UK government also committed £12 billion to create and support green initiatives.
 
The EC approved an Important Project of Common European Interest in the battery value chain, which will provide €2.9 billion to research and development in the battery supply chain. The EC expects to add an estimated €9 billion in private investment to this project. 

European governments want to invest in industries that will boost the economy and create jobs. An EV market with a shorter supply chain would help these countries meet climate change and emissions targets.
 
Among its multitude of aftereffects, Covid-19 led to border closures, quarantines and logistical disruptions. For example, South Africa entered a nationwide lockdown in spring 2020, which created delays at borders and bottlenecks at the port of Durban. This pushed miners to divert their exports via other ports in Africa and prioritize their long-term contractual obligations, lending short-term support to hydroxide payables. 

The risks of depending on the existing, yet lengthy, supply chains could not be ignored. 

Redeveloping the supply chain
European EV manufacturers are reliant on raw material imports. Most raw materials come from outside of Europe – mainly South America, Africa and Australia – while the main battery production facilities are in Asia. All of these separate moving parts have created a long supply chain with an equally heavy carbon footprint.

Europe wants to mirror the supply chain in Asia, where intermediaries, battery producers and auto manufacturers are in regional proximity. This ensures timely deliveries, reduced costs, closeness to the consumer and less risk of disruption to supply. 

And the downstream market has begun to respond. Many major auto manufacturers in Europe are reworking their existing facilities and building new capacity to meet demand. 

New electric battery gigafactories are planned for the UK, Sweden and Italy, which would put the battery production closer to car manufacturers as well as closer to a large market where the vehicles will be sold.  

Electrode intermediary facilities could be making a move into Europe as well. 

The changes to the European supply chain are in their infancy. There are large parts of the value chain that do not exist right now, which represents an opportunity for new participants to enter the market through investment or equity valuations. 
 
Spanish consortium Battchain is seeking funding, some of which will come from the EC’s recovery fund. This group will focus on expanding Spain’s battery value chain from locally sourced raw materials to battery recycling.

The Battchain initiative joins multiple projects trying to bring the sourcing and production of batteries and EV tech within Europe. 
 
The upstream of the supply chain is not receiving as much investment as downstream. The investment cycles in raw material production are long and the prices have been low, which dampened interest.
 
Now that capital is available for investment, it will be interesting to see where participants choose to enter the market. 

New paths in an existing market
Covid-19 did not stop the overall growth in the EV market in Europe but it did expose the risks and dependencies in the current supply chain. 

Raw material sources within Europe have said they would struggle to keep up with long-term demand so a completely autonomous supply chain is not possible. But regionalizing a large part of the supply chain, however, would reduce the risk of disruption and secure the supply of materials. 

Newly installed or expanding existing capacity in this market will create new jobs and protect existing ones.  Regionalized supply chains will help to reduce carbon emissions and minimize supply disruptions as well as open up the market to new participants. All of these are key benefits for the European economy, however. 

As the auto market is so crucial to the European economy, shortening the battery-raw-materials supply chain is essential for continued growth.