A successful transition to a zero-carbon future depends on the electric vehicle (EV) market. The promise of a vibrant EV market, driven by the combined force of government policies and consumer demand, is extraordinary. But stubborn realities exist in the European and US markets that risk limiting the full potential of EVs.
Global supply will be tight, but should be sufficient to meet surging EV demand
Although demand for critical battery raw materials (BRM) is expected to grow significantly through 2032, the Fastmarkets NewGen Long-Term Forecasts show that BRM supply will be able to support that demand. It is going to be tight and supply-demand balances will go slightly negative in the second half of decade. But, overall, the combination of investment, expanded production, new projects, evolving technology, and an emerging recycling market is forecast to support EV (and ESS and other battery demand) through 2032.
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Global equilibrium masks regional imbalances
The important caveat is that global supply is expected to meet global demand. However, that global equilibrium masks structural challenges in Europe and the US.
Regionally sourced supply is not expected to meet regional demand, even with planned projects and government policies like the recent American Battery Materials Initiative. In 2032, Europe will represent 25% of lithium demand, but will contribute only 4% of global lithium supply. Likewise, the US will represent 8% of demand, but only 6% of global lithium supply.
Government policies may not reflect market realities
The US and European governments have laid out clear plans for new car sales to transition from ICEs to EVs by 2035. These are ambitious goals, and in some instances they risk diverging from what the industry is capable of delivering, or even throttling EV growth. For instance, the 40% incentive hurdle for domestic or ally mine supply through the end of 2023 (lifting to 80% through the end of 2026) in the US. Or the possibility of lithium being declared a toxin.
And although ESG concerns are a public priority, governments may have to make a difficult trade-off between “how clean” and “how much” to secure supply and fuel the EV revolution. The Fastmarkets NewGen Long-Term Forecasts show that regional projects – some that are under pressure or paused today due to ESG concerns – will succeed. But the forecasts also show that there is clear downside risk that can delay supply and complicate EV growth in Europe and the US.
The durable risk is the cost of the battery
Yes, there is supply risk and, yes, there is an inherent ESG conundrum. But the markets will generally work these issues out over time. The durable issue is battery cost. The ideal is that EVs deliver cost parity with ICE vehicles, for which it is widely regarded that battery prices need to reach < 100 $/kWh. But the economic and competitive physics are not pointing in that direction.
- The battery represents 30%-40% of the cost of an EV
- China’s strategy to sell cars into the European and US markets suggests that they may be less willing to export battery raw material or at prices that benefit competitors of Chinese automakers
- There will be fierce competition for supply in markets such as Australia, Chile, Argentina and Africa; competition that suggests prices will remain high
- The Fastmarkets NewGen Long-Term Forecast, which provides in-depth cobalt data, shows that the price risk remains high: the high price scenario is 17% higher as compared to the base case for cobalt, it is 58% higher for lithium and graphite
These high prices affect all chemistries, so that even though there is increased interest in LFP to lessen the cost burden, LFP does not escape the physics of elevated prices through 2032. As an example, both LFP and NMC811 pack costs will remain above the critical 100 $/kWh mark up to 2032 considering lithium carbonate and hydroxide base price forecasts.
Today’s buyers largely accept that EVs are more expensive than ICE vehicles and recent price increases from Chevy, Tesla, BYD and others have not shortened the EV wait lists. But these buyers can afford it; the emphasis on luxury and performance vehicles has attracted customers that can tolerate the EV premium. The real challenge with cost will be for mass EV adoption where buyers will be far more sensitive to price.
With constraints come innovations
In blunt terms, the EV revolution will win out. It is a matter of how, not if. Several innovative approaches to offset high EV and battery costs are in market today with varying results – but each gives a hint to the goal of addressing the mix of battery cost shock at purchase and charging anxiety on the road that results from lower cost, lower range batteries.
- Lease the battery to defray up-front costs: Automakers like VinFast are in the early stages of battery rentals with mixed market feedback. The theory is to separate the car purchase from the battery lease to reduce sticker shock. The feedback aligns with sentiment about the leasing market: the buyer does not avoid costs; they simply push it out with the added challenge of not benefitting from the residual value of the battery when they sell the car.
- Swap the battery to reduce charging times and ensure access to the latest technology: Apart from the financial issues associated with Better Place, Israel’s electric-car network, battery swapping is gaining some steam as shown in NIO’s deployments in Europe. The key challenges appear to be cost and trust: the significant up-front costs for the swapping provider to have the right battery configurations at scale at swapping centers; and the consumer trust that the replacement battery is the same or better than the swapped battery. The added challenge is that swapping may negate the possibility for automakers to differentiate based on battery chemistry or performance.
- Leverage the accelerating wave of battery technology improvements: Although EVs have been around for a while, we’re in the early days of driving investment and attention to battery technology. Whether it is improvements on the cell-level to improve cell energy density, or pack-level innovations such as cell-to-pack integration to minimize non-cell mass, or the shift from 400V to 800V packs to allow for more efficient powertrains, we can expect technology to bridge key performance and lifetime concerns. The question is whether technology can create a new inflection point in battery cost itself.
- Lean on lower cost batteries and leverage a more expansive charging infrastructure to address range and charge-time anxiety: One way to address battery cost is to look outside the battery itself by expanding the charging infrastructure. In the US for example, the real estate placement with existing gas stations is already intact to support traffic patterns and there is an existing economic model to offer charging infrastructure at these locations, with roughly 70% of their profits today coming from secondary revenues such as snack food and drinks, rather than the fuel itself. This can give battery chemistry optionality, and leveraging new technology, can simultaneously address range and charge-time anxiety.
The costly road ahead
The EV revolution will take shape – there is simply too much critical need driving it forward. But battery makers and automakers will need to navigate the complexity and volatility of both supply and price across the battery raw materials market, making access to price, news, forecasts, and analytics vital to compete and win in the (inevitable) EV revolution.
