Tight margins, sustainable supply chains drive EV manufacturers’ need for lithium benchmark

The whole battery supply chain will benefit from lithium benchmark pricing, Fastmarkets head of battery raw materials research William Adams says as he explores what is driving auto manufacturers to support this pricing mechanism.

The auto industry is going through a period of unprecedented change due to companies introducing electric vehicles (EV) into their portfolios alongside internal combustion engine vehicles (ICE). To complicate matters, most manufacturers are also having to produce hybrids that have both an ICE powertrain and an electric powertrain.

Billions of dollars are being spent by leading auto manufacturers to develop EVs and build new capacity while still investing in new ICE models to ensure they meet ever more stringent carbon dioxide emission requirements.

Expanding their portfolio down two streams, ICE and EV, with the EV stream having to take on board very new and different technology, is costly for auto manufacturers, and it is therefore essential that they have every tool to control input costs. (Particularly since they must compete with new entrants focused solely on EVs).

“It’s going to be the biggest change we’ve seen in the last 100 years, and it’s going to be really expensive even for the biggest companies,” Erik Gordon, a professor at the University of Michigan Ross School of Business, said.

While EVs in theory should be easier to make as they contain far fewer parts than ICE vehicles and should be therefore cheaper, they are not because the most important and expensive part of an EV is the battery pack.

Conventional auto manufacturers have been able to lock in the prices of most of their raw materials either by working closely with their suppliers or by hedging their price risk themselves. Aluminium, steel and zinc (for body panels and castings), nickel (for stainless steel), copper (for wiring), lead (for lead-acid batteries) and rubber (for tires), are all liquid markets that offer numerous hedging opportunities.

But EV manufacturers cannot readily hedge their price risk and this is something they need to be able to do to control their costs.

For example, taking the average-weighted battery pack cost of $176 per KWh, a 60 KWh battery would cost around $10,500, around one third of the total expense of manufacturing the vehicle. This is why price volatility for the battery raw materials is a risk that needs to be managed.

Taking the lowest and highest prices over the past 10 years for lithium, nickel and cobalt, raw material costs per KWh have oscillated between $10 per KWh and $67 per KWh, according to Kurt Vandeputte, senior vice president of the rechargeable battery materials business unit at Belgium’s Umicore. In terms of a 60 KWh battery pack, that means the cost of the raw material components could vary between $600 and $4,000 – so any adverse move in raw material prices, if unhedged, could hit EV manufacturers’ margins critically.

Nickel metal contracts are traded on the London Metal Exchange and the Shanghai Futures Exchange with good liquidity, with LME prices quoted out for five years forward – so nickel risk can be hedged.

The Fastmarkets cobalt metal price is used across the supply chain, with premiums and discounts applied, bringing transparency and clarity to supply contracts and valuations for price-makers and takers alike.

A benchmark price would enable lithium to be priced in a comparable way while it travels down the supply chain.

Consider that at the moment some manufacturers in the middle of the supply chain buy lithium basis one price and then sell their product basis another. Only the development of a benchmark price will address this risk, with all the challenges that it currently brings.

While auto companies work to ensure that they have the robust and sustainable supply chains that are necessary to electrify road transport, their requirement for a robust and hedgable price benchmark is clear.

William Adams will be providing more insight at the Fastmarkets Battery Materials Europe event taking place in Amsterdam on September 26-27. Find out more here.

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