This year the impact of climate change has been more visible than ever before. Temperatures in the UK reached an unheard-of 40+ degrees C; rivers in Germany and China have run dry, creating problems for transport and hydro-electric power creation; one-third of Pakistan is under flood-water. This feeling of crisis has been compounded by Russia’s invasion of Ukraine and the consequent ever-rising gas prices. These factors have combined to focus international political and public attention on the urgency of the energy transition.
The success of the energy transition will depend on access to significantly increased quantities of rare earth metals and minerals, which are central to the production of permanent magnets used in electric vehicles (EVs) and wind turbines. According to the IEA, meeting current energy policies will require a doubling of current levels of mineral extraction and refining by 2040. Reaching the Paris target of 1.5 degrees C will require a quadrupling by 2040. Attaining Net Zero by 2050 requires a six-fold increase by 2040.
Can this be done?
Proven reserves of rare earth elements (REE) are assessed to be sufficient (just) to meet the needs of the energy transition. The question is therefore whether a solution can be found to the inefficiency of their extraction and use; and whether mining and processing activities across the value and supply chains can be expanded quickly enough to meet this projected growth.
But the demand is not just for REE – lithium, nickel, cobalt, manganese and graphite are essential for batteries; and copper and aluminum for electricity networks and other electricity-related technologies.
This demand is increasingly converting energy companies and car manufacturers into vertically-integrated companies inserted into the mining sector – in the last two years, car firms have made around 20 investments in battery-grade nickel, and five others in lithium and cobalt. EVs and battery storage are already the largest consumers of lithium and will be the largest end users of nickel by 2040.
Within 20 years, energy companies’ share of total global demand to over 40% for copper and REE is forecasted to rise; to 60-70% for nickel and cobalt; and to almost 90% for lithium. By 2040, demand for lithium could be 40-60 times current levels; demand for graphite, cobalt and nickel could be around 20-25 times; and demand for copper more than double.
What does this mean for Electric Vehicles?
A typical electric car requires six times the mineral inputs of a conventional car, so the supply of these material is essential to the success of the EV industry. It is an industry which is growing fast – in 2021, EV sales, at 6.6 million, were double the 2020 sales volume. This year, EVs already account for more than 10% of all new cars sold – a figure which is projected to reach 40% by the end of the decade – an increase in demand which will require battery production to increase six-fold. But reaching Net Zero by 2050 will require an extraordinary expansion of production to replace every existing car – a total of around 2 billion EVs on the road worldwide….
The good news is that construction of battery giga-factories to respond to that demand is racing ahead – there are currently plans for 282 new giga-factories to come online worldwide by 2031. If they are all built (and giga-factories typically take three years to build and longer to reach full manufacturing capacity), these giga-factories would produce around 5,800 gigawatt-hours (gwh) of battery capacity – cumulative global capacity was just over 600 gwh in 2021.
The bad news is that the brake on development is not the building of the factories to make EV batteries, but the access to reliable supply of the necessary raw materials. And there are a number of potential bottlenecks which threaten that supply.
China is responsible for nearly 80% of current global market share of battery construction. Even if all the other giga-factories transpire, China’s market share will only decline to 70% by 2030 (Europe – 18% – and the US account -12% – for the rest) and China will continue to dominate the battery component supply chain.
Sichuan Province provides 30-40% of China’s lithium and more than 10% of its polysilicon – vital for the production of EV and solar panels. A severe drought has dried up the region’s rivers, which are key both for transport and hydropower. This reliance on the rivers has resulted in a shortage of components parts and power rationing, which have combined to reduce lithium carbonate and lithium hydroxide output by 1,250 tons and 3,050 tons respectively in August 2022 alone.
The dependence on China creates significant fragility in the global EV battery supply chain. Given rising geopolitical tensions with China over Taiwan and the Uighurs, this fragility could quickly become a vulnerability.
Batteries are the most expensive single component of an EV – making up approximately one-third of the cost of an EV. Optimism that the cost of an EV could match that of a ‘traditionally -powered’ car by the middle of the decade is undermined by the increase in demand for constrained supplies of lithium (see below). And international sanctions and other legal measures may increase the price of Chinese imported batteries and encourage EV manufacturers to use more expensive alternatively-sourced batteries.
Raw Material Bottlenecks
Technological progress has been successful in reducing the cost of lithium-ion batteries by 90% over the past decade. However, those cost reductions are increasingly offset by the rising cost of raw materials, which now make up between 50-70% of total battery costs (up from 40-50% five years ago).
Cobalt is one bright spot. Its use in batteries declined following a price spike in 2018. New mines are planned in the DRC and Indonesia: though operating in the DRC carries significant compliance risks for companies.
Nickel is more problematic. 37% of the world’s nickel comes from Indonesia. But Indonesian nickel is lower quality and can only be made battery-compatible by double-smelting it – emitting three times more carbon than higher-grade ore from Canada, New Caledonia or… Russia.
But it is the need for lithium which poses the biggest potential raw material bottleneck. In 2021, annual demand for lithium was approximately 500,000 tons (with production at just 100,000 tons). By 2030, that demand is projected to rise to 3.7 million tons. The IEA estimates that the world will face lithium supply constraints by 2025. As EV demand accelerates beyond 2030, supply constraints become more acute. On the basis of 2 billion EVs on the roads by 2050 and taking an average of 10 kg per battery, the world will need 20 million tons of lithium for EV batteries alone by 2050 (total global lithium estimated reserves are currently only 22 million tons).
Whilst the near-term outlook for lithium and cobalt is manageable, longer-term supply (including for key RRE such as neodymium or dysprosium) becomes increasingly tight, with expected supply from existing mines and projects under construction estimated to meet only 50% of projected lithium and cobalt requirements and 80% of copper needs by 2030.
Production and Refining Concentration
Lithium is available in commercially viable quantities in only a limited number of countries – mainly Chile, Bolivia and Argentina. Deposits in the US, Australia and China are lower-grade and therefore costlier to process into battery-compliant Lithium carbonate and the smaller reserves in Zimbabwe, Brazil and Portugal are not currently economically viable.
The world’s top three producing nations control well over three-quarters of global output of lithium, cobalt and rare earth elements. The DRC and China alone were responsible for some 70% and 60% of global production of cobalt and rare earth elements respectively in 2019. Chile controls nearly 60% of the world’s lithium reserves. The level of concentration is even higher for processing operations. According to IEA estimates, Chinese companies refine nearly 90% of the world’s RRE; 85% of its cobalt; 84% of its nickel and nearly 70% of the lithium. China also controls 80% of lithium hydroxide output; and 60% of global lithium chemical production.
Lithium’s constrained supply is compounded by the fact that over half of today’s production is in areas with high water stress or (ironically) in areas liable to flooding – it takes 2.2 tons of water to make a ton of lithium. In addition, processing capacity is not easily expandable and the technology for RRE metallurgy is complicated and challenging – creating significant barriers to new market entrants.
Building mines is highly capital-intensive and time consuming – the IEA calculates that lithium mines that started operations between 2010 and 2019 took an average of 16.5 years to develop. Once produced the investment risk does not end – whilst RRE deposits are frequently co-produced, their markets are divergent; and the high waste-to-yield ratio creates significant mine tailings, which also contain radioactive elements – every ton of REEs produced creates 2,000 tons of mine tailings, including 1-1.4 tons of radioactive waste.
With the EV market still in its infancy and the inefficiency of REE deposits, the risk-return ratio on investment frequently does not stack up for major mining companies; whilst the smaller mining companies cannot afford the upfront capital. Compliance and contract enforcement risks in countries such as the DRC can act as a major disincentive to market entry and new pieces of ESG regulation such as the EU’s Green Taxonomy can have the perverse outcome of driving investors away from the mining industry.
Security of Supply as a National Security Issue
Governments are increasingly identifying RRE and minerals as strategic industries, crucial to national security and are accordingly devising strategies to protect their national interests. The Australian government has established funds to support companies breaking into the market; the UK published its Critical Minerals Strategy in July 2022; the US Government is planning to build a brand new heavy rare earths separation facility to counter China’s dominance of critical mineral supply chains. The EU is proposing a Raw Materials Act aimed at stimulating EU production; designating key strategic projects for accelerated permitting; creating a one-stop shop for project authorisations; and encouraging measures to speed up national legal processes.
Electric vehicles have a vital role to play in the energy transition as the only realistic alternative to hydrocarbon transport that can currently be deployed at scale. However, without secure and reliable supplies of key component elements, batteries could actually increase in price, despite technical advances, creating a risk that EVs could price themselves out of the market as lithium becomes scarcer.
If EVs are to succeed, recycling will have to become more efficient and alternatives to lithium more widespread. But even ultra-efficient recycling does not significantly reduce demand for lithium – the IEA calculates that recycling used batteries would only could cut lithium supply requirements by about 10% by 2040 – and technologies that replace lithium, such as sodium-based cathodes seem a long way off.
The more alarming conclusion is it is possible that the availability of the required raw materials may mean the lifespan of demand for EVs is limited. In an extreme case, the combined impact of resource and processing constraints; geopolitical and compliance risk; and cost and speed of building mines could drive EVs out of the market altogether, to be overtaken by the middle of next decade by demand for alternative zero-emission vehicles, including hydrogen-powered cars.