Demand for electric vehicle (EV) batteries has surged as countries pledge to phase out gasoline cars and automakers roll out more EV models. According to a report from the International Energy Agency (IEA), global battery demand will grow to over 3500 GWh by 2030. Therefore, investment in the supply chain, especially in raw materials extraction, is needed now.
The report was released in July, titled Global Supply Chains of EV batteries. According to IEA, EV sales accounted for 10% of global car sales in 2021, four times the market share in 2019. China contributed half the worldwide EV market growth with 3.3 million vehicle sales. Europe also saw a robust growth of 65% to 2.3 million cars last year.
Thanks to the electrification underway, IEA projected that EV battery demand will surge from about 340 GWh today to over 3500 GWh by 2030 in the Announced Pledges Scenario, a scenario assuming all government's climate commitments will be met.
While the need for batteries grows across the board, the report shows the global average utilization rate for battery plants was only 43% of nameplate capacity in 2021. The low rate resulted from the ongoing process of ramping up production and that much capacity investment was for projected future growth.
LFP adoption to grow outside China
As for battery chemistries, nickel-based cathode materials like NMC and NCA remained dominant, with 75% of the demand share in 2021. However, the prevalence of LFP has gradually increased in recent years and reached a 25% share. LFP holds the cost advantages as it contains no cobalt, nickel and other expensive metals. In addition, the recent innovation of cell-to-pack (CTP) technology helped improve the energy density of LFP batteries, which usually possess 65% to 75% of high nickel battery energy density.
According to the IEA report, China holds the most global LFP production because of patents besides early government subsidies in the supply chain. An agreement between the patent owner and battery makers guarantees that manufacturers would not be charged for license fee if they only use the technology in China.
However, the patents and license fees will expire this year. Moreover, several automakers have adopted LFP in their entry-level models. As a result, production and sales outside China are set to surge.
For example, in an announcement on July 21, Ford said it was adding LFP to its portfolio, creating a 10% to 15% savings compared with current NCM material costs. The automaker aims to source LFP batteries from CATL and will localize production of 40 GWh in North America starting in 2026.
Tesla has begun equipping its Model 3s and Model Ys with LFP batteries. According to the company, more than half of the cars it delivered in 1Q 2022 had the LFP pack.
IEA's report also provides a clear picture of China's dominance of the battery supply chain downstream of mining. For instance, 70% of global cathode and 85% of anode material production are in China. More than half of raw material processing for lithium, cobalt and graphite also occurs in the country. With the advantages, China owns three-quarters of the worldwide cell production capacity.
In contrast, Japan accounts for 14% of cathode and 11% of anode material production and South Korea is responsible for 15% and 3%, respectively.
The battery production concentration in China is likely to change in the future. According to the report, a quarter of battery production capacity will be located in Europe and the US by 2030 if current announcements and investments are realized. The two areas will also see more cathode material production. However, China will likely dominate anode material production because it controls the whole supply chain.
Battery prices to increase 15% if metals remain costly
The demand for batteries grows, prompting key metal prices to rise. The report shows that lithium prices increased more than sevenfold between the beginning of 2021 and May 2022. Nickel and cobalt prices doubled over the same period.
Besides the surging demand, increasing pressure on the supply chain also cause metal prices to rise. For example, the pandemic has already created multiple production challenges. In addition, since the Russia-Ukraine war unfolded, concerns about Class 1 nickel supply from Russia have arisen because the country produces 20% of battery-grade nickel globally.
On top of the above, there is structural underinvestment in new supply capacity in the three years before 2021, when metal prices were low. For instance, some Australian mining companies curtailed lithium projects or expansion due to the low price in 2019.
IEA projected that if metal prices in 2022 stay as high as they were in the first quarter, battery pack prices will increase 15%, all else being equal.
Heading toward 2030, EVs will remain the primary driver for battery demand. According to IEA, current trends and announcements suggest that EVs will have higher battery capacity in response to the needs for longer driving ranges and larger cars.
While China is projected to own the most significant battery demand, its global share in 2030 would shrink from 60% to 40% in the Stated Policies Scenario and 25% in the Announced Pledges Scenario. The Stated Policies Scenario is a scenario reflecting current policy settings based on a sector-by-sector assessment of the specific policies that are in place.
Europe's demand share in 2030 is projected to reduce, too. However, the US is likely to enjoy the fastest battery demand increase among major markets, thanks to rapid EV deployment and the largest battery capacity per vehicle.
Demand for EVs and batteries will grow aggressively in the foreseeable future but scaling up supply would take some time. IEA said more investments are required now to meet battery demand in 2030, especially in the extraction of raw materials. The process has the longest lead times in battery production.
Tesla CEO Elon Musk recently also encouraged more investments in raw material businesses. In the company's Q2 earnings call, Musk urged entrepreneurs to enter lithium refining to produce battery-grade lithium carbonate and hydroxide. The CEO said the business is "licensed to print money."