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Insights / Article

28 Jul 2017 / 18 min read

Scrapping the Combustion Engine: the Metals Critical to Success of EVs

The demise of internal combustion vehicles is in sight with electric vehicles poised to replace them. But the cost and scarcity of critical metals could prove a major hurdle, writes Daniel Quiggin.

A fast charging plug to support electric vehicles (EVs). Image: Jean-Francois Monier/AFP via Getty Images

In recent months, the debate over the future of electric versus internal combustion engine (ICE) vehicles is again dominating business headlines. China has asked all its car manufacturers to ensure 8 per cent of their sales will come from electric vehicles (EV) by next year, rising to 12 per cent by 2020.1,2 India has likewise pledged that only EVs will be sold by 2030.3 In Europe, the UK recently joined France, Germany and the Netherlands in looking to ban the sale of diesel and petrol vehicles altogether by 2040.

If the death knell of ICE vehicles is being sounded, it may be because the point at which the total cost of running an EV reaches parity with ICE vehicles is tantalisingly close. The Norwegian government – a pioneer in this area – thinks EV subsidies will be unnecessary as soon as 2025.4 All of this is fuelling anticipation of an inflection or tipping point, where EVs fast become the norm and ICE vehicles disappear from the rear view mirror.

In 2016, EV sales grew by 55 per cent – twenty times greater than ICE vehicles. That said, an unsubsidized Tesla Model 3 that will be rolling off the production lines within days, still costs $35,000, which for a medium-sized car is still beyond many consumers’ budgets.5,6 So how near is this inflection or tipping point and what could stand in the way?

Looking forward, one unknown is the price of critical metals needed for EV batteries. Speculation of an impending lithium supply crunch is rife, with soaring demand and a doubling of prices over the past two years. But is this just a bump on the road or could these pessimistic forecasts come to pass? And what, if anything, can governments and companies do to ensure stable material supplies, clearing the path to the EV revolution?

Tesla's Model 3 on display - the first mass-market electric car developed by Tesla. Image: John Leyba via Getty Images

Falling battery prices: is the inflection price point near?

The point at which inflection occurs may be upon us sooner than anticipated. EV lithium-ion battery costs have collapsed by three quarters over the last six years, and are now at $273/kWh.7 Parity is commonly accepted to occur at $100/kWh,8 which is widely anticipated in the next decade or so.9,10 According to Tesla, the price level McKinsey forecast for 202011 just six months ago has already been achieved in the Model 3.12

Another 30 per cent reduction in lithium-ion battery prices by the end of the decade could be on the horizon, as global manufacturing capacity looks set to increase six-fold by 202013. Each time cumulative production of lithium-ion has doubled, prices have dropped by 19 per cent.14 A very similar ‘learning rate’ has helped drive down the cost of solar PV modules in recent years.

That said, material input costs - a function of the quantity and price of materials needed - will need to come down substantially to achieve price parity. In 2016 material input costs15 were in excess of the price parity point of $100/kWh.16

Workers preparing an industrial lithium pool in the salt flats of Uyuni, Bolivia. Bolivia has the largest lithium deposits of any country, which are estimated to be about half of the world's supply. Image: Aizar Raldes/AFP via Getty Images

Will scarcity and price speculation delay inflection?

Unfortunately, the critical materials for EV batteries appear susceptible to speculation, which could run the risk of price spikes and volatility, acting as a counterweight to the rapid advances in material efficiency, and delaying the onset of price parity with ICE vehicles.

Partly this is down to market structure. These are relatively opaque markets and just a handful of companies play a key role. Valuations of lithium mining firms have soared in recent months, fuelling concerns of a bubble. The share price for Albemarle, the largest producer, has risen threefold since September 2015. Most strikingly perhaps, a Chinese buyer bought a lithium mine in Australia for 2,000 times the price paid 11 months prior.17 Speculation has spread to cobalt, with investment funds reported to have begun stockpiling the metal on forecasts of 20 per cent growth per annum.18

At a time when most commodity prices have experienced near-historic declines, these metals have bucked the trend (Figure 1). The Bloomberg Commodity Index sank by 35 per cent between 2015 and 2017, yet over the same period lithium prices more than doubled, and cobalt rose by more than 60 per cent.19 In the battery manufacturing heartland of China, lithium prices increased four-fold during 2016 due to supply shortages from Australia.20

Figure 1: Lithium and cobalt bucking the price trend

Figure 1 : Price increases of lithium, cobalt and the Bloomberg Commodity Index (BCOM), 2015 - 2017.

Will production keep pace with demand?

Global lithium demand looks set to double – or even triple – by the mid-2020s, raising the spectre of a lithium supply crunch between 2023 – 2025* (Figure 2). Such forecasts are only approximate, as manufacturers are understandably secretive about the quantity of critical metals within their lithium-ion battery chemistries, and this information is protected by intellectual property. There is also uncertainty over the scale of future EV sales. Even so, most market-watchers expect rapid growth in lithium demand.

Could a ramping up of lithium production capacity close this gap however? There appears to be a good chance of a production surge, with all the ‘big four’ lithium mining companies committed to rapid expansion.21 Global lithium production expanded by 12 per cent in 2016 in response to increased EV battery demand, while in Argentina production climbed by an impressive 60 per cent.22 However, it is difficult to assess the prospects for global production into the late 2020s.

Figure 2 : Demand for lithium projected to outstrip supply

Figure 2: Upper and lower range of future lithium demand from the EV lithium-ion battery sector and non-EV lithium demand, alongside future supply. See * for methodology and data sources.

Cobalt is more of a concern in part because most cobalt is produced as a by-product of copper and nickel mining, limiting market responsiveness to price shifts and making it difficult to assess capacity. Cobalt demand from the EV lithium-ion battery sector could exceed 2015’s production23 by 2026*.24 But it is unlikely that other materials – such as nickel, graphite and manganese – will pose a significant risk to price parity on a materials supply or cost basis.

The main issue with cobalt, however, is that the conflict-prone Democratic Republic of Congo (DRC) currently accounts for around half of global supplies, and the African country accounts for a similar share of proven global reserves.25 China relies on the DRC for around 80 per cent of its cobalt imports, and Chinese buyers purchased the Tenke Fungurume mine in the DRC in 2016.26 Meanwhile, Tesla has been exploring new cobalt mining opportunities in North America.

What options are available to support price parity?

Lithium and cobalt markets are likely to be tight over the coming years, as production tries to keep pace with fast-growing demand. Yet for EVs to achieve price parity, the aggregate cost of all material inputs to lithium-ion batteries will need to decline. So what can be done to keep the costs down?

More transparency about the information around lithium and cobalt markets could help reduce unnecessary price volatility and encourage investments in new mining capacities and processing facilities. But given the scale of the expected consumption surge, many of the solutions will need to come on the demand side.

Of course, all efforts should be made to enhance material efficiency and performance for lithium-based batteries, reducing the overall amount needed. Improved battery energy density reduces the mass required to deliver one kWh, but it also increases the driving range of EVs therefore enhancing customer experience. To account for the propriety nature of battery chemistry development, targeted government support for university and industrial collaborations may be needed here.

A copper and cobalt mine in the Democratic Republic of Congo (DRC). The DRC accounts for around half of global cobalt supplies. Image: Per-Anders Pettersson via Getty Images

Better recycling rates could be the lowest-hanging fruit. Only around 5 per cent of lithium-ion batteries in portable electronic equipment are collected,27 partly due to their explosive nature,28 in sharp contrast to the 99 per cent of lead-acid batteries recycled in the US.29 As well as clearer regulations to ensure safe recycling, better information is needed on stocks of materials - including mobile phones. In 2015, the US government helped fund the first purpose-built lithium-ion recycling factory, where Tesla and others now send spent battery packs.30

We can also recover more materials from each battery sent for recycling. With current processes, more than 50 per cent of the cobalt can be recovered, but less than 1 per cent of the lithium, as low concentration makes recovery prohibitively expensive.31,32 More innovation is needed in these advanced recycling methods, including the most ambitious options. One research team, for instance, hopes to use fungi to push lithium recovery up to 85 per cent.33

Reuse of lithium-ion batteries could also contribute to lower battery costs. By around 2025, the first generation of EV batteries will need to be replaced to optimize vehicle performance, but they could still have a valuable ‘second life’ in stationary storage on the electricity grid.34 The Renault-led Powervault partnership is one of several industry initiatives exploring the use of retired EV batteries in home-storage systems.35 The business case for reuse will improve once complicated re-manufacturing processes are automated, but higher-performance, next generation batteries are likely to prove tough competitors.

Finally, research is needed into effective substitutes. Commercialization of metal-air batteries, for instance, could remove the need for cobalt and significantly reduce lithium content post-2030.

Note on methodology

* Analysis from 2015 underpins assumptions as to the critical metal content of the dominant NCA and NMC battery chemistry types and subsequent modelling.36 To capture the uncertainty in forecasting demand of these EV critical metals, upper and lower densities (kg/kWh) across the NCA and NMC types are utilized. Critical metal supply-demand is modelled, taking into account planned lithium production capacity37 and demand from other sectors.38,39 An annual gain in material efficiency of 0.5 per cent is applied.