EV transition threatened by rising metal costs

The automotive industry's transition to affordable electric vehicles (EVs) could be threatened by soaring costs for battery metals and chemicals, with prices hitting multi-year highs and supply chain risks causing some market participants to draw parallels with the ongoing semiconductor shortage.

Lithium carbonate prices hit a record high last week of $38.50-39.50/kg cif China as adverse weather conditions force some producers to operate at reduced rates while others carry out maintenance work before the lunar new year holiday. Overall, China's lithium carbonate production is expected to drop by 20pc in January from its normal rate of around 16,500t/month, Argus estimates.

Meanwhile, nickel prices have surged since the start of 2022 amid high demand from China's EV sector, with the LME three-month contract reaching a 10-year high of $22,845/t last week. On-warrant nickel inventories in LME warehouses have dropped to 44,832t, their lowest since 2019 and down by 82.94pc from the 12-month high of 262,848t on 21 April last year.

In the cobalt market, prices for alloy and chemical-grade metal have gradually risen to the near record highs they hit back in 2018. Prices were assessed at $33.50-34.50/lb du Rotterdam on 13 January, up by 85pc from $18-18.60/lb a year ago. Bottlenecks along southern Africa's export routes for cobalt hydroxide have lifted prices for most cobalt products, and Chinese metal producers have curtailed output, switching toward direct chemical production. China is also importing metal at elevated rates, tightening the global market.

As supply concerns pile up across the battery metal suite, end-users across the world are weighing up the risks to margins and manufacturing. Tesla's co-founder and Redwood Materials chief executive JB Straubel warned in a recent television interview that EV producers will struggle to find enough materials in the coming years. "It will put enormous pressure on the supply chain, to make enough materials to make enough batteries to supply that need," he said. "There is absolutely a risk that we could see a repeat of the semiconductor-type shortages which would hamper EV growth."

Alternative solutions to switching required

Chinese EV producers have acted quickly over the last year to cut reliance on cobalt and nickel, opting to use a growing amount of lithium-iron-phosphate (LFP) batteries. But LFP batteries are not suitable for longer-range and more powerful vehicles, and so solutions to the current bottlenecks will be needed.

Restricted lithium supply in China has highlighted the need for other countries to increase output, but that is no simple task. Political issues in Chile are hampering the development of new supply, with Chilean courts attempting to block the allocation of new contracts.

On 12 January, the outgoing Chilean administration allocated 80,000t of new contracts to Chinese automaker ByD Co Ltd and local firm Servicios y Operaciones Mineras del Norte, but on 14 January a court ordered a halt to the allocation. President-elect Gabriel Boric — who is due to take office in March — has criticised the auction and he is widely expected to demand more concessions from mining firms looking to extract Chile's lithium in future.

China and Chile accounted for a combined 35pc of global lithium production in 2021, up from 33pc in 2020, according to Argus data. Australia maintains its position as the dominant supplier, accounting for 53pc of global production in 2021, although the country's exports from Port Hedland slipped to 370,653dmt in 2021, down from 374,237dmt in 2020.

Some market participants are hopeful that several mine expansions will progress and help soften the lithium carbonate market in the second half of 2022 — SQM in Chile, Albemarle's La Negra III and IV in Chile, Talison Lithium's Greenbushes, Pilbara Minerals' Pilgan plant in Australia and Orocobre's Olaroz facility in Argentina.

But in the long term, the further diversification of supply will be key to overcoming bottlenecks. European and US clay lithium projects are required to meet the industry's needs, but many of those under development will not start producing until the middle of this decade.

Meanwhile, South Africa's efforts to contain the Covid-19 pandemic and last July's riots in the Durban area shone a spotlight on the risks facing the continent's cobalt supply routes and the speed at which bottlenecks could flare up. Two major mines in the Democratic Republic of the Congo (DRC) — Glencore's Mutanda and China Molybdenum's TFM mine — are expected to increase output between now and 2025, but logistical issues may continue to hamper efforts.

Glencore expects Mutanda to average 11,000 t/yr of cobalt production in 2022-25. China Molybdenum has ambitions to increase output at its TFM mine by 17,000 t/yr by 2023, from its original capacity of 20,000 t/yr. Global cobalt demand is expected to exceed 153,000 t/yr by 2023, up by 32,000t from 121,645t in 2020, according to forecasts from Argus Consulting.

There is an immediate challenge in the nickel market, where new projects are limited to Indonesia. Increased environmental concern may push EV producers to exclude Indonesian nickel in supply chains. Tsingshan's plans to convert NPI to matte and then to class 1 nickel is much more carbon intensive than most carmakers find acceptable, although necessity may override their concerns.

By Thomas Kavanagh