How Europe can unblock the midstream battery materials bottleneck

Asian investments in the battery value chain

China, and to a lesser extent, South Korea, dominate material trade flows today with significant infrastructure and capacity in controlling market dynamics and pricing.

Between 2009 and 2013, the Chinese government began providing subsidies to promote the growth of the EV sector, having identified EV manufacturing and lithium-ion battery production as strategically important sectors to the broader economy. The government offered cheap land for factories and significant capex subsidies to build plants. They offered tax breaks and subsidies worth up to one third of the cost of the EV, on the proviso that automotive OEMs used batteries from a list of approved battery suppliers, including entities such as CATL (Contemporary Amperex Technology Co. Limited) This initial support provided CATL with the platform to corner the market, particularly the LFP (lithium iron phosphate) cell market.

From a basis of scale, and an ability to deploy the cash flow generated from cell production, CATL has embarked upon a series of value chain investments that have allowed it to secure supply and move into the midstream. Some examples of their investments include:

• Building a plant processing nickel laterite ore in Indonesia which starts production in 2024
• Acquiring Pilbara Minerals, which plans to expand the Pilgangoora Lithium-Tantalum Project and processing facility to produce lithium hydroxide in South Korea
• Purchasing stakes in mining projects in the South American Lithium Triangle and in cobalt mines in the Democratic Republic of the Congo
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US targets cleaner EV batteries through legislation

In August 2022, US President Joe Biden signed the Inflation Reduction Act (IRA) into law, containing incentives designed to develop a local supply chain targeted at encouraging domestic production and sourcing. To incentivize demand, the law provides tax credits based on the MSRP limits. From 2024, US vehicles cannot have any battery components sourced from a “foreign entity of concern”, and from 2025, EV batteries cannot have any critical minerals sourced from a “foreign entity of concern”.

Through this legislation, the US is localizing production within the area covered by its North and South American free trade agreements, which includes agreements with commodity-rich countries such as Chile. The US is aided by a slower adoption of EVs than Europe.

The US Department of Energy (DOE) has awarded $2.8b to around 20 companies across 12 states operating in its domestic battery supply chain through the US Bipartisan Infrastructure Law. This has driven $1.5b to be allocated toward materials separation and processing, and $1.3b allocated toward component manufacturing. Of the $2.8b, 30% has been allocated to anode investments and 25% to PCAM & CAM, covering NMC and LFP technologies.

Capital deployment at coordinated scale has also been limited, with potential investors detracted by challenging infrastructure economics, cost competitiveness and technology obsolescence risks. Europe faces some fundamental challenges with few native supplies of battery raw materials, substantially more expensive energy costs and significant capital investment requirements to develop the required chemical processing capabilities.

Furthermore, Europe demands a differentiated approach to battery materials sourcing, with transparency, localization and sustainability at its heart. This approach is driven by regulations such as the CBAM, tariffs incurred on a fully manufactured vehicle that does not meet locally sourced value requirements, and OEM net-zero targets.

Compared to Asia, European capacity remains limited across the material supply chain, despite steps taken by BASF, which is developing a PCAM facility in Finland and CAM facility in Germany and Umicore, which inaugurated a greenfield plant in Poland in late 2022.

Elements of the material supply chain carry significantly greater risk and therefore should be prioritized for localization sooner due to value, forecasted capacity gap and high rules of origin (RoO) imperatives. Specifically, CAM supply shortages and challenges will be a critical bottleneck across both LFP and NMC chemistries.

There may be opportunity to commercialize newly discovered commodity reserves (such as British Lithium in the UK) through domestic or regional midstream developments in lithium. However, it’s too early to tell whether these deposits are extensive enough or commercially viable to attract localized midstream processing and refinement.

With a targeted focus on where to incentivize and invest, Europe can play a leading role in driving forward technology innovation and leadership to alleviate some of the capacity challenges. This represents a significant opportunity and manifests in two main areas:

1. Focusing on recycling technologies, such as hydrometallurgical processes, that keep high spec materials in a circular European loop and offset the need to go back to the refining process.
2. Developing conversion technology to enable commercialisation of a broader mineral base, including direct lithium extraction and extraction from geothermal brines.

While targeting investment toward high-value areas of the material supply chain, especially toward extracting and refining materials agnostic of chemistry mix, Europe may try to lead in technology advancements that will enable it to offset some of its strategic challenges.

A “do-nothing” approach, which just continues to focus on downstream battery development, leads to constrained access to critical materials supply and price volatility, resulting in stranded or under-utilized cell manufacturing assets. This in-turn impacts the overall performance of European automotive OEMs and the European automotive sector.

Relying on private capital will likely provide limited returns given the capex associated with building the necessary infrastructure and the opex associated with European energy prices. These issues culminate in prospective European midstream players being unable to compete against cheaper Asia-based alternatives on cost, which downstream cell manufacturers will not want to digest, given the challenge in passing those costs onto OEMs and in turn consumers. 

Another option is to attempt honing vertically integrated regional champions with the requisite balance sheet strength. In recent years, across the minerals and chemicals landscape, there has been an increasing pursual of partnerships, minority investments, joint ventures (JVs) and less frequently M&A to gain vertical control in the value chain. For example, Rio Tinto made a $10m strategic equity investment in Nano One last year to collaborate on battery metals as inputs for Nano One’s cathode processing technologies. Northvolt is one such Europe-based cell manufacturer that is following a vertically integrated approach with a JV with GALP for a lithium conversion plant, as well as a partnership with paper and pulp producer Stora Enso for a lignin-based anode.

Vertically integrated players can benefit from the surety of technology roadmap alignment and afford the opportunity to co-locate on premises which offers clear synergies with regard to sharing R&D, know-how, resource, operationalizing the plant (including providing access to the requisite energy connection and contracting) whilst minimising logistics and associated challenges with transporting materials.

Other examples of vertical integration include Volkswagen’s offtake agreement to secure lithium hydroxide from Vulcan Energy and a JV with Umicore to produce precursor and CAM. While vertical integration does appear to be one tool deployed by OEMs and at-scale cell producers, it is still proving to be limited in its coverage and ability to reduce reliance on Asia.

One solution that looks increasingly promising is a coordinated approach to midstream development, spanning value chains and countries through the creation and development of European battery alliances. While vertical integration provides significant synergistic value, a multi-player alliance model can emulate this benefit and generate additional value for member states and industry actors in its coverage.

Today, the risk associated with each step of the value chain is different, and none of the preceding options can properly mitigate each of these risks. Miners feel the capital risk associated with funding multi-year exploration and drilling a new mine; midstream processers have to endure the risk of accessing sufficient material volumes as well as the challenge associated with managing high opex; and CAM manufacturers endure the risk of technological obsolescence if product roadmaps deviate with new discoveries. The development of an alliance that spans multiple facets of the value chain will help to share the risk and encourage investment and collaboration enabling European players to compete with Asia-based competitors.