The dynamics of tightening supply and soaring demand for electric vehicle batteries are becoming increasingly fragile. Battery manufacturers are now looking into new technology with advanced chemistry compositions to ensure long-term metals supply, but progress will be impacted by the outlook for metals prices.
The rapid increase in electric vehicle sales during the Covid-19 pandemic has exacerbated concerns over China’s dominance in lithium battery supply chains. Meanwhile, the ongoing war in Ukraine has pushed prices of raw materials – including cobalt, lithium, and nickel – to record highs.
The dependence on specific suppliers is not the only concern. Batteries make up a big part of an EV’s total cost and typically account for 30% to 40% of their value, but this proportion increases with larger battery sizes.
Rising demand for EVs amid tightening supply chains has also pushed prices of battery materials (including cobalt and lithium) to multi-year highs. This impacts prices, which in turn makes consumers more hesitant to make the shift to electric vehicles.
While prices for nickel and cobalt have come down in the first half of 2023, they are still higher than they have been in previous years. For example, Chinese prices of lithium carbonate (a refined form of the metal that goes into EV batteries) jumped more than 1000% from the end of 2020 to reach a high in November last year. They then lost more than two-thirds of their value through late April, according to data from Asian Metal.
The five key materials for lithium-ion batteries (Li-ion) are lithium, cobalt, nickel, manganese, and graphite, all of which provide the battery with the power to store and release energy for boosting EVs.
Most of the key materials used in electric vehicle production are mined in resource-rich countries, including Australia, Chile and the Democratic Republic of Congo (DRC). There are likely sufficient reserves of minerals in the earth’s crust to satisfy future demand for EV batteries, but scaling up mining is a long and expensive process.
For battery production alone, a conservative estimate from the International Energy Agency (IEA) suggests that by 2030, we will need 50 additional lithium mines and 60 for nickel. We will also need to add 50 new cathode and 40 new anode active material manufacturing plants to produce high-performance battery materials. Currently, it can take between two and seven years to build a new factory, depending on the technology and member state. It takes 10 years on average until a new mine comes online.
Batteries are now the dominant driver of demand for lithium. For Li-ion batteries, lithium is irreplaceable. Over 70% of global lithium production comes from just two countries: Australia and Chile. Australia is the world’s largest supplier and produces most of its lithium by mining hard rock spodumene, unlike Argentina, Chile and China, which produce it mostly from brine. Chile comes in second, holding more than 40% of the world’s known reserves.
The intensity of cobalt in Li-on batteries has decreased significantly over recent years, with battery makers moving to higher nickel content chemistries. Cobalt is mainly mined as a by-product of copper or nickel mining, and more than 70% of it is produced in the DRC. Artisanal and small-scale mining is responsible for around 10-20% of the DRC’s cobalt production. Refining is concentrated in China, accounting for around 80% of global capacity, although the country has little of the raw material.
In Li-ion batteries, the use of nickel lends a higher energy density and more storage capacity to batteries. Class 1 nickel (>99.8% purity) is required in battery production, while class 2 nickel (<99.8% purity) cannot be used without further processing. Nickel is primarily found in two types of deposits: sulphide and laterite. Sulphide deposits are mainly located in Russia, Canada and Australia and tend to contain higher grade nickel. Russia is the world’s largest supplier of Class 1 battery-grade nickel, accounting for around 20% of the global supply. Trade restrictions on Russia would therefore pile pressure on prices. Laterite, which contains lower grade nickel, is mainly found in Indonesia, the Philippines and New Caledonia. Indonesia, which holds almost a quarter of global nickel reserves, prohibited the export of nickel ore in January 2020 and is now attracting investments into higher-value processing, mostly from China.
Lithium and cobalt were relatively unaffected by the supply disruptions following Russia’s invasion of Ukraine. For nickel, it's a different story. Russia is the third-largest producer, supplying around 9% and processing around 6% of global nickel in 2021 – but most importantly, it is the world’s largest Class 1 nickel supplier and accounts for around 20% of global supply, most of which is supplied by Norilsk Nickel.
Volatility in the nickel market has become increasingly common over the past year. We've seen reduced liquidity ever since the short squeeze seen back in March, when fears of sanctions on Norilsk Nickel (following Russia’s invasion of Ukraine) coincided with a huge short bet by the world’s largest stainless steel producer, Tsingshan. This caused prices to more than double in just a matter of days. The LME was forced to suspend trading for a week and cancel billions of dollars worth of nickel trades.
LME volumes have declined since then, with many traders reducing activity or cutting their exposure due to a loss of confidence in the LME and its nickel contract in the aftermath of the March short squeeze. These low levels of liquidity have left nickel exposed to sharp price swings – even amid small shifts in supply and demand balances. But as the exchange introduced daily price limits and margin requirements fell, volumes started to pick up. The resumption of Asian trading hours has also encouraged more volumes and improved liquidity, which in turn has reduced volatility in the contract. While volumes have stabilised over the past few months, they remain at lower levels than before the nickel crisis last year.
