EV battery shortage set to become a glut as China charges ahead
Goldman Sachs predicts the country’s production will meet its own demands and supply all of Europe’s needs, 2.5 times over
It wasn’t that long ago that the auto industry’s once-in-a-century shift to electric cars faced an almighty threat: a battery shortage.
Lack of production capacity would, Elon Musk predicted, “be the limiting factor on progress towards sustainability.” RJ Scaringe, chief executive of Rivian, a$20 billion electric vehicle start-up Rivian, put it more starkly. The world only had enough factories, he said last year, to produce 10 per cent of the projected 2030 requirement.
“Ninety to 95 per cent of the supply chain does not exist,” he said. The semiconductor shortage that wrought havoc on countless industries last year would be, he added, “a small appetiser to what we are about to feel on battery cells over the next two decades.”
The scaremongering, and some high prices for lithium, the key element in batteries, appear to have worked swiftly to turn scarcity to surplus. The world is about to be awash in batteries, setting the stage for a price collapse and some painful years for European battery makers who will unlikely be able to compete with a wave of Chinese “gigafactories”.
So predicted Goldman Sachs in a detailed note that lays out how China has almost transformed the market with astonishing speed. The country already produces 80 per cent of the world’s batteries. In response to soaring demand — global electric car sales have gone from less than three million in 2020 to ten million last year and are due to reach 30 million by 2030— China is to almost quadruple battery capacity by the end of the decade. By 2025, the American bank predicted, the country will have built enough new capacity not only to meet the demands of its own fast-growing market, but also supply all of Europe’s needs, 2.5 times over.
Sky-high prices for lithium carbonate, the key element for batteries that last year surged to $80,000 a tonne when fears over a supply crunch peaked, also played a role. Miners and refiners greenlit projects or maxed out capacity to cash in on the boom, pushing production up and prices down. Lithium carbonate last week traded at $21,000, a 75 per cent fall.
“What’s the saying: ‘The cure for high prices is high prices?’”, said Gene Berdichevsky, chief executive of Sila Nanotechnologies, a battery technology start-up based in California. “If there ends up being a supply glut, it’s the new battery cell makers that I think are gonna suffer.”
The new reality means that the price of certain battery types could fall up to 40 per cent by 2025, Goldman predicted, potentially undercutting efforts in Europe to jumpstart a “local” supply chain. Britain has only one Nissan battery plant in Sunderland. Upstart Britishvolt collapsed in January, taking with it a £3.8 billion plan to build a British “gigafactory” in Northumberland. India’s Tata Group announced in July, however, that it would build a £4 billion gigafactory to supply Jaguar Land Rover.
Like oil in the age of the internal combustion engine, access to the minerals and production capacity for batteries has grabbed the centre of the geopolitical stage. BMI, a research arm of Fitch, the credit rating agency, forecasts, “a rise in government intervention” in production and sourcing of lithium, which it said has come to be seen as a “strategic material”. In March the EU passed the Critical Raw Materials Act, which offers to fast-track and provide financial aid for new factories and mining operations. At least ten new gigafactories are to come online by 2025 across the continent, both from Chinese giants such as CATL to newcomers such as Verkor of France and Norway’s Freyr.
Yet Europe’s growth is being lapped by China and even America. President Biden last year signed the Inflation Reduction Act (IRA), a $1 trillion package of tax cuts and subsidies for green technologies that goes far beyond any efforts across the Atlantic. Luring battery production was chief among its goals.
In 2019 America had just two battery factories. Now there are 30 in planning, construction or operation thanks to the act’s subsidies. That is in addition to new mining projects and refineries, such as an $800 million plant in Etowah, Tennessee to refine raw lithium into battery-ready material that has been given building permission.
“There’s no world where a battery from China is cheap enough to make up for the loss of the IRA tax credit, which is $7,500 a car. Basically that’s the cost of the entire battery,” Berdichevsky said.
The upshot is that much of China’s coming surplus will probably end up in Europe or Britain. “Europe screens as a more attractive export destination for Chinese-made batteries compared with the US,” Goldman said. “This also leads us to the conclusion that Europe may prove a less favourable location for new gigafactory attempts.”
It wouldn’t be the first time that the Chinese obliterated European clean energy rivals by dramatically scaling up operations. It happened in the 2010s with solar panels. China built so much manufacturing capacity to feed Europe’s demand for solar panels that prices plunged by as much as 90 per cent. Today, the country controls more than 80 per cent of the market; Europe is an also-ran.
“We believe the battery industry could follow developments of the global solar module industry in the 2010s,” Goldman said.
There are two reasons, however, that the battery boom has more twists in store. One is a deficit of lithium. Building plants is one thing. Making sure that they have enough lithium, cobalt, nickel and other minerals to turn into batteries is another matter entirely. Most of the world’s lithium, a light, silvery-white metal prized for its ability to hold energy, comes from Australia. Other big producers include Chile, Argentina and, of course, China.
Getting new projects approved is difficult because extracting lithium from ores or brines requires noxious chemicals or large evaporation ponds, respectively. BMI expects the lithium supply deficit to widen between now and 2031, despite an expected quadrupling of output. The mismatch will probably lead to soaring prices that will wreak havoc on everything from new plant building to the cost of electric cars.
The other concern that industry insiders have is that while many factories are being built by “tier one” companies, such as Panasonic, others are to come from upstarts or less-proven rivals whose ability to deliver these megaprojects is unclear.
Evan Hartley, an analyst at Benchmark Mineral Intelligence said: “A lot of the capacity that has been announced is coming from companies who are new market entrants. They’re not 100 per cent established in the supply chain. They don’t have customers. What they do have is great ambitions and hope that this growing market will sustain their businesses. Not all these companies can survive.”
So while the crisis Musk warned about just last year has calmed, another is brewing.
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