The automotive industry could experience materials shortages that disrupt electric vehicle production quite soon.
A decade ago, the automotive industry could not foresee a semiconductor shortage disrupting vehicle production. A decade from now, automakers may face a scarcity of materials required for EV batteries and other essential components. Shortages might even come sooner than that.
Increased electronics content in vehicles has tied automotive companies to the semiconductor industry. In 2020, semiconductor manufacturers, anticipating a seasonally soft Q4, didn’t increase output. When auto demand suddenly spiked, chip makers were unable to muster a quick reaction — aside from supply chain issues, semiconductors take 18 weeks to build. Automakers are now competing with massive chip buyers (such as consumer electronics companies) for a limited supply of chips.
Materials are similar from the perspective of pure supply and demand. The move toward zero-emission vehicles now puts materials such as graphite, cobalt, nickel and manganese in automakers’ line of sight. Demand for EVs was expected to reach nearly 2.5 million in 2020, said IHS Markit, and then rise by about 70% by 2021. The materials used in EV batteries are not easy to obtain. Graphite, which is used in the anodes of lithium-ion batteries, could become scarce as early as next year.
The global electric vehicle battery market, valued at $35.1 billion in 2019, is projected to reach $133.4 billion by 2027, according to Verified Market Research. The demand for graphite from the battery sector is expected to rise 30% per year every year until a deficit is reached in 2022, reports Benchmark Mineral Intelligence.
Graphite and materials qualified as rare earth elements (REEs) aren’t hard to find, but they are difficult to extract from the ground, explained Lewis Black, CEO of Almonty, an international raw materials development company. Like semiconductor fabs, mines require billions of dollars in investment and years to build.
“REEs are everywhere but the reason they are not mined in environmentally-friendly jurisdictions is they require a level of leeching that makes it a dirty business to extract them,” said Black. “Nobody wants them in their backyard. The mines have found homes in low-cost jurisdictions that are less influenced by community standards [than in the Americas and the EU.]”
Nearly all of 17 REEs are mined in and exported from China. As China continues to build its own high-tech ecosystem, China could decide it’s not in the country’s best interest to export REEs, Black explained. “It’s an entirely different political systems than in the West; the state is the be-all and end-all. If they decide not to export, there’s very little you can do about it,” he said.
This is among the issues that will be examined by the U.S. in a review of the nation’s supply chains. The Biden Administration, by executive order, wants to gauge U.S. dependence on supplies and services from foreign nations. Separately, Congress is looking to bring semiconductor manufacturing onshore through the CHIPS for America Act.
The focus on graphite
The United States is not able to produce graphite and the government has designated it to be a critical mineral due to its importance in national security and its supply chain vulnerability. Benchmark estimates that the amount of graphite needed for the anode material in lithium-ion batteries will rocket to 1.75 million metric tons by 2028, a nine-fold increase over 2017 levels.
Graphite is all about the purity of the material, explains Bharat Parashar, CEO of Ceylon Graphite. The highest grade graphite in the world is found in Sri Lanka. Ceylon Graphite mines there and has invested in environmentally-friendly and sustainable operations.
For renewable energy to be successful, storage is essential, he explains. Current technology predicates that all energy-storage products need graphite for the anode. Automakers who are looking for batteries/energy storage cells for EVs will therefore face competition for raw materials.
“When [U.S. dependence on foreign sources] was first discussed it took a broader approach, looking for domestic production,” explained Black. The current initiative is looking at alliances.
“At first blush an insular approach does not look so good; it takes a long time to develop a mine. It takes five years just to get a permit in some areas. There is a more diverse option with companies friendly to the United States. Within a decade you could have strong, diverse supply chain that is competitive. You can’t disadvantage your own customer because you can’t be competitive in price.”
Should tech get into mining?
If global partnering is not enough, companies that own battery mega-factories or heavy users of battery raw materials should consider vertically integrating — buying mining operations, said Parashar. “Tesla, for example, is in the battery /energy storage business and intends to build mega factories to produce its own batteries/energy storage cells — and should definitely consider buying the source of the raw materials if they want all their plans to fructify.”
Founder Elon Musk envisions Tesla playing a significant role in sustainable energy and storage in addition to more affordable electric vehicles. Musk plans to phase out using cobalt in its battery cathodes in favor of iron phosphate, nickel the other cathode raw material which is highly concentrated in Indonesia, Russia, Canada, and the Philippines.
Musk is also known for large projects (such as SpaceX) and his willingness to forego typical supply chain practices may be the only way some of these transformational strategies succeed, according to Parashar.
For example, if the global plan to have at least 150,000,000 EV’s by 2030 is to become reality, the world will need about 10,000,000 tons of refined graphite ( at least 12.5 mm tons of raw graphite) and almost the same amount of other key minerals also in short supply.
“Will there be enough product around? No, and not enough development is contemplated,” he said.
Vertical integration is in vogue again in the electronics industry. Power management company Vicor Corp. has expanded its factory in Andover, Mass., so it could control its processes as well as designs. Vicor will manufacture power products more quickly, more efficiently at lower costs and higher quality, executives said.
“For someone like Musk or [Jeff] Bezos, it conceivable they may — and in my opinion, they must — acquire the source if they need scarce raw material for their various products,” said Parashar. “You need to vertically integrate no matter what element you are talking about if you want to succeed.”
Those who control these critical raw materials and those who possess the manufacturing and processing know-how will hold the balance of industrial power in the 21st Century auto and energy storage industries, Benchmark Managing Director Simon Moores told U.S. legislators last year.