Coronavirus supply chain shift was already underway in battery industry

The coronavirus / Covid-19 global emergency is ramping up and is fundamentally changing the way people, business and industriesoperate.

Having to move all physical operations into a virtual space may appear to be temporary but will have a lasting impact on the centralisation versus decentralisation of operations.

It has thrown into doubt the certainty of truly global supply chains, a phenomenon that has seamlessly integrated into our lives over the last 15 years.

Just-in-time supply chain models which 21st century trade has been reliant upon are now suffering in a major way.

This is something I tweeted about on 5 March 2020: “The coronavirus could well be the final straw for truly global supply chains. The weaknesses are too great at a times great change.

“Expect to move to local-global supply chains where centralising most critical components on the ultimate end user location.”

Yet, while most industries scramble to quickly evolve their own mature supply chains, the lithium ion battery industry has found itself in a unique position of being ahead of the pack.

For the last two years, the rise of the lithium ion battery megafactories has seen super-sized battery cell plants established continent by continent.

Driven by the advent of pure electric vehicles, the next decade will see Europe build 16 battery megafactories, North America construct at least 7 and China to have 93 operation plants according to current plans in the pipeline.

Electric vehicle demand has shifted the lithium ion battery industry on its axis: from supplying a battery the size of a mobile phone to producing a battery pack and enough cells to be the size of a car.

It is an order of magnitude shift that has forced a complete rethink in the way the traditionally fragmented battery supply chain operates.

What the megafactories trend has underlined is the need for some form of localisation.

The initial reason for this was cost reduction.

Not only via scale but also through supply chain integration, by reducing as many links in the chain and as many participants as possible to make battery cells — and ultimately electric vehicles — cheaper to produce.

The second tailwind driving localisation is the safety of shipping lithium ion batteries.

You may have experienced the issues with taking your mobile phone or smart suitcase into an airplane in recent years.

The issue of transporting lithium ion cells long distances is set to become more regulated as the industry grows.

On the 1 January 2020, for example, the United Nations introduced new regulation which forces manufacturers of cells to make available the test results for their products.

It is additional paper work that acts as a further roadblock to shipping vast quantities of cells across our oceans.

As a result of this trend, the need to build battery plants on every major automotive-producing continent has become paramount.

In what is a global supply chain today (with lithium ion’s epicentre in Asia), becomes a localised or continental supply chain tomorrow.

And in this case ‘tomorrow’ means by the early 2020s.

These factors forced the entire battery to electric vehicle supply chain to rethink everything – something the coronavirus is doing to everyone else now.

Tesla sparked this cultural shift in thinking between 2014 and 2016 when the Gigafactory blueprint became a reality, forcing a sea change in the volumes of raw materials being consumed by electric vehicles.

While you can stipulate where much of the supply is located, the hard reality is that you cannot shift the highest quality and lowest cost sources of raw materials such as lithium, cobalt, nickel, graphite, and manganese.

As a result, the lithium ion battery supply chain is evolving into a local-global hybrid where the raw materials travel the furthest distance but the majority of the supply chain, including cathode production, anode finishing, battery cell and pack manufacturing, EV assembly, and battery recycling happens continentally, locally, or maybe even on one site.

It is important to recognise that the raw materials to battery cell section of the supply chain was not established for this way of operating.

Lithium for, example, has been built on a blueprint of ceramics and glass; natural graphite on a blueprint of steel and industrial uses in refractories, foundries and recarburiser; and, cobalt for superalloys used in aviation.

This has dictated where global material trade flows and the direction is towards China even though most of the battery raw materials are not located there.

For example, in 2019, China mined 1% of the world’s cobalt but refined 68% of cobalt chemicals and, similarly with lithium, only accounted for 9% of extraction but 59% of global chemical production.

The lesson? If you do not own the resource, ensure you are a major direct customer of the resource.

What both Europe and the USA need to do is ensure the majority of these supply chain arrows either point towards or are located on their continent. No longer can they rely on value added material production in Asia for finished components made in the USA or the European Union.

It will force companies and domestic industries to critically think about whether they have the resources or skills to perform a function such as cathode or separator making.

And this has been the thinking for some time which sparked the likes of BASF to build an EV cathode plant in Germany or for Northvolt to build a second battery Megafactory in partnership with VW.

The cost savings of both localisation and vertical integration may outweigh importing just-in-time products from around the world.

However, most critically now, the supply security benefits in a post-coronavirus world will no doubt push these plans over the line and give Europe and the US confidence that they can bring 21stcentury high-tech manufacturing to their economies on a mass scale.

Instead of continuing the discussion or launching sporadic plans, the lithium ion battery supply chain must now enact on building an EV supply chain ecosystem on each of the world’s major continents while the rest of the world waits to dust to settle.

This is a Benchmark Membership article, written by Simon Moores — Managing Director of Benchmark Mineral Intelligence.