By Andrew Leyland, Head of Strategic Advisory
Lithium ion battery cell prices have decreased from $290/kWh in 2014 to $110/kWh in 2020 (large contract automotive), according to Benchmark’s latest data, yet there is a view in the lithium ion industry that this trend will continue indefinitely.
This in turn will lower the price of electric vehicles and bring cost parity between internal combustion engine (ICE) and electric vehicles (EV) in the all-important $20,000-$30,000 mass market vehicle segment.
Given the strong track record of the industry over the years you could be forgiven for thinking this is a done deal.
It is not.
What battery cost analysis often ignores is that declines have primarily been driven by two things, economies of scale and technological improvement, ignoring a third critical input to cell costs, the cost of raw materials.
Worryingly enough many automotive board members still expect battery costs to continue to decline at pace without understanding the supply chain they are at the end of. Price volatility is introduced to the automotive battery supply chain at the mineral extraction phase. Here prices are determined by the market fundamentals of supply, demand, cost and inventory level.
This is something Benchmark Mineral Intelligence has built a global data and advisory business on.
There is little argument that demand for critical raw materials and chemicals will continue to increase.
Even in this year with its unprecedented demand shock the market has been broadly favourable for EVs, with more and more announcements on EV sales targets, cell and cathode investments.
However, the mine finance side of the market has been more akin to the slow-moving train wreck for which 2020 will be mostly remembered. In short, we are financing demand for commodities and chemicals, but not their supply.
Mines and refineries require high sunk capital, often in challenging social and political environments. They take years to find, define, licence and construct. Geology does not recognise boarders and EU and other “Green Subsides” will not, for example, finance nickel and cobalt mining in Indonesia.
All of this leads us to the ever increasing need to build more extraction capacity. There is no geological shortage of these materials, there is a planning and financing shortage.
Capital requires a return, and in some industry forecasts of cell costs falling to $60-70/KWh there is little room to pay for, let alone incentivise, all the greenfield mining projects required.
As shown in the chart below for lithium, the industry needs to double in size every 4-5 years, as do other battery raw materials.
Any industry would struggle to do this in a falling price environment, especially if it cannot service its debt. This will put a floor on how low raw material and battery costs can fall.
It is worth noting the role of recycled supply (in red), which has an approximate 12-year lag on when material was first consumed. In lithium and other raw materials recycling will play an important role, but it will not solve supply questions alone until the late 2040s or 2050s at the earliest.
To understand lithium ion cell costs, you need to know raw materials
In the below chart we look at what would happen to next generation NCM 811 cell costs if each of lithium, cobalt and nickel hit their highest price levels seen in the past 10 years. The result is an increase in cell costs from $87.2/kwh to $119.0/kwh. The same amount of lithium, cobalt, and nickel running along the same production line, but with a 36.5% cost increase.
These raw material price levels have happened before, and the market fundamentals show they could happen again.
When a 10% cell producer margin is included, moving from a production cost to a price, in a 70KWh battery pack this adds almost $2,500 to every vehicle.
Given raw material markets are widely forecast to see supply deficits in the coming years it would seem to be optimistic to base investment plans on historical performance.
Battery costs and prices will not continue to decline because they have declined in the past.
Larger factories, higher nickel content, increased energy density from the anode and a thousand incremental improvements will all help drive cell costs lower, but, without investment in mining and refining capacity this could be quickly reversed.
Responsibility falls to the carmakers
Price risk falls at the feet of the consumer, in this case the carmaker or original equipment manufacturer (OEM). Raw material prices are cost pass-through for cathode and cell producers. They may negotiate and purchase the raw materials, but it is the OEM who ultimately pays for them.
Their ability to pass on these costs to their customers is also limited given EVs are in essence a substitute product for ICE vehicles.
The answer for OEMs is more active management of supply chains. It is unsurprising that Tesla as the Western World’s “Thought Leader” in all things EVs addressed this (albeit in a somewhat woolly fashion) during its Battery Day. Other OEMs should take heed and take a more active role in raw material sourcing and purchasing, or battery costs will soon reverse course.