Lithium mine. Source: Morgan Stanley
As the world transitions away from petrol and diesel cars to electric vehicles, the complex supply chain feeding the 70 million unit per year vehicle market will change dramatically.
The most obvious change will be the reduction in oil feeding the world’s billion plus fossil vehicle fleet, although this will take time as the average vehicle stays on the road for over 10 years.
The more immediate shift will be in the supply of materials feeding the global new car market, particularly critical minerals such as lithium and nickel and their supply chains.
A new report by Morgan Stanley analysts highlights some of the winners and losers in this transition, and highlights how the transition creates concerns around national security and sustainability.
“Onshoring the EV battery supply chain will require radical changes in policy and technology, and over $7 trillion of capex, re-casting the global balance of power within autos that has stood for over a century,” the report says.
The 100 page report, with contributions from 36 Morgan Stanley analysts, notes the global EV battery supply chain is currently dominated by China, and that if other major economic zones like the US and Europe want to have any hope of taking a share in the future they need to incentivise local sourcing and production and radically shift policies.
“Up to 90% of the EV battery supply chain relies on China. A continuation of the current EV adoption path would increase dependency on economic rivals. If the West wants to drive EV adoption to meet decarbonization goals, while also mitigating national security concerns, a radically new battery supply chain will need to be created.”
Morgan Stanley poses three scenarios that decarbonise the global auto fleet. Each case will have dramatically different decarbonisation timeframes and global economic outcomes.
“Getting off ICE quickly and creating a secure onshore battery supply chain may be mutually exclusive over the near term. De-risking battery supply in the framework presented in seeking security in the multipolar world will take time,” says the report.
“Decoupling battery production from China would be hugely disruptive, and would likely be piecemeal in the developed world.”
Morgan Stanley say that if the US and Europe want to develop their own EV supply chains to rival those of China’s, governments must play a strong role.
“We cannot rely on market forces alone to drive us to an electrified, on-shore future. Policy around adoption must be coordinated with policy around supply chain and sourcing, and the more acute need is on supply rather than demand, in our opinion.” says the report.
Morgan Stanley says that governments incentivising in EV supply must be careful to discern between subsidising innovation and entrenching inefficient technology.
“While still in flux, the US Inflation Reduction Act (IRA) is more of a blunt instrument to incentivize onshoring. The Act funds battery investment dollars by kilowatt-hour rather than dollars by a measure of efficiency/innovation, which propagates sub-optimal operations.”
Morgan Stanley points to the recent deal between Ford and CATL to highlight the geopolitical challenges around EV supply chains.
In February this year Ford announced a deal with Chinese battery technology leader CATL to build a $3.5 billion EV battery plant in Michigan.
Multiple US states bid for the plant however political pushback complicated negotiations. Virginia Governor Glenn Youngkin withdrew his state from consideration for the factory, calling it a “Trojan Horse” that would undermine policy efforts to strengthen the US auto industry.
Eventually the deal struck with Michigan means Ford will own the plant while licensing CATL’s technology. CATL will have no equity stake in the factory. Ford received $1 billion from the state of Michigan as part of the deal.
“According to Reuters, U.S. Senator Marco Rubio introduced legislation to block tax credits for EV batteries produced using Chinese technology – the government is wary of this deal as circumnavigating the spirit of the IRA,” says Morgan Stanley.
“Also according to Reuters, a 12% royalty is included in the Ford-CATL partnership, which means, in essence, CATL will receive $900 of the$7,500 tax credit granted to US customers if the partnership is allowed under IRA.”
This example of political concerns obstructing the utilisation world’s best battery technology highlights the challenges facing the transition.
Morgan Stanley says the Ford-CATL deal marks an inflection in the historical relationship between the US and Chinese auto industries.
The report notes that the current EV battery supply chain is highly concentrated. For lithium, nickel and cobalt over 75% of global output is concentrated in just three nations including Australia. Cobalt is however being used less in new EV batteries with Tesla’s lithium iron phosphate batteries not using any cobalt at all.
China controls over 75% of cell production, over 70% of processed energy material production, and over 60% of energy materials purification and refinement.
While Australia currently supplies around half of the world’s lithium, only a fraction of it is refined in Australia.
Morgan Stanley says the US does not import any lithium from Australia today because 94% of Australian lithium is allocated to China for battery manufacturing as of 2022.
“The changing policy landscape with favorable economic incentives can catalyze a re-architecting of the existing battery supply chain, where the US could increase its share of FTA-sourced minerals.”
From Australia’s perspective, developing local lithium refining for the global EV supply chain appears to be an enormous opportunity.
Tesla recently began construction of its own lithium refinery in Texas. It will be one of the largest lithium refineries in the world and produce enough lithium for 1 million EVs per year when it reaches full production.
Tesla’s new refinery will use inert reagents and can take feedstock from recycled batteries. Tesla says with its new refining methods production cost is around 30% lower on a unit cost basis.
If the new lithium refinery is a success, perhaps Australia with its massive lithium resources could be the the ideal place for Tesla to build a second refinery.
Daniel Bleakley is a clean technology researcher and advocate with a background in engineering and business. He has a strong interest in electric vehicles, renewable energy, manufacturing and public policy.
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