With the runaway success of Tesla and the rapid rollout of competing electric vehicle models from major automakers, the switch away from fossil fuels and transportation seems a certainty. The automotive technology is in place, as is the tech needed to safely charge the vehicles at home and on the road.
However, electric vehicles—particularly EV batteries—are different with respect to material inputs compared to internal combustion engine cars and trucks. In particular, lithium, cobalt and nickel are in high demand, and it’s unclear where supplies of these vital minerals will come from, and if there is enough worldwide at reasonable prices to drive the electric vehicle transition in the time frames required to meet climate change goals. What if this turns out to be impossible?
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Episode Transcript:
We’ve all heard the politicians talk about this, and some nations have already implemented policies. But has anyone actually thought about what it will take to replace the 60 or 70 million internal combustion engine vehicles manufactured every year?
Take a look at the material inputs. Like internal combustion engine vehicles, steel, aluminum, glass, rubber and plastics will be necessary in roughly the same proportion as they are for fossil fuel powered vehicles. More copper will be needed, primarily due to electric motors, but the real change is in the battery. Lithium, cobalt and nickel will be needed in significant quantities, and are not currently used in meaningful amounts in gasoline or diesel-fueled vehicles.
Automakers can retool a factory for EV’s in a year, and there is now a Tier 1 and Tier 2 supplier base that can provide batteries, motors, control electronics, wiring harnesses and everything else needed to mass-produce electric vehicles. But what about those critical battery inputs?
McKinsey has researched this problem, and the results are sobering.
Consider lithium. McKinsey expects that the battery industry’s demand for lithium will grow at an annual compound growth rate of 25 percent to 2030, and while lithium is present around the world, 70 percent of current global production is in Australia and Chile. The situation is even worse for cobalt, where the majority of production is in the Democratic Republic of the Congo, where cobalt mining is highly controversial due to corruption and human rights abuses.
And what about prices? Well, market forces are at work, and lithium prices increased over 500 percent between 2021 and 2022. By March 2022, lithium carbonate and hydroxide prices had soared to over $65,000 per metric ton, against a five-year average of $14,500 per ton.
New technologies are in development, such as the extraction of lithium from brines, but out of the five different techniques for extracting lithium this way, only one—adsorbents—is in use commercially. Recycling is not predicted to be a significant source, for the simple reason that the existing vehicle fleet is not large enough to create a meaningful supply of end-of-life batteries to feed new EV production, even if a cost-effective way to recover the lithium is discovered.
And I’m talking about only one metal. Significantly more lithium, cobalt, nickel, copper and other expensive metals are going to be necessary for at least a decade, until enough internal combustion engine vehicles are replaced to flatten demand growth.
Automakers such as Tesla are attempting to control the skyrocketing costs by buying supply forward and investing in mineral processing companies and even investing in mines.
This kind of vertical integration is usually a sign of desperation in manufacturing, and it’s risky. The other risk, of course, is geopolitical. With relatively few countries producing such a high percentage of critical materials, supply disruptions are a real possibility.
So, what’s going to happen? Expect electric vehicle prices to remain high, which will drive auto manufacturers to build higher-value electric vehicles such as large SUVs and light trucks preferentially over smaller, lower margin cars. I expect that governments will attempt to bridge the price with more subsidies and tax breaks for consumers—but most importantly, I’m watching for a change in the residual values that drive the entire automotive market.
$20,000 is common as the replacement cost of an EV battery, and after 10 years of the ownership cycle—perhaps less for cheaper models—it’s very unlikely that there will be enough residual value in the vehicle to justify this expense. The high price of battery materials, and the batteries themselves, may make EV’s essentially disposable, and from an engineering perspective it makes little sense to engineer a durable vehicle if its battery will end its life after six or seven years.
Some are looking for a new type of vehicle engineering, where the entire system is designed to last perhaps seven or eight years maximum, at which point the car is returned to the manufacturer and disassembled for recycling. BMW already does this in Germany with internal combustion engine cars for environmental reasons, but if the market goes in this direction, and with current auto loan terms frequently running five or six years or longer, you may be looking at a future where leasing is how we all drive personal vehicles.
The environment will love us, but they’ll pry the keys to my Triumph TR-8 from these cold, dead hands.