The Lithium-Ion Supply Chain View From North America - Shining City on a Hill or Fading Giant?

Recently, I was invited to write an essay for a journal on the opportunities and challenges that North America faces as the buildout of lithium-ion supply chains intensifies.

After submitting the piece, I was informed that it was rejected. In the interest of openness and in hopes of stimulating conversation, I am publishing the original piece here (with only minor editing to account for recent events with the labor unions in the United States). I welcome any and all feedback.

The Lithium-Ion Supply Chain View from North America

Shining City on a Hill or Fading Giant?

By Chris Berry

In President Ronald Reagan’s Farewell Address, he referred to a vision of the United States as a “shining city on a hill” [i]. As North America embarks on a Green Industrial Revolution, the reference from the 40th President of the United States is apt in that North America (and much of the world) is at a crossroads. This crossroads is marked by both geopolitical (a new Cold War, rising authoritarianism, resource nationalism) and environmental (climate change) tensions, but how North America responds may determine the balance of geopolitical power for decades to come.

The decarbonization of industry is a multi-trillion-dollar challenge on a global scale which won’t be solved by either the private or public sector alone. Success means technological leadership, stable economic growth, productivity, job creation, and a cleaner environment for future generations.

Winning this race (supposing one can actually define what winning means) requires confronting several challenges – all of which can be overcome with a combination of capital, political will, and time. There are four primary challenges:

·      catching up to China’s lead in battery supply chain development and production

·      decoupling critical supply chains

·      increasing pricing and operational transparency along battery supply chains

·      balancing domestic priorities such as negotiating with labor unions

This is an incomplete list of challenges, but all must be faced to set a course for growth able to withstand volatile global economic environments.

CATCH ME IF YOU CAN

Perhaps the biggest challenge facing North America as it aims to develop next generation battery supply chains is catching up to China. Forty years of increasingly globalized trade, where the lowest cost of production was relentlessly pursued and declining interest rates manifested as cheap capital, is over. In its place is a mirror opposite – protectionism, a focus on reshoring of supply chains, and higher interest rates. All are recent phenomena unfamiliar to many policymakers, business owners, and financiers today. This domestic focus on industrialization is designed to counter China’s multi-decade economic policy of “capitalism with Chinese characteristics” – state-sponsored industrial capacity expansion underpinned by theft of western technology. China’s mercantilist economic model has produced an almost-insurmountable lead in various economic sectors including the lithium-ion battery supply chain, where dominance across mining, refining, cathode and anode production, cell and pack production, and recycling has been hiding in plain sight for years. If it weren’t for President Trump’s trade war and the supply chain paralysis resulting from COVID, private sector companies in western markets may not have ever addressed these issues harming North American economic competitiveness. 

Since President Joe Biden entered office in 2020, the solution to turbocharge US economic competitiveness has been to spend capital igniting a resurgence in industrial policy not seen since World War II. In the United States, both the Infrastructure Investment and Jobs Act (IIJA) in 2021[ii] and the Inflation Reduction Act (IRA) of 2022[iii] are designed to use carrots rather than sticks in the form of production and investment tax credits to incentivize domestic manufacturing of a host of green technologies including batteries. The IRA is a 730-page document which almost overnight has transformed the economics of lithium-ion battery production to the point where even US allies such as South Korea and the European Union are clutching their pearls and issuing pointed statements about the unfairness of new US industrial policy.[iv] As an example, Section 45X of the IRA offers a USD $45 per KWh tax credit for lithium-ion batteries produced in the United States. Though there is only a ten-year window to take advantage of this credit and the positive economics are undeniable, as the proverb says, “the road to hell is paved with good intentions” and an unintended consequence of the legislation may be a subsidy war, where companies hold out on investing until enormous subsidies are lavished on them. Case in point is the automaker Stellantis who halted construction of a gigafactory based in Canada until the Trudeau government and the province of Ontario came forward with billions more Loonies of financial support, lest the company move its operations to the US.[v]  

While the argument over just what is the right level of subsidy to grow a business is fodder for another piece, the fact remains that the Biden Administration has thrown down the battery gauntlet in an attempt to catch up with a well-developed Chinese battery supply chain. Though the IRA doesn’t directly address more domestically mined supply of battery raw materials, mining companies seem particularly well-positioned. The competition and (non-Chinese) cooperation amongst allies this inspires will be the catalysts for lower costs in the long run through economies of scale and leveraging of technologies, though we may see a higher industry cost structure in the near-term given the time needed to achieve true scale.

CONSCIOUS DECOUPLING

The motive behind the legislative onslaught described above is the perceived need to decouple critical supply chains from China. The need was first laid bare during the early stages of President Trump’s trade war and was exacerbated during COVID when we all found out just how inflexible many globalized supply chains really were. Since then, and despite the table pounding in Washington, there seems to be a divergence of opinion between the public and private sectors with respect to China and decoupling. While dislike of China and its mercantilist business practices seems to be the only thing Republicans and Democrats agree on in Washington DC in 2023, the private sector, highlighted by automotive companies, seems to be singing from a different hymnal. Case in point is Ford Motor Co and their partnership with CATL, based in China, the largest lithium-ion battery manufacturer on Earth. While the goal of the partnership is to build battery capacity in the state of Michigan with Ford owning the infrastructure and making hiring decisions and CATL essentially providing technical assistance with battery production, the deal has invited a rather pointed request for more details from US Congressmen Gallagher and Smith, Chairman of the Select Committee on China and Chairman of the Committee on Ways and Means respectively.[vi] Is this deal between Ford and CATL a subtle admission that Ford needs Chinese battery technology to compete? Is company management tone deaf to the ultimate goals of legislation such as the IRA or the CHIPS Act? These are questions that will be answered more clearly as we lurch towards a presidential election in the US in 2024 and China remains a convenient villain. Interestingly enough, the deal was recently “paused” by Ford due to the economics of the plant. While the real reason for this pause in construction remains to be seen, the fact is that Chinese battery technology will remain vital to Western OEM ambitions.

If domestic OEMs really do need Chinese battery technology to survive, how do we work more closely with allies in other countries such as South Korea or Japan that are already taking full advantage of the financial benefits of building battery infrastructure in North America? We will have an answer here, but it will be measured in years, rather than in shorter and politically convenient election cycles. A longer-term view of policy goals and objectives is perhaps more important than any specific subsection of any legislation. The economic justification for decoupling and the policy justification for decoupling may be different.   

PEERING THROUGH THE HAZE

Any supply chain rebuild cannot rely on federal funds alone to succeed. The private sector must participate. Historically, this has not happened widely due to the poor economics of building and operating manufacturing infrastructure in North America relative to Asia – a consequence of Globalization. The third challenge in North America involves building a supply chain that provides visibility and liquidity for financial markets participants. Lithium has historically been characterized as an oligopoly with a murky pricing structure at best. Ask five people what the price of lithium is, and you’ll receive five different answers, if that. While the China-based spot price accounts for a smaller portion of overall lithium traded volume, the roller coaster-like volatility of the spot price for lithium carbonate from $6,500 USD per tonne in late 2020 to a peak of $85,000 USD per tonne in late 2022 to the current level of $26,000 USD per tonne serves as an impediment to the enormous investment needed to build a lithium supply chain. Private capital is attracted to high returns and transparent pricing environments.

Given the focus on acquiring raw materials needed to achieve decarbonization goals, an unintended consequence may be increased pricing volatility as multiple companies and countries are now after a finite amount of available material. The implication here is that large pools of capital may sit on the sidelines or scan the investment horizon for opportunities downstream in the battery supply chain or in other technologies where a more appealing risk/reward ratio appears.

Fortunately, there are solutions in the works here with the London Metal Exchange, Chicago Mercantile Exchange, and the Guangzhou Futures Exchange offering futures contracts on specific types of lithium and cobalt with the goal of hedging against price volatility and protecting margins. While the liquidity in the futures contracts continues to build, this, coupled with more flexible and longer-term lithium off-take contracts between producers and end users, are keys to aid in sustainable growth of a regionalized battery industry. We have come a long way in a short period of time, however, more volume is needed across select battery metals markets to provide liquidity for financiers such as larger markets including nickel or copper.  

KEEPING YOUR (ECONOMIC) HOUSE IN ORDER

A fourth and final challenge involves balancing domestic priorities while competing on a global stage. The costs of climate change are becoming clearer given recent examples of heat waves, wildfires, and floods both locally and globally. The cost of the IRA of just shy of USD $400 billion for clean energy investment coupled with a similar amount of capital available from the Department of Energy’s Loan Programs Office is designed to mitigate the effects of climate change through massive green infrastructure investments. These costs (both explicit and implicit) aren’t likely to abate, despite the presumed long-term economic benefits of the IRA and IIJA investments in North America and so devoting public and private capital on an accelerated basis is crucial.

According to the Center for Automotive Research, the United States has seen announced investment in EV and battery infrastructure of $112 billion since 2018[vii] and we are likely to see much more as the benefits of the IRA make themselves felt. However, for all of the bullishness and momentum on EV sales light duty EV sales are still a cost center for major OEMs with Ford recently forecasting an EBIT loss in their EV business of USD $4.5 billion for 2023 – up from USD $3 billion forecast in the previous quarter.[viii] Traditional ICE sales are stemming losses for now, but more ICE sales only delays the transition to EVs and doesn’t help corporate America compete with runaway Chinese EV sales and supply chain dominance. As if that weren’t enough, major North American auto manufacturers are facing a looming domestic issue in labor contract negotiations with the United Auto Workers. EVs require fewer parts relative to their ICE cousins and therefore require less labor to build. While union officials know this, they are not willing to accept lower pay, especially as auto executives reap in million dollar salaries and the overall health of the Big Three North American auto manufacturers is robust with billions of dollars in profits thanks to sales of ICE cars. With the current contract with the UAW having expired on September 14, this thorny issue will be dealt with shortly with an uncertain outcome.

CONCLUSION

Nobody claimed that the energy transition would be easy, fast, or economical in the short term. Despite the macroeconomic challenges faced by North American companies in this transition highlighted by higher interest rates, the momentum towards a more electrified society appears unstoppable. The US and Canadian governments have been more than generous in incentivizing companies and “friendly” countries to build battery supply chain capacity domestically. The economic opportunity is almost too good to ignore despite the lack of affordability of many EVs currently. A revamped green industrial policy is sure to inject volatility into commodity prices as friend and foe alike all look to access a finite amount of multiple critical materials, however this is the price to be paid to build infrastructure, create jobs, and provide a cleaner climate for future generations. Building these supply chains will require creative decisions in board rooms across North America. The success of these decisions will ultimately determine whether or not North America remains the “shining city on a hill” referenced earlier or is left behind by countries that moved faster.

[i] https://www.reaganfoundation.org/media/128652/farewell.pdf

[ii] https://www.whitehouse.gov/briefing-room/statements-releases/2021/11/06/fact-sheet-the-bipartisan-infrastructure-deal/

[iii] https://www.whitehouse.gov/briefing-room/statements-releases/2022/08/19/fact-sheet-the-inflation-reduction-act-supports-workers-and-families/#:~:text=The%20Inflation%20Reduction%20Act%20will%20raise%20revenue%20by%3A,minimum%20corporate%20tax%20of%2015%25.

[iv] https://www.europarl.europa.eu/doceo/document/CRE-9-2022-12-14-ITM-004_EN.html

[v] https://www.reuters.com/business/autos-transportation/stellantis-says-resume-battery-plant-construction-canada-after-reaching-deal-2023-07-05/

[vi] https://www.politico.com/news/2023/07/21/house-gop-pair-launch-investigation-into-ford-battery-deal-00107597

[vii]https://www.wsj.com/articles/uaw-says-costly-ev-transition-wont-change-unions-demands-1561a725

[viii] https://www.cnn.com/2023/07/27/business/ford-earnings/index.html

A Few Thoughts On A Volatile 2022 for Battery Metals And A View to 2023

What follows is a general listing of takeaways from recent conferences I attended both here in the US and in Europe in 2022. Some of these may seem obvious, but I wanted to include them here as there are ideas that have more momentum behind them than I initially thought (like reshoring.

·      The three most talked-about topics I encountered were:

o   Raw material pricing and inflation along the supply chain

o   The outsized role of China in overall EV demand and the general economic outlook for the country

o   How different technologies will affect the supply and demand balance of battery raw materials in the future. Examples include recycling, anode technology, and cathode blending

·      Reshoring of supply chains has enormous momentum behind it

o   Much of this has been turbocharged by the signing into law of the Inflation Reduction Act in the US

o   Every supply chain participant I surveyed throughout the year (auto OEMs, battery component producers, miners – close to two dozen) were actively planning on building a more localized supply chain infrastructure

o   There was widespread agreement that this will take years to materialize and is driven more by geopolitical concerns than cost (it’s hard to see how costs won’t increase as this infrastructure is built and operated)

·      The Inflation Reduction Act (IRA) entered into every conversation in both the US and Europe

o   There is a gigantic lack of clarity around how the law will be implemented (the eligibility for the EV tax credits is a major issue) and by when

o    It appears that the IRA will benefit the downstream portion of the supply chain (refining, cathode/anode production/cell and pack manufacturing/recycling)

·      The fatal flaw in the IRA is that it does not directly address mine permitting reform. As such the US will remain reliant on foreign allies (and some adversaries) for battery raw materials

o   The Department of the Treasury won’t issue guidance on the IRA before Q1 2023 – a slight delay owing to the enormous economic impacts to all involved

·      Traceability has the auto OEMs and battery manufacturers worried

o   As most Western auto OEMs do not have a vertically integrated EV strategy, the ability to trace a battery throughout its entire life has become very important (and exceedingly difficult) as battery manufacturer and EV manufacturer are often different entities

·      Auto OEMs I speak with would generally prefer to see batteries go through a second life use rather than recycling

o   This was a surprise to me as I think second life is much more manual and more of a hassle relative to recycling (which has its own set of challenges)

o   Cathode producers disagreed and were more in favor of recycling scrap and producing CAM and pCAM

·      Western OEMs announced that they are “fully supplied” with respect to batteries to 2025

o   This is new in that these same OEMs historically hadn’t been willing to make these claims. Color me skeptical given that many product offtake agreements are non-binding and with mining companies that either have no production experience or are not currently in commercial production

o   This also begs the question about what happens after 2025 given the decade of lead time needed to bring greenfield mine supply to market and get it qualified for automotive battery use

o   GM has announced a goal to secure 75% of their battery raw materials from the US by 2030. I think this is unlikely unless they plan on producing a miniscule number of EVs.

·      Inflation throughout the battery supply chain feels stickier than many would like

o   BNEF announced that lithium-ion battery pack pricing has flatlined at ~ $151/KWh (up 7% YoY) and this is due mainly to high raw materials and input pricing

o   Another longer-term concern is adequate expertise and labor along the supply chain (recycling, for example)

·      There was a sense that Chinese companies will still have a presence in the North American EV market despite the IRA rules around “foreign entity of concern”

o   All eyes are on potential tie ups between Ford and CATL and VinFast and Gotion to see how they thread the needle here

Happy to discuss any of this in more detail, so please do reach out.

Lithium Panel Webinar with 121 Group

I was pleased to participate in this investment panel (link here) which focuses on current lithium market dynamics including:

1. Supply, demand, and pricing

2. Macro dynamics of the current market

3. Sustainability and low carbon lithium

4. M&A

5. Competing battery tech

About an hour long, but indexed so you can jump across different discussion topics.

The Evolution of the Revolution - The Path to Resilience and Keys to Battery Metals Growth

By all accounts, we have been through an eventful four years with the boom, bust, and recent boom again in the battery metals. While it is important to remember that it’s never “different this time”, I do think we are at an interesting hinge in the electrification thesis. This hinge is notable in several ways as the battery metals markets mature and only increase in their strategic importance.

The market consensus for just about any battery metal calls for steadily increasing demand with a supply response that is likely to keep pace only in fits and starts, creating opportunities and threats for an investor base that is growing as the battery metals opportunity continues to make itself all but obvious.

In my previous article, I focused on the “state of play” for different battery metals, calling that moment in time Churchillian and viewing it as the “end of the beginning”.  While the general availability of the metals is important, this piece will focus more on the macro factors driving the current rally in the sector. I like to think of these forces as pillars underpinning this secular change in terms of how energy is generated, stored, and used. They can be thought of as the Four Ds: decarbonization, cost deflation, decoupling, and demand. However, it is the rise of geopolitical tensions and ESG that deserve a deeper discussion here. These forces will continue to play an increasingly important role in capital accumulation and allocation well into the future and I think require a reassessment of one’s investment rationale and philosophy.

CHESS OR CHECKERS? WHAT GAME ARE WE PLAYING?

Geopolitics and the associated tensions are set to play an increasingly central role in the global race to build electrification supply chains. This is one of the biggest changes in the landscape between previous cycles in battery metals and today. The line between economic security and national security has been blurred – perhaps permanently. One could argue that this line of thinking has steered China’s growth ambitions in recent decades, and it appears that other large trading blocs such as North America and the EU are set to follow suit, especially when you look at the trillions of dollars and euros of proposed stimulus directed towards “green growth”. 

An increasingly assertive China has to date flexed its muscles mainly through its checkbook, encouraging outward-bound economic development through the Belt and Road initiative (BRI) and internal growth through strategies such as Made in China 2025. Much of the capital invested in lithium development in recent years has come from China in the form of equity, debt, or off take and this current and future supply has been locked up. Concerns around debt trap diplomacy have served to halt some of the initial progress made in the early days of the BRI rollout, but with respect to battery metals supply chains, China is well ahead of the rest of the world.

The pendulum has clearly swung away from a more globalized “flat” trading system and it appears that a Biden Administration will not change course from the previous Administration’s approach to China. The meeting the US and China recently had in Alaska did not go as well as either side wanted and so more of the same tension is to be expected. The isolation of China or surrounding of the country by democracies (which I think is the point of the Quad – Australia, Japan, India, and the US) is a theme to watch closely but is also an opportunity for countries around the world to exploit their advantages as a top tier low-cost supplier of critical materials such as lithium or nickel.

So, if a rising China is less willing to play by global norms, this raises an important question being debated in corporate boardrooms and political capitols alike – is decoupling or regionalization of supply chains the next logical step here? An interesting side effect of COVID is the focus on selective decoupling of supply chains and the general push back against Chinese dominance of battery metals. With the EU pushing forward with its own EV supply chain through planned the spending of trillions of Euros, North America is no longer just competing with China for capital and market share. This is another incredibly important development in battery metals since 2017. Separate supply chains for certain industries such as PPE, or critical metals are a real possibility over the next decade. Capital is widely available due to low interest rates and accommodative central banks and (rare) political will is in place, but the patience to see this through is the only outstanding issue. The competition for raw materials, intellectual property, and intellectual capital is now a three-way race between the three largest economic blocs in the world: China, North America, and the EU. What does this mean for raw material availability?

 A LITTLE AIN’T ENOUGH (WITH APOLOGIES TO DAVID LEE ROTH)

Given the geopolitical backdrop, it has been encouraging to see the amount of capital raised in the lithium sector and recent M&A activity. Recent equity raises by Albemarle and SQM of over US $1 billion each combined with other equity capital raised in recent months put the total at over US $4 billion. For an industry that boasts global revenues currently well below that, this is a significant accomplishment and testament to the belief in future growth on the part of companies and investors. Additionally, the US $3.1 billion merger between Orocobre and Galaxy Lithium helps to consolidate the lithium producer sector while building a new market participant with both geographic and geologic diversity and a strong balance sheet. Incidentally, the strategy of growth via M&A has a history of success in lithium judging by the outcomes of the Lithium Americas-Western Lithium merger and the take over of Altura Mining by Pilbara Minerals. Though much more capital is needed, there may be a lesson in here for battery metals companies thinking about balance sheet sustainability throughout this decade.

Seasoned battery metals investors have debated the potential for a structural shortage of material which will underpin any shift towards electrification since early in the last decade. This is an important but nuanced argument and really must be thought through on a raw material-specific basis. While the trajectory for lithium or copper is clear, the electrification thesis will affect these markets differently give their overall sizes, dependence on battery growth, and pricing transparency. Given the vagaries in pricing and associated volatility, perhaps a strategy of just locking up raw material supply is no longer enough. I would argue that owning the intellectual property around resource extraction (such as direct lithium extraction technology), cathode and anode production, or battery recycling is at least as important going forward. There is no shortage of any battery metal “in the ground”. Certain battery metals contain known resources that would last decades even at current elevated consumption rates. The real challenge is in producing battery grade material at scale and the battery metals producers have historically found this a challenging endeavor, so a focus on more efficient extraction and production methods offers somewhat of a hedge to these challenges as supply chain infrastructure is built out.

ESG IS THE VIP

Finally, once we have established the “why” for building battery metals supply chains, the “how” will become increasingly important. This speaks to the newfound emphasis on ESG goals across the industry.  Turbocharged growth, opaque pricing dynamics and oligopolistic market structures have left battery metals development to a relatively few companies and a few countries. For the industry to grow to meet surging demand to serve the EV and renewables markets, the origin and flow of materials such as lithium or rare earth elements must become much more transparent while also keeping a lid on costs. Ironically, a more transparent supply chain likely involves increased domestic mining capacity and should be a priority in global capitals such as Washington DC, Ottawa, or Brussels. This may drive up costs but is a worthy price to pay for supply chain transparency and self-sufficiency. We know we are going to need more raw materials to achieve aggressive decarbonization goals. Would you rather the raw materials come from countries where ESG criteria are more difficult to monitor? This is a key question facing all stakeholders involved with the decarbonization thesis.  

Capital is the fuel that breathes life into the energy metals sector and is the bridge between ore in the ground and the battery in your car. With a more relentless focus on projects that adhere to a strict ESG criteria those projects that can demonstrate a strict adherence should be first in line for “green” funding. Capital always finds a home where it is treated well and jurisdictions with an attractive investment profile, proximity to major end markets, and respect for the rule of law would appear to be a prime destination for some of the capital needed to construct resilient battery metals supply chains. It is incumbent upon both the public and private sector to coordinate efforts to raise and deploy capital in an efficient and effective manner.

PIECING IT ALL TOGETHER

The bottom line here is that to hit even modest electrification goals (10%, for example) we are going to need an enormous amount more material and these typically small markets such as lithium or rare earth elements will need to scale flawlessly and aggressively – no easy feat when you consider the fact that these are really specialty chemicals that are being produced. New supply will have to come from existing players, new players, recycling, and a leveraging of technology. This is necessitated by the factors discussed earlier in geopolitics, supply chains, and ESG. While the demand appears to be there, a coordinated effort between the public and private sectors which focuses on R&D and project development is the optimal way to ensure supply from domestic sources or other allies.

The bullish narrative around battery metals has been amazingly resilient and accelerated somewhat because of the effect of COVID on supply chains. This perceived freight train of demand is about to run headlong into several industry-wide challenges including increasing product purity demands, decarbonization/ESG requirements, and a potentially inflationary supply chain rebuild. A key takeaway is cost curves for battery metals including lithium and cobalt will almost certainly have to rise, implying a positive outlook for battery chemicals producers that can finance, build capacity, and sell product to a growing list of downstream customers. 

In the 20th Century, owning the raw materials in a supply chain conferred a competitive advantage. Just ask Henry Ford. However, the 21st Century demands something more as raw material control is not enough. Developing and owning the intellectual property around battery metals supply chains is the next Great Game. A holistic view of each piece of the supply chain and technology’s effects on it offers a front row seat to the opportunities and challenges that will confront investors as we move on from the “end of the beginning” over the next decade.

The Size of the Prize: Building a Domestic Battery Metals Supply Chain

I was recently invited by The Mining and Metallurgical Society of America to present my thoughts on the pathway forward for domestic battery metals supply chain build out. Really enjoyed this and thanks to the MMSA for hosting.

Here is the link to the YouTube video. Presentation runs about 30 minutes with another 30 minutes of Q&A.

Taming The Hydra: Funding The Lithium Ion Supply Chain in an Era of Unprecedented Volatility

Earlier this year, I was asked to contribute a chapter to a forthcoming textbook on Lithium Storage. I jumped at the chance here as much of the academic literature on the lithium business is a little dry, to say the least.

The focus of the chapter is on financing challenges for the lithium supply chain as the overall growth continues in fits and starts. Rather than a “how to” manual, this chapter takes a case study approach. Here is the link:

https://www.intechopen.com/online-first/taming-the-hydra-funding-the-lithium-ion-supply-chain-in-an-era-of-unprecedented-volatility

Click here for a pdf copy and comments welcome!

So, You Want to Make Batteries Too?

As supply chains come under increasing focus and no clear playbook in place given the focus on decoupling, it was a pleasure to collaborate with @LithiumPodcast and @alexjadecove to push the debate forward.

The size of the prize is too big to ignore.

Special thanks to the Payne Institute and Institute of the Americas for their help in publishing the piece.

Here is the link to the report.