Auto Industry

Out of Africa

EV battery firms look to lock in raw materials


Lithium production in China

“A skilled woman cannot cook without rice,” warned the Southern Song Dynasty poet and historian Lu You, in what has become a famed Chinese saying.

The country’s media has been deploying that idiom again this week to illustrate the increasing challenges for the electric vehicle (EV) sector in sourcing materials to manufacture the growing volume of batteries the eco cars require.

There have been plenty of headlines about skyrocketing prices for lithium carbonate: up from Rmb77,000 per tonne in January 2021 to Rmb500,000 per tonne in March 2022. Since then prices have eased slightly to their current level around the Rmb480,000 per tonne mark. However, domestic commentators believe the respite will be brief, attributing the pullback to the temporary impact of Covid-19 lockdowns in cities like Shanghai on EV manufacturing output.

This May the International Energy Agency called for urgent investment in new mining projects. It predicts that by 2030 a 50% gap will open up between the lithium mined and the market demand, based on current supply and on future projects that have already been commissioned.

Tesla has been particularly vocal about “insane” raw material prices and why it now feels compelled to secure supplies directly from mining groups rather than rely on the mid-stream operators in the supply chain – i.e. the battery manufacturers – being able to do so themselves.

Other automakers have been following suit – albeit for other key materials. In March Germany’s VW announced the formation of a partnership with China’s Tsingshan Group and the world’s largest cobalt refiner, Zhejiang Huayou Cobalt, to source nickel and cobalt from Indonesia. Huayou Cobalt is also one of the suppliers named in the release of supply chain information by Tesla recently in the carmaker’s claim that it had secured 95% of its lithium hydroxide needs, 50% of its cobalt and 30% of its nickel direct from miners during the 2021 financial year.

Such partnerships are likely to become more commonplace. In a recent analyst briefing, Shanghai-listed Huayou Cobalt said that growing cooperation is a new feature across the EV industry in the quest to build more sustainable supply chains encompassing cathode manufacturers, battery producers and even the auto manufacturers themselves.

Its latest tie-up is with LG Chem, the South Korean group, which supplies materials to its battery-producing sister company LG Energy Solutions.

Huayou Cobalt will hold a 49% stake in the proposed joint venture which involves cathode material (constituting nickel, cobalt, manganese and aluminium). The plant will be built in the South Korean city of Gumi, with planned capacity of 60,000 tonnes per annum from 2024 onwards, or enough to power 500,000 EVs.

The move represents a step forward for Huayou Cobalt. In 2021, for example, it produced 43,000 tonnes of ternary cathode materials through its majority-owned subsidiary Tianjin Bamo Technology.

Both Huayou Cobalt and LG Chem have ambitious targets to significantly expand cathode materials production capacity over the next few years. The former is aiming for 201,500 tonnes by 2023 and the latter 260,000 tonnes by 2026. Earlier this year, Huayou Cobalt issued an Rmb7.6 billion ($1.14 billion) convertible bond to fund the working capital for two new cathode material plants in Guangxi and Zhejiang provinces.

Africa is becoming increasingly important as a source of raw materials for a number of Chinese firms. In April, Huayou Cobalt completed its acquisition of a lithium spodumene project in Zimbabwe previously owned by Australia’s Prospect Lithium, for instance. also reports that Shenzhen-based BYD has identified six mines in Africa with an estimated 25 million tonne lithium oxide production capacity. That would be enough lithium to meet 10 years worth of battery supply, based on BYD’s 2022 production targets for passenger EVs.

If BYD moves forward in acquiring stakes in the African mines it may also signal a spin-off of BYD’s battery production unit, which wants to grow sales to other auto manufacturers. However, BYD still needs to buy the mines first and bidding for them could be a competitive process. China’s Caijing magazine reports that the sale of a 54% stake in another lithium firm ­– the bankrupt Yajiang Snowway Mining Development – set a new domestic record last month. Domestic creditors set a starting auction price of Rmb3.35 million. The Sichuan mine went for Rmb2.93 billion, equating to a price of Rmb7,443 per tonne of lithium carbonate equivalent.

Taking control of African resources won’t be straightforward either. In the Democratic Republic of the Congo (DRC), the current government under President Felix Tshisekedi is already reevaluating contracts signed by its predecessor administration under Joseph Kabile. Most involve Chinese companies, which account for the majority of foreign investment in mining operations. One such contract concerns the Tenke Fungurume cobalt-copper mine, in which Freeport-McMoRan sold a majority stake to China Molybdenum in 2016. Another of the deals in question is the Sinohydro and China Railway Group Sicomines cobalt-copper mine.

In both cases, the DRC government says that it wants to ensure that it can “fairly lay claim to its rights”. Last month, Germany’s Handelsblatt also reported that Congolese officials are keen to expand beyond China’s traditional approach to committing to infrastructural investment in exchange for access to natural resources. The idea is to go beyond putting capital into roads and hospitals and start to invest more in the EV industry chain on home soil, with plans for a pilot cobalt precursor plant by 2023 and a Congolese battery production factory by the end of the decade.

Whether these ambitions are realistic in a country like the DRC is open to question, not least when there are already a number of disputes over ownership rights. The legal uncertainties of some of these situations have extended to the mining companies themselves: Zijin Mining is currently tussling with Australia’s AVZ Minerals over the majority ownership of the DRC’s Manono lithium mine, for instance.

Gregory Miller, an analyst at Benchmark Mineral Intelligence, told the South China Morning Post earlier this year that Western governments have been slow to wake up to the consequences of companies selling lithium assets to Chinese competitors, often with the backing of the Chinese state.

The EV industry news site Elektrek agrees, claiming that the industry transition from combustion engines to electric ones will not just be “difficult but existential for some automakers” because “they waited too long to invest in securing large volumes of batteries and battery materials”.

“Supply constraints are going to go all the way down to the mines: Tesla has been talking about this for almost two decades,” it added.

The growing intensity of the struggle to secure resources is the consensus view. RJ Scaringe, CEO of American EV manufacturer Rivian, argues that the forthcoming battery shortage is going to make the recent semiconductor shortfall look like a “small appetizer,” for instance.

Not everyone agrees that shortages are imminent. In its editorial points out that the world has an abundance of lithium deposits and it also discusses the industry’s longer-term plans to move towards battery recycling. The newspaper also suggests that while lithium prices are being pushed upwards by a supply versus demand imbalance in the shorter term, they have also been spiking because of investor speculation. In the longer term prices will come down, it concludes.

A number of other analysts seem to agree that the bull market in battery metals won’t last for too much longer, pointing to a pipeline of new production in lithium, for example, much of it from hard rock projects in Australia.

Opponents of that view counter that the demand side of the equation will more than absorb the new supply. And in the meantime companies in the upstream reaches of the EV sector are enjoying their moment to “mint money” as Tesla founder Elon Musk recently described it.

Huayou Cobalt recorded 2021 net profits of Rmb3.9 billion, compared to Rmb1.5 billion in 2020. Guosen Securities analyst Wang Qi says the company can expect another year of record returns, increasing profits to Rmb7.18 billion by the end of 2022.

Meanwhile the China Daily reported this week that after a 3.9% rise in its shares on Wednesday, Warren Buffett-backed BYD has become the world’s third most valuable carmaker (ahead of Germany’s VW) with a market capitalisation of $142.7 billion.

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