Charging forward

By Myles McCormick
Published: Thursday, 23 February 2017

Two months after the production cogs began to churn out battery cells at Tesla’s ‘Gigafactory’, Myles McCormick, Reporter, investigates the arrival of lithium-ion battery megafactories, the hurdles they face and their significance for raw material demand.

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Twenty miles east of Reno, a stretch of desert covering 3,200 acres is an unlikely spot for anything of any major significance to occur, never mind a venture set to transform an industry. 

But, sprawled across the remote, arid plains of Nevada’s Great Basin, a construction project of 5.8m square feet is set to become the largest building on the planet by footprint and produce nearly as much lithium-ion (Li-ion) battery cells as the rest of the entire world’s current output combined, according to its owner.

On 4 January, Tesla Inc. began production of battery cells at its so-called "Gigafactory". It aims to have an output of 35 gigawatt hours (GWh) of cells for electric vehicles (EVs) and energy storage systems (ESS) by 2018.

Such an output would dwarf any other Li-ion plant and radically change the volume at which batteries are produced. 

Tesla’s CEO and frontman Elon Musk – whose side project is investigating the colonisation of other planets – has become something of a superstar, making bold pronouncements about revolutionising the battery industry and championing clean energy.

But while Tesla may be the loudest player in the game, it is by no means the only one. Japan’s Panasonic and China’s BYD currently lead the market, though their combined output of EV and ESS batteries is just 18 GWh.

Meanwhile, established Korean battery makers, Samsung SDI and LG Chem are both building new facilities in Europe. In China, the country driving Li-ion market growth, BYD has major ramp-up plans and CATL has discussed expanding its output to as much as 100GWh by the end of the decade. 

The Li-ion battery market is set to rocket in coming years. And the knock-ons of this will be far reaching. Battery prices will fall. EV uptake will rise. Demand for raw materials will increase. 

But with the whims of politicians ever-changing, regulatory and incentive policy is never a certainty, leaving open questions as to what barriers government actions could impose on the boom.

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The Chinese government is pursuing a target of having 5m electric vehicles on the
country’s roads by 2020.
 

The state of play

Turning initially to the status quo, current annual global manufacturing capacity for Li-ion batteries is around 100 GWh, according to estimates by Lux Research Inc.

It has been rising quickly. In 2015, Deutsche Bank estimated it had grown 80% in two years to around 70 GWh, with EVs accounting for some 35% of this.

This is a trajectory set to continue. Tracking announced projects alone, this will rise to 240 GWh by 2020 and possibly more, according to Lux (See Figure 1).

"This is a baseline estimate, as there will be capacity increases before then that have not yet been announced, and may be closer to 300 GWh by the end of the decade," says Chris Robinson, energy storage research associate at Lux.

Breaking this down, Bloomberg New Energy Finance (BNEF) put global cell capacity for transport and ESS in 2016 at 82.1 GWh, with China’s BYD and Japan’s Panasonic leading the pack (See Figure 2). 

China will lead the growth over the coming years, driven by battery requirements for EVs, where its stated goal is to have 5m vehicles on the road by 2020.
Figure 1: Li-ion Production Increase 2016-2020 
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Source: Lux Research Inc. 

That said, as Jon Hykawy of Stormcrow Capital notes, "this is tempered by the growing realisation in China that their slightly rickety and highly-polluting electricity grid may not be served well by slapping millions of rechargeable vehicles into the mix".

Moving forward, Deutsche Bank estimates global battery consumption will grow to exceed 535 GWh by 2025, with EVs accounting for 55%, e-bikes 14% and ESS 9%.

Mineral mania

Moving upstream, and perhaps most relevant from the point of view of a mining-focused publication, is what this means for raw materials involved in Li-ion battery production. Lithium and cobalt form key components of the cathode, while graphite is used to make the anode.

Figure 2: Lithium-ion global manufacturing capacity 
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Source: BNEF 
"Obviously the demand for lithium, cobalt, and graphite will increase," says Chris Berry, founder of House Mountain Partners LLC. "When you look at the sheer number of OEMs [original equipment manufacturers] electrifying their fleets between now and 2025, one new lithium mine per year will be required and by 2025 and just the battery business alone could consume today’s entire global production of cobalt chemicals," he adds. 

Lithium

Lithium’s story over the past 18 months has been indelibly linked to that of growth in battery demand, and specifically EV battery demand.

As Chinese EV demand took off in the latter part of 2015, so too did lithium demand, in a way that one local lithium producer admitted to IM "took us by surprise". Prices escalated on the domestic spot market, rising from $7.7/kg in June 2015 to a peak of $26.8/kg in June 2016, in the case of lithium carbonate (CIF China, spot, 99-99.5% Li2CO3), as tracked by IM’s market assessments.
It has since settled back down to $18-21/kg but, outside China, large annual contract prices (del. US, 99-99.5% Li2CO3) for 2017 have been forced up to $10-16/kg, around double 2016 levels.

But as global EV uptake increases, lithium demand will be pushed up again. 

Global bank Citigroup predicts a compound annual growth rate (CAGR) in demand of 11% to the end of the decade, bringing total demand to around 324,000 tpa lithium carbonate equivalent (LCE) by 2020 from a 2016 base of around 212,000 tpa.

EVs are likely to account for about 40% of global lithium demand by the end of the decade, up from roughly 20% now, according to Citi’s estimates.

There has been a flurry of interest around new lithium projects, with the spike in prices attracting investors by the drove. Hundreds of prospective projects will seek to come online in the coming years, but market consensus is that most of these will fail.

To bring a lithium project to fruition is no easy task, as has been illustrated by delays incurred by all of the companies that brought new material to the market in the past two years – Orocobre Ltd in Argentina, Galaxy Resources Ltd and Reed Industrial Minerals Pty Ltd in Western Australia. 

While some of the junior projects are inclined to shout from the rooftops about exponential predictions on rate of demand growth, the established producers tend to be less hyperbolic. 

Tom Schneberger, vice president and global business director of the lithium division of FMC Corp., a major producer, said he expects a CAGR in lithium demand of "over 10%", but remains "confident that adequate, cost-effective supply can be brought on to support the growth of this market".

A number of other major lithium producers declined to comment on their outlooks when contacted by IM.

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Lithium is one of the mineral groups set to benefit from rising battery demand. Chinese spot prices tripled in the year to June 2016 as a result of the country’s push toward vehicle electrification. (Anthony Tong Lee, via Flickr)


Graphite 

On the other hand, graphite, another key battery mineral, has not made lithium-style price gains. 

The graphite market has been glutted for some time, with supply into its main market segment – refractories, foundries and crucibles – falling on the back of a weaker steel industry and efficiencies leading to a lower specific per tonne consumption.

While demand from batteries is growing, this market only represents around 10% of demand, according to IM’s Graphite Market Outlook to 2021, and is easily offset by contractions in the far larger refractories market, accounting for around 40%.

IM’s Natural Graphite Report 2015 estimated that growing demand for graphite from batteries market should increase this market’s share to 25% in 2020.

Graphite consumption in EVs is between 1.2-1.6kg/kWh, meaning up to 56kg could be used in a single EV battery. On this basis, flake graphite consumption for the manufacture of spherical graphite for battery anodes is forecast to grow at a CAGR of close to 30% until 2020, consuming nearly 360,000 tonnes flake graphite in 2020, from a base of 75,000 tonnes in 2014.

But with traditional markets such as refractories stagnating at a growth rate of around 0.3%, overall demand for flake graphite will probably grow at a CAGR of around 6% to 1.124m tonnes in 2020 from 800,000 tpa in 2014.

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Donald Trump’s aversion to subsidising one form 
of energy over another may threaten EV demand
growth in the US. (Gage Skidmore, via Flickr)

Cobalt

In cobalt, a market covered by Industrial Minerals’ sister publication, Metal Bulletin, supply currently remains tight. With prices at a six year high and 70% above the levels of one year ago, the metal has yet to undergo a battery-driven spike. 

Indeed there is some concern in the market that should prices rise too quickly, battery makers may seek to substitute away from cobalt. 

At the time of writing in early February, cobalt prices stood between $18-19/lb (low grade, free market, in warehouse), up 26% since the beginning of the year. 

Despite the movement in the prices of raw materials, they have yet to cause much of an impact on overall battery demand. 

"There could come a point where high raw materials prices affect the economics of the battery. This has not yet occurred though," notes Berry, adding that "despite lithium’s meteoric rise, it only accounts for 2% of the battery cost".

Regulation as a pitfall

Despite bullish outlooks for the EV market, there is the potential for much to change in the coming years. One unknown remains the variable stance regulators and legislators will take on the industry. While they have thus far been largely supportive, there are some indications that this may change. 

Consider the key markets: China, the US and Europe, which combine to form around 85% of the EV market.

In the US, the newly-elected president, Donald Trump’s policy position presents a potential threat. Trump has made no secret of his feelings on climate change – "very expensive (…) bullsh*t" – and is against government "picking winners and losers".

This position does not bode well for the federal tax credit of up to $7,500 available to Americans purchasing EVs (covering the first 200,000 sales by a given automaker), which would slash a potential 21% off the cost of a Tesla Model 3.

Indeed, Citi has pointed out that "Trump’s stated policy stance presents a risk to the future growth of EV within the country with possibility of subsidy cuts/rollbacks". 

However, Tesla’s Musk holds a seat on the president’s Strategic and Policy Forum, an advisory council. Musk has retained his position as an adviser, despite facing pressure to follow the lead of Uber CEO Travis Kalanick, who resigned following Trump’s signing of an executive order to block immigration to the US from a number of Muslim-majority countries.

Musk’s decision despite criticism to stay on in the role – he has argued that "simply attacking [Trump] will achieve nothing" – is likely a good thing for the EV industry, giving a major proponent of the technology close access to the White House. 

Lux’s Robinson believes it is unlikely that the new US administration would hinder large-scale EV adoption in the country to any major extent, arguing that automakers have been operating under the current subsidy programme for years now and there is "little to be gained from eliminating" it. 

Where the government could negatively affect things is by failing to promote EV use or removing funding from national laboratories working on EV development, says Robinson, although, he adds, both are unlikely to change consumer adoption.

House Mountain’s Berry believe that "as Trump continues to confuse and threaten other countries through threatening a trade war and sending mean tweets, the real growth in renewable technologies and EVs will most likely come from other countries – specifically China where 500,000 EVs were sold last year".

"I don’t see the overall momentum behind clean energy technologies regressing anytime soon, though it won’t be a linear progression, to be sure as the economics and technology continue to surprise," he adds. 

In China, the generous EV subsidy policy that contributed to the 2015-16 boom in lithium prices has been scaled back.

A new policy rolled out by Beijing in December 2016 tightens up on state aid to EV makers. Subsidies will now be awarded a year after the sale of individual vehicles and are down by around 20% on passenger vehicles and 40-70% on buses, depending on size. 

But despite the reduction in financial aid, the new policy is in many ways a welcome sight for EV makers. Previously a government clampdown on so-called "subsidy cheating" in mid-2016 had seen an investigation launched and a delay in the awarding of subsidies. The announcement of the new programme at least provides some clarity to market players. 

Lux’s Robinson notes that sales of EVs are "very closely tied" to subsidies, flagging China and Norway as "prime examples of strong incentives resulting in strong EV sales". 

But he argues that a massive shift in support for plug-in vehicles is unlikely. "China has been transparent about it phasing out subsidies starting in 2017, completely eliminating them by 2021, while in the US automakers aren’t yet close to the 200,000 vehicle limit before subsidies expire," he says.

"Removing EV subsidies would hurt sales in the short-term, although there is enough momentum from both consumer adoption and OEM commitment that it wouldn’t affect long-term sales or technological development," Robinson adds.

Costs

Regardless of the subsidy framework, the price of making batteries for EVs is dropping. This process will be accelerated by the emergence of large scale facilities such as Tesla’s Gigafactory. 

BNEF maintains that average Li-ion battery pack costs in EV and ESS markets fell 22% in 2016 versus the previous year to around $273/kWh. Comparing this to a cost of around $1,000/kWh in 2010, the contrast is stark. 

Basic economies of scale imply this steep decline will continue. 

But Lux questions when saturation point may be reached. "Our analysis has indicated that there are limited cost reductions available beyond 10 GWh of annual production," says Robinson, noting that there is some disagreement in the industry on this topic, with LG Chem and Samsung SDI setting up smaller, regionally-located factories in contrast with Tesla’s single larger location. 

Stormcrow’s Hykawy agrees: "Batteries are almost exclusively made by automated production lines, and scale doesn’t have the same impact on automation. The cost reductions are going to come from improved processes and R&D into better manufacturing methods. The cost of batteries can’t and won’t drop like the costs of electronics, because we can’t miniaturise batteries and get the same performance out of them," he says.

While arguments can be made as to the scale and speed of the cost decline, it is certain to continue to fall. Indeed, by 2025 costs should reach $109/kWh and by 2030 $73/kWh, according to BNEF’s estimates.
As costs fall, the economic case for EVs becomes ever more competitive and subsidies become ever less necessary. But they have yet to reach par with the internal combustion engine (ICE). 

"The standalone economic argument for pure battery EVs is not there yet.  The subsidies are necessary," says Hykawy. 

And as subsidies begin to evaporate over the next few years, notably in China, the pressure upon EV manufacturers to reduce costs will increase. 

Deutsche Bank estimated that in 2015-16, the final sales price of a commercial EV in China was "almost equivalent" to that of a traditional commercial car.

With the system leaving minimal time for manufacturers to increase efficiency and decrease outlays as China slashes subsidies over the next half decade, the country’s central government has warned producers to cut costs as soon as possible.

But the reduction of subsidies in many ways could be a positive factor for the EV industry, pushing manufacturers into a competitive state as quickly as possible. 

Tesla’s Model 3 is expected to be the first mass market EV, reaching beyond more affluent drivers to make the electrification a possibility for the market at large. 

And when the hurdle of affordability is passed, the future of EVs becomes very optimistic indeed. 
For Musk though, there is little doubt EVs will move centre stage, regardless of variables:  "optimism, pessimism, f**k that; we’re going to make it happen".