Battery Costs Are Soaring Amid A Global Supply Crunch

Cheap batteries have been the key factor for the mass adoption of electric cars for a while now. Until recently, battery costs were on a steady downward curve as technology improved and efficiency increased. But then the pandemic came and wrought havoc on every single industry and supply chain. Lithium prices are running to record highs at the moment, with the London Metal Exchange reporting the price for a kilogram of lithium hydroxide—one of three forms of lithium traded on global markets—at $27 last Friday. The other forms of battery-grade lithium are also soaring, as seen in these charts from Fastmarkets. And this trend is threatening the EV revolution.

That revolution was to be driven by the longer ranges carmakers offer for their electric cars but mostly by these cars becoming more affordable thanks to cheaper batteries, the result of economies of scale. Yet because of the global shortage of various raw materials, the economies of scale are being delayed for the foreseeable future.

China's EV giant BYD said last week it would raise the prices of its batteries by at least a fifth beginning in November, Caixin reported. The company cited not just lithium prices but also the price of cobalt as a reason for the price rise. The price of lithium cobalt oxide—a compound used for battery cathodes, BYD said, had risen more than threefold since last December. The price of electrolytes, the company also said, had surged 150 percent in the period.

Related: First Large U.S. Shale Driller To Pledge Flat Output In 2022

The problem seems to be particularly acute in China, which has a lot of battery makers, but it is unlikely to remain limited to that country alone. BYD, for one, does not just use its batteries in its own vehicles. It also supplies batteries to Toyota and Ford.

"The market may have to reposition itself for a period of rising battery cell prices, a new phenomena for an industry conditioned to expect year-on-year falls," the chief executive of Benchmark Mineral Intelligence told Reuters last week. BMI has forecast the price for EV batteries using nickel, cobalt, and manganese could rise to $115 per kWh in 2022, from $105 per kWh this year if battery manufacturers in South Korea and Japan follow in China's footsteps.

In truth, the Chinese lithium price trends were also substantially affected by factory shutdowns amid the energy crunch. However, other factors affecting the prices of battery metals are global: supply is tight for many of them while demand is on the increase. It's not just lithium.

Last month, Rystad Energy warned that the carmaking industry's shift to an all-electric future could run into an obstacle in the form of a nickel supply shortage within five years. The Norwegian consultancy has forecast that as soon as 2024, demand for nickel could reach 3.4 million tons, which would be higher than supply. Currently, nickel demand stands at 2.5 million tons.

Related: Chronic Underinvestment Could Send Energy Prices Higher For Longer

The outlook for lithium's fundamentals is, if anything, even more worrying. Rio Tinto recently forecast that under net-zero commitments, lithium demand would come to substantially exceed supply in the coming years, creating a hard-to-fill gap. The reason it will be hard to fill is that existing lithium projects would only be able to contribute about a million tons of supply annually while demand is seen growing to 3 million tons, from just 300,000 tons today.

With such gaps between supply and demand for metals and minerals critical for EV battery production, Rystad expects EVs to add a few thousand dollars to their price tags, which will make selling them harder. Perhaps the problem could be solved by additional government subsidies, but subsidies are a tricky tool to use as they invariably get shouldered by the taxpayer who is the target of the EV push in any case.

By Irina Slav for Oilprice.com

More Top Reads From Oilprice.com:

• Russia Insists That It Is Not Weaponizing Gas Exports
• Average Heating Bills In The U.S. Set To Soar To $746 Per Household
• When Will America’s Oil Industry Open The Taps?