As the transition to a low-carbon future makes batteries critically important, countries are making significant progress in reducing China’s dominance of the supply chain, according to a new report from Goldman Sachs Research.
Based on announced projects, Europe and the US could achieve localization of downstream cell manufacturing between 2025 and 2027, the authors project. They also write that the recent passage of the Inflation Reduction Act represents a “strong commitment” from the US government to promote battery self-sufficiency. “Battery capacity growth outside China is poised to accelerate,” which could go a long way toward avoiding supply-chain bottlenecks.
China’s leadership in battery production – it will produce nearly 70% of global electric vehicle (EV) batteries in 2021 – stems from several factors. The country’s market for lithium-ion batteries, which are used in consumer products such as laptops and phones, provided a base. A Chinese regime in 2011 eliminated patent-licensing costs for a key cathode material, and government policy supports EV production. Manufacturing efficiency completes the picture: It typically takes a third the time to build a battery plant in China than elsewhere.
Despite these factors contributing to China’s leadership in battery production, GS Research sees three key trends that will begin to challenge China’s dominance:
- Policy. Regulatory support and protective policies are shifting the battery cost curve out of China. Tax credits in the Inflation Reduction Act, signed in August, could offset the 20% to 30% higher operating expenses that manufacturers may incur due to adding US production capacity. EV purchase incentives in the US and Europe will also support battery localization.
- Chemistry. Newer chemistries that require smaller amounts of critical minerals – such as lithium, cobalt and graphite – are being pursued. Manufacturers outside China could benefit if sodium-ion batteries – which use more plentiful and cheaper materials – begin to compete with or displace lithium-ion.
- recycling. Battery recycling may also result in a reduction in the need for battery minerals. The GS Research European Autos team sees more than 50% of lithium and nickel for the European EV market coming from recycled batteries by 2040.
While these trends point to greater self-sufficiency for Europe and the US, the planned supply expansion outside China of upstream products used for cathodes and anodes will not be sufficient to meet local demand. GS Research believes that by 2030 a cumulative investment of $164 billion will be needed to localize US and European supplies – including mining, components and battery production.
In the near term, prices are likely to remain high as demand exceeds supply and US policies seek to keep Chinese batteries out of the US market. GS Research has raised its estimate for 2023 battery prices, partly due to higher lithium prices, to US$171 per kilowatt hour of capacity, up from US$164/kWh.
But GS Research expects battery prices to come down in the long term as production outside China continues to ramp up. The team now estimates that battery prices will drop to US$87/kWh by 2030, a 10 percent decrease from its previous published forecast. “Over the longer term, we continue to expect the elimination of raw material supply constraints, which should contribute to better price deflation amid capacity expansion, manufacturing improvements and technological innovation,” the authors write.