Progress towards net-zero commitments is picking up speed with the roll-out of renewable power and electric vehicles (EVs) in many countries. Indeed, so successful has been the push towards EVs that lead times for some vehicles extends well beyond 12 months.
Car OEMs are focused on satisfying customer demand by reworking production and bringing new factories online. And with fears about the scarcity of raw materials, some are even investing in junior miners and signing long-term agreements with nascent mines to guarantee the supplies they need.
The step up in demand for these specialist materials has seen miners prospecting harder, developing mines and processing less attractive deposits. Supply is still running behind demand, but the gap is narrowing as more money flows into extraction and prospects become more certain.
The concerns for governments extend past just satisfying net-zero goals, to the socio-political implications. The EV revolution is simultaneously an opportunity to stimulate domestic industries and a threat to existing automotive production bases. Facilities like engine workshops will become superfluous and obsolete, while others, such as battery factories, will need to be added. Many workers will need to be retrained to ensure their skills remain relevant.
However, none of this is possible without the materials. And with one country, China, having a stranglehold on many raw materials, its influence on EV production is too pervasive to ignore.
Incredibly, in the 1980s and 1990s, China was a bit player in the commodities it now controls.
Take rare earth elements, for example.
Up to 1985, the United States was the largest producer of Rare Earths. Other regions, including China, added production in the late 1980s and 1990s, but when Chinese production accelerated, output from other countries was marginalised, as the chart below all too clearly demonstrates.
Outsourcing production to China seemed commercially (and environmentally) attractive but looks short-sighted in hindsight.
Today, the geographic concentration is being addressed, including through political means.
The US Inflation Reduction Act will, paradoxically, not reduce inflation but will bring materials production back to the United States and disincentivise production in China. The EU’s Critical Raw Materials Act is likely to do the same. Only vehicles using materials processed in the United States or Europe, for example, will likely reap tax benefits.
Shifting the production bases of materials is a momentous task that will also raise costs. China is not only the dominant producer but also the largest demander of these materials. And it will want to maintain control. With Chinese companies having been early investors in mines globally, partly through the “Belt and Road Initiative”, the country’s influence extends far beyond its borders.
Canada’s recent removal of Chinese company ownership of two lithium mines hints at the political will to regain control of mineral assets.
Costs will also be higher. The co-location of processing, low financing and labour costs, and weaker regulatory oversight had all helped keep prices low for many commodities – further incentivising the shift of production into China. Producing and processing the commodities in other regions will see prices rise, increasing the costs of EVs and renewable power installations.
Balancing production away from one country will benefit the supply chains for EVs, helping develop resilience and bringing greater price transparency to keep markets working effectively.
Higher costs will need to be absorbed and how readily other regions can displace market share from such an ingrained player remains to be seen.
Business cases for new material mines often stress that their supply of lithium, graphite or other critical material comes from “Not China”. This is a clear nod to the challenges of China’s dominance and indicates the urgency of addressing the issue.
Image (c) y Li Yang on Unsplash
Director (Special Projects)
Jason Kaplan has been analysing commodity markets and forecasting developments for more than 20 years. He combines a keen understanding of commodities, the commercial drivers of companies along the supply chain, and the effects of macroeconomic factors to predict how markets will develop.