L to R: Roland Gauss (European Battery Alliance), Colleen Yates (Regional Development Australia- Perth), Karen Hanghøj (CEO European Institute of Innovation and Technology - Raw materials) and Cameron Edwards (Director InfraNomics), Brussels 2019
Recently the Volkswagen Group and Ganfeng Lithium Co., Ltd. (registered in Jiangxi, China) signed a memorandum of understanding on long-term lithium supplies for battery cells. Under the agreement, Ganfeng will supply lithium to the Volkswagen Group and its suppliers for the next ten years. Where does this lithium come from? Some of it certainly comes from WA, as Ganfeng has 50% ownership in and an offtake agreement for 100% of the Mt Marion mine 6% spodumene concentrate. Ganfeng also has an offtake agreement with Pilbara Minerals for 150,000tpa of spodumene concentrate once the Pilgangoora plant has been completed.
Many other major car manufacturers have recently rushed to secure supplies of raw materials including lithium, rare earths and cobalt. Unless the car companies take steps to control their supplies of raw materials, these car manufacturers will be buying their batteries from the companies that do control the raw materials. The car companies will therefore be paying a premium compared to those companies with more strategic investments further up the supply chain. As several of these critical raw materials are in opaque markets dominated by a few parties there is a real risk of market price and supply distortion.
Electric vehicles are effectively batteries on wheels and the battery is central to the entire vehicle’s performance. In electric vehicles, the vehicle performance is a function of the battery management system, the battery specifications and the quality and purity of the materials used in the battery cell manufacture. Suddenly, battery specifications are core intellectual property for automotive companies.
If car companies are relying on 3rd party suppliers for their batteries, this means that core intellectual property is existing outside the company. As the 3rd party battery suppliers will know the power specifications and limitations of each car company’s batteries, is there a risk of battery cell suppliers entering into preferential agreements with car companies to differentiate or reduce differentiation between models? If one battery supplier has the specifications of the batteries from competing car companies, how is the core intellectual property of an electric vehicle’s performance really being protected? Furthermore, will car companies always be able set their own battery specifications in the future, or will the cell manufacturers force customers to choose from a “battery menu”, thereby allowing electric vehicle performance to be controlled by 3rd parties?
Historically, European manufacturers and their suppliers have had no problems buying raw materials on the open market – until now. Recently, a blue chip European automotive company put out an expression of interest for cobalt with the standard tome of conditions. Not one company answered. This was a watershed moment and a wake up call from the supply chain complacency of the past. However, it appears the resulting knee jerk reaction could be more problematic in the long term if these same automotive companies become dependent on suppliers who dominate market supply and pricing while having close relationships with competitors.
We accurately forecast these developments in the Lithium Valley report. European companies have in the past almost religiously avoided upstream investments. Now it is going to cost them. Not only in money, but also in technology transfer and lack of intellectual property protection, security of supply, and strategic control over the development of their products. Core components sourced from countries that also have strong domestic electric vehicle manufacturing industries will likely be systemically higher priced to international competitors than the same items are priced in the domestic market.
It is difficult to see how the European companies can get out of this and still be cost competitive going forward without a dramatic change in thinking. In this case the Gordian knot legend could be a suitable analogy. When the game of international battery material supply chain control is viewed for what it really is, it is hard to imagine Europe's current approach not having a major negative impact on European companies and their Bloc’s economy, with a knock-on social impact.
In meetings with the European Battery Alliance and the companies involved, it was clearly demonstrated that there is a massive opportunity for Australian firms to deal directly with Europe. There is a change in the global dynamics and Australia is in the middle of it.
The European Commission publishes a list of Critical Raw Materials. Interestingly – and somewhat alarmingly – in InfraNomics’ meeting with the European Commission we were advised that this list has been based on historical rather than future demand. This was one of those penny dropping moments… Gulp! So, going forward the situation is far more dire than currently reflected in EU documentation and this must impact policy and the Bloc’s economy, assuming the EU now recognises the limitation of their current approach.
Europe is now investing billions into this area, especially innovation, research and collaboration. It is hoped this money is targeted towards achieving the long term goals. However, one must ask: have the upstream components of this strategy been properly considered?
One point worth noting is the cost of energy. The Europeans were very sensitive to the sources of energy, particularly in an energy intensive business like refining. The companies the WA delegation met consistently requested 100% renewable energy. Again, WA has won first prize with abundant solar and wind as well as competitively priced domestic gas. New renewable energy projects in WA can now cost <A$0.10/KWh compared to energy pricing in Germany of A$0.24/KWh (non-residential) or A$0.47/KWh (residential). Energy is a major competitive advantage for WA, especially for energy intensive industries. Add in the advantages in logistics, tax, employment costs, etc, and WA becomes very attractive from a global manufacturing perspective.
Unfortunately, as we realised many times during the WA delegation, it is fair to say that internationally, the benefits of manufacturing in WA are relatively unknown.