Why European EV targets are ripe for Australian investment
By Dr Francis Wedin
As volatility within the domestic lithium market continues to loom large, an increasingly supportive policy framework for critical raw materials in Europe represents an underutilised opportunity for many Australian investors.
There has been a lot of media commentary over recent months on the global lithium market and the outlook for the sector, given the meteoric rise in prices from $8000 to $80,000 a tonne in 2021-22, and the recent dip to around $10,000 a tonne for battery grade material.
The vast majority of lithium produced ends up in lithium-ion batteries, and most of these batteries end up in battery electric vehicles (BEVs).
That means the fate of lithium is very closely tied to how quickly the world electrifies its vehicles.
Sensationalist headlines
When it comes to BEVs, there is so much data that it is easy to get carried away with sensationalist headlines. Articles might talk of a "slowdown" in BEV uptake, after a month-on-month, or quarterly, drop in growth of sales from a particular country.
This could be linked to the end of a national subsidy scheme for example, when there is a spike in sales the month prior, and a sharp drop the month after.
The big picture however, is that globally, on an annual basis, the BEV market is growing at a compound rate of around 20%.
This means lithium demand is growing around the same rate and means that we need to build around 10 new large projects every year going forward to satisfy demand. There are not many markets, in any sector except perhaps AI, which are growing at this rate.
Because the lithium market is still a very small one, and growing very quickly, there are short term supply-demand imbalances.
Price volatility
We have seen a ten-fold price increase since 2020 and are now in a corresponding dip.
Excessively high prices and volatility are not good for anyone. BEVs should be cheap enough for people to buy, and now they are. In China, two-thirds of BEVs sold are cheaper than their petrol alternative.
However, current spot prices have over-corrected, meaning new supply is not incentivised.
The right level for lithium prices is probably somewhere in the middle.
Some lithium companies have secured long term offtake contracts with automakers, setting a fair price for both, which is the right strategy and should start to bring some maturity into the market.
Emissions targets
As part of Europe's plan to address climate change by reducing greenhouse gas emissions, a central pillar is the requirement that all cars sold in the European Union will need to be zero-emission vehicles from 2035.
One of Europe's largest industries is the automotive sector, and to survive and thrive, this sector is trying to transform into producing BEVs as quickly as possible - importing BEVs from overseas, and destroying the local industry, will not be politically palatable.
To level the playing field of state help, the EU is introducing high tariffs on BEVs from China.
Europe has learnt however, that it must develop control of its own supply chains, including the critical raw materials required for production of BEVs.
In a uniquely European way, the EU also wants its batteries, and the raw materials going into them, to be the cleanest and greenest in the world.
Raw materials
The introduction of the European Critical Raw Materials Act (CRMA) in March this year highlights the importance of the local critical raw materials supply chain.
The CRMA focuses on fostering domestic supply of critical raw materials production, by identifying and nurturing strategic projects.
Then, there is the EU Battery Passport legislation, applicable to every battery on the EU market with a capacity of over 2 kWh. This legislation, which will come into force in 2027, is intended to ensure responsible mineral sourcing along the EV battery supply chain.
The Carbon Border Adjustment Mechanism (CBAM) will also be expanded to include chemicals later this decade, which will favour local production, and lower carbon sources of production, of chemicals and raw materials.
The direction of travel is clear: supply chains are deglobalising and onshoring, to reduce geopolitical risk in the transition to BEVs, and this will also affect battery raw materials.
Creating opportunities
There will continue to be intense volatility in the BEV supply chain, including in lithium, as this small market continues to grow at a rapid rate.
This creates opportunities.
The next phase of growth will favour low-cost producers, and localised supply chains. Jurisdictions such as the EU, where long-awaited policies are starting to take effect, are the ones to watch.
It will be an exciting next chapter in the electrification of transport.
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