Unraveling the Challenges and Opportunities in the Battery Materials Industry

Challenges in the Battery Materials Industry

The battery materials industry is facing persistent long-term challenges. It must address issues such as reducing carbon emissions across the value chain and minimizing adverse effects on nature and communities. This requires a careful balance of the "materials trilemma" - availability, affordability, and sustainability. Automotive OEMs are now shifting their focus from tailpipe emissions to reducing Scope 3 emissions from material usage. Within the battery market, the choice of battery chemistries determines demand for materials, with lithium nickel manganese cobalt oxide (Li-NMC) and lithium iron phosphate (LFP) being the two main families. The attention to Scope 3 reduction and sustainability makes battery materials sourcing a crucial decision.

Supply and demand imbalances occur at the regional level. The shift from internal-combustion engines to BEVs is affecting the materials industry, leading to an increase in demand for battery materials. However, 2024 has been a challenging year due to economic slowdown and price pressure. To meet net-zero goals, companies need to balance these three dimensions of the "materials trilemma" and ensure a reliable supply of materials.

2030 Battery Raw Materials Supply Outlook

Battery manufacturers can expect challenges in securing the supply of essential battery raw materials by 2030. Lithium, for example, is crucial, with more than 80 percent of mined lithium used by battery producers and that share expected to grow. Direct lithium extraction technology is helping to unlock large deposits. Nickel is also in demand, with significant investments in new mines, especially in Southeast Asia. Cobalt, largely a by-product of copper and nickel production, is expected to see an increase in absolute demand. High-purity manganese supply is projected to grow moderately, but demand is likely to outpace supply, requiring new refineries.

Based on the latest estimates, McKinsey analysis projects that demand will outpace supply for certain materials, leading to concerns about shortages and price volatility. Different scenarios, such as the rapid adoption of LFP technology coupled with lower EV production growth, can affect the demand for battery materials.

How Global Trends Influence Supply

While overall demand for batteries and raw materials is increasing, supply remains concentrated in a few naturally endowed countries. This poses challenges for regions like the European Union and the United States, which rely heavily on imported materials. ESG standards and supply chain transparency are becoming increasingly important. Recent supply chain disruptions have highlighted the need for buyers to boost supply chain resilience. The European Union and the United States are taking measures to produce critical raw materials domestically and attract suppliers.

Emissions Profile of Battery Raw Materials

Reducing greenhouse gas emissions along the full value chain is crucial for the decarbonization of the transportation sector. On average, about 40 percent of battery emissions come from upstream raw materials mining and refining. Different battery types have different emission profiles, with cathodes in Li-NMC batteries being more emissive than those in LFP batteries. The raw materials needed for cathodes and anodes contribute significantly to total emissions. Over time, as the industry reduces emissions from the most intensive materials, the relative emissions intensity of smaller materials will increase.

Processing and refining are the most emissive phases for all battery materials. For example, nickel smelting and refining processes consume a substantial amount of energy. Understanding these emissions sources is essential for targeted abatement strategies.

What Does a Sustainable Battery Look Like?

Best-in-class battery producers have the opportunity to reduce emissions significantly over two horizons. By 2030, they could potentially reduce emissions by more than 70 percent, and by 2040, to less than 12 kilograms of CO2 equivalent per kilowatt-hour. Actions such as sourcing materials from sustainable producers and recycling battery materials play a crucial role. With increasing feedstock supplies and regulatory support, recycled-materials supply is expected to reach up to 50 percent of total demand by 2040.

Short- to midterm challenges, including price volatility and materials shortages, will persist. Serious sustainability challenges related to emissions and other environmental and social effects are also emerging. Collaboration between battery cell and automotive OEMs producers and materials producers is critical to achieving low-carbon battery consumption and reducing emissions in electric vehicles.