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Electric vehicles: Europe is chasing lithium closer to home

Maria Eugenia Sanin
María Eugenia Sanin
Lecturer in economics at Université Paris Saclay and coordinator of the Sectoral Policies group at the Energy and Prosperity Chair.
Key takeaways
  • The EU ban on new combustion-powered cars is driving the European automotive industry towards electric vehicles, with expected growth of 10% per year until 2028.
  • But Europe is not competitive in this industry and will be dependent on China for the raw materials and refineries needed to make batteries.
  • To achieve its objectives, the EU will have to sign bilateral agreements with countries that have abundant, lower-cost lithium to position itself strategically in the battery value chain.
  • It is above all by strengthening the recycling capabilities (for cars and their components) that Europe will be able to make its mark.
  • The EU's future objectives are clear: security of supply and energy transition.

The EU ban on the sale of new com­bus­tion engine cars from 2035 is shift­ing the Euro­pean car indus­try towards the most com­pet­i­tive exist­ing alter­na­tive: the elec­tric car. By 2028, we expect the glob­al mar­ket for elec­tric cars to grow by almost 10% a year. In auto­mo­tive terms, the Euro­pean indus­try has his­tor­i­cal­ly been com­pet­i­tive, but it is no longer so when it comes to elec­tric cars. This indus­try is dom­i­nat­ed by the Chi­nese com­pa­ny BYD, and Tes­la in the Unit­ed States (respec­tive­ly 17.5% and 12.5% of the mar­ket in 2023).

The defin­ing com­po­nent of elec­tric cars is the bat­tery. To con­quer the bat­tery mar­ket, Europe has decid­ed to invest in so-called gigafac­to­ries. In Octo­ber 2023, for exam­ple, the Euro­pean Invest­ment Bank announced that it would be invest­ing €450m from 2025 onwards. These giant fac­to­ries, ded­i­cat­ed to bat­tery design, are only com­pet­i­tive if sourc­ing of the nec­es­sary raw mate­ri­als is avail­able. Yet, to achieve the 2035 tar­get, both the raw mate­ri­als and refin­ing mar­kets need to be prop­er­ly assessed.

Electric vehicles and batteries: a market in several stages

To posi­tion itself in the elec­tric car mar­ket, Europe will have to invest in the whole bat­tery sup­ply chain. From an eco­nom­ic point of view, there are sev­er­al stages in the bat­tery val­ue chain that need to be addressed.

The upstream mar­ket cov­ers the extrac­tion of resources. The “mid­stream” mar­ket cov­ers the trans­for­ma­tion stage, i.e. the refin­ing of these resources. The down­stream mar­ket ranges from anode/cathode pro­duc­tion to cell pro­duc­tion and the final assem­bly of bat­ter­ies in gigafactories.

Min­ing is rel­a­tive­ly even­ly divid­ed between sev­er­al com­pa­nies. How­ev­er, extrac­tion oli­gop­o­lies still exist for some mate­ri­als. The Chilean com­pa­ny SQM and the Amer­i­can Alber­mar­le had the largest mar­ket share in 2022 (20% and 16% respectively).

It is at the refin­ing stage that the first warn­ing signs appear: more than 40% of the lithi­um found in bat­ter­ies is refined in Chi­na, by Chi­nese com­pa­nies. The rate ris­es to 65% for nick­el and 93% for man­ganese1. The same applies to the man­u­fac­ture of anode and cath­ode com­po­nents, more than 50% of which are pro­duced in Chi­na. For bat­ter­ies, and more gen­er­al­ly for elec­tric cars, Europe is depen­dent on Chi­nese production.

The downstream market and its gigafactories

Europe has not invest­ed enough in the “upper end” of the bat­tery val­ue chain. As a result, the sup­ply of elec­tric cars will not be able to keep pace with Euro­pean demand. For exam­ple, demand for lithi­um will increase 40-fold by 2040. But sup­ply is not keep­ing pace, giv­en the time need­ed to open mines and refiner­ies. The trends are sim­i­lar for oth­er bat­tery com­po­nents, such as cobalt and nickel.

STEPS actu­al poli­cies and SDS sus­tain­able devel­op­ment sce­nario2

How can we meet the challenge of 2035?

Chi­na refines over 40% of the lithi­um that will end up in our bat­ter­ies, although it only extracts 13.36%.The chal­lenge is not so much in extract­ing raw mate­ri­als, but in strate­gic posi­tion­ing the EU at the inter­me­di­ate stages of the bat­tery val­ue chain. Europe should first try to sign bilat­er­al agree­ments with coun­tries that have abun­dant, cheap­er lithi­um. It would also be in Europe’s inter­ests to devel­op the indus­try local­ly. Final­ly, Europe should invest in refin­ing and the man­u­fac­ture of components.

Final­ly, the devel­op­ment of a recy­cling indus­try for bat­ter­ies and their com­po­nents is a lever that has not been men­tioned enough but is nonethe­less very impor­tant. This sec­tor is not yet suf­fi­cient­ly devel­oped any­where. Mas­ter­ing the recy­cling of cars and their com­po­nents could be Europe’s com­pet­i­tive advan­tage. For greater effi­cien­cy, and to lim­it the costs of these invest­ments, these efforts should not be spread too thin­ly. With a strong Europe-wide pol­i­cy, rather than a case-by-case pol­i­cy, scale economies would be sub­stan­tial. Learn­ing effects are the rea­son why we are already see­ing a reduc­tion in bat­tery pro­duc­tion costs. Addi­tion­al­ly, such an effort would have spill-over effects on oth­er sec­tors and oth­er technologies.

Evo­lu­tion in lithi­um price per year. Blue: annu­al vari­a­tion in price. Grey: price in USD/kwh3.

At present, fos­sil fuels are expen­sive, and they will remain so. Europe must there­fore pre­pare for this future. Yet most of our green­house gas emis­sions come from the use of fos­sil fuels. The objec­tives of ener­gy secu­ri­ty and ener­gy tran­si­tion are there­fore close­ly aligned. Hence the need to invest in raw mate­ri­als that are crit­i­cal to the tran­si­tion. At the same time, Europe must set itself the goal of becom­ing a pio­neer in the cir­cu­lar econ­o­my, bat­tery recy­cling and ener­gy effi­cien­cy. That is the chal­lenge for the next decade.

Interview by Pablo Andres
2IEA, 2022
3Sanin et al. (2023) Banque Inter­amer­i­caine de Devel­ope­ment

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