Financing critical minerals on the road to a more sustainable auto sector
Financing minerals growth is key to the car industry meeting EV market targets.
Auto-industry pioneer, richest man in the world, bold and ambitious with controversial views on a range of topics.
If you are thinking of Elon Musk, think again. A century before Tesla, a revolution in mobility was underway and at its heart stood Henry Ford. In 1922, annual sales of Ford’s Model T exploded to pass the million-units mark and doubled a year later, a feat unequalled by any model of any automaker since.
But Ford had to overcome a major problem to get there. A deep recession in 1920 caused car demand to slump and the real price of iron and other raw materials to soar. These factors, together with supply chain disruptions, forced the Model T’s price to fall from USD575 to USD440, substantially decreasing profits.
His solution was to take control of the company’s raw materials by acquiring an idled iron-ore operation in Michigan, coal mines in Kentucky and Virginia and the Allegheny Glass Company near Pittsburgh to secure enough automobile-grade plate glass to avoid production shutdowns. By the mid-1920s, Ford used a quarter of all plate glass produced in the US.
These imperatives – price stability, the reliability of supply chains and the physical availability of high-quality raw materials – are equally applicable to today’s car industry revolution.
As the quest to decarbonise accelerates, car manufacturers must embrace new technologies, shift demand patterns for raw materials and rethink their supply chains, all in a very short space of time.
Mining challenges to resolve
With electric vehicle (EV) sales continuing their upward trend, demand for minerals such as lithium, cobalt and nickel is increasing at an unprecedented pace. This is changing the supply and demand dynamics for these and other energy transition minerals.
Lithium, for example, has gone from having niche demand as a specialty mineral used by the chemical industry to a mainstream commodity vital for producing lithium-ion batteries, in just a few years.
Lithium supply roughly needs to double by 2025 and increase 20-fold by 20501, to facilitate projected global EV growth. But exploring, permitting and building a mine takes time, which could cause a bottleneck for processing lithium at the quantity and specification needed to produce high-quality EV batteries.
Similar challenges exist with in-demand minerals like cobalt, nickel and others.
Two-thirds of global cobalt supply comes from the Democratic Republic of the Congo2, for example. Alongside major mining companies, this industry can attract whole families to the job of small-scale mining and involve child labour, particularly when cobalt prices are high.
This raises important ethical concerns that require solutions, such as using blockchain technology to bring transparency to the supply chain.
Sourcing low-carbon nickel is also fundamental to the global shift to EVs. The lifetime CO2 emissions of an EV are heavily dependent on the source of nickel in the battery and the way it was processed, so some EVs may have a higher lifetime carbon footprint than a diesel vehicle3. At Standard Chartered, we are able to finance renewable power generation and low-carbon nickel production methods to help solidify the logic of the EV revolution.
Supply strategies
Currently just three countries supply more than half of all the minerals production needed for EV batteries.4
Asia-Pacific, led by China, accounted for 90 per cent of the world’s battery production in 2021. This is expected to fall to 69 per cent by 20305. Countries like China were quick to realise the strategic importance of critical minerals, leaving western countries to play catch-up. And, while most mining of minerals isn’t done in China, much of it is done by Chinese companies.
Conflict in Europe has created renewed interest in energy independence. Western governments are introducing policies to reduce the dominance of China, such as the US Inflation Reduction Act, which includes a tax break for consumers buying vehicles with batteries made of raw materials from Free Trade Agreement countries.
Nevertheless, the US and others have a long way to go to keep pace. China continues to invest heavily in raw materials for batteries with planned investments into nickel production in Indonesia, alone, amounting to c. USD30 billion6.
Political will is driving the bifurcation of battery supply chains between China and the rest of the world, while policy and consumer preferences are dividing the market between ESG-friendly and non-ESG-friendly supply chains.
How finance partners can help facilitate change
Like Henry Ford in the 1920s, the race to secure raw materials is tempting some original car-industry equipment manufacturers (OEMs) to invest directly in mining and processing companies to secure offtake of vital minerals supplies. Of course, expanding from vehicle production to mining – whether through equity stakes or some form of debt agreement – carries some risk.
Banks like Standard Chartered can help create investment partnerships to get downstream dollars to flow upstream. We can also help reduce technology risk by bringing groups with specialist expertise into the fold, assisting mining clients in their negotiations with downstream participants and vice versa.
Both new and major mineral producers need funding, which can be provided by banks for the right types of projects. We can also arrange strategic equity investments, including from sovereign wealth groups who are increasingly looking to pivot their own investment portfolios towards the energy transition.
By facilitating mergers, such as Galaxy and Orocobre merging to form Allkem7, Standard Chartered is able to help create larger, more diversified, more financeable companies that are better able to service the needs of large OEMs.
Mines and car factories operate on very different time scales. In the near- to medium-term future, there simply won’t be enough raw materials of the right quality and from the right sources for all car manufacturers to make good on their EV production commitments, so we’re seeing a scramble for resources.
Those with the resources will be the winners in the race to roll out EVs and those without will be the losers; the losers may find their business models imperilled.
1 https://www.benchmarkminerals.com/membership/lithium-has-to-scale-twenty-times-by-2050-as-automakers-face-generational-challenge/
2 https://www.nytimes.com/2021/11/20/world/china-congo-cobalt.html
3 https://api.mziq.com/mzfilemanager/v2/d/53207d1c-63b4-48f1-96b7-19869fae19fe/c6c2d8f7-911a-53a7-04b9-651ca7e6f690?origin=1
4 https://www.mining-technology.com/analysis/concerns-for-mineral-supply-chain-amid-booming-ev-sales/
5 https://www.woodmac.com/press-releases/global-lithium-ion-battery-capacity-to-rise-five-fold-by-2030/
6 https://www.brookings.edu/blog/up-front/2022/09/21/indonesias-electric-vehicle-batteries-dream-has-a-dirty-nickel-problem/
7 https://www.allkem.co/news/merger-with-galaxy-implemented-fy21-financial-results
Industries in Transition
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