Supply risks accelerate for an electric vehicle-driven future

10 April 2018

8 out of 11 of the principal countries supplying raw materials for EV batteries are “high risk disruption territories” – adding to supply/demand pressures and upping the stakes for car makers. In this bulletin we assess the key risks automakers and suppliers need to consider and outline key ways in which they can best be mitigated.

As the race towards electric vehicles gathers pace, risks in delivering a secure supply of the critical raw materials used in EV batteries are also rapidly increasing. New research by JLT Specialty has revealed that 8 out of the 11 principal countries that supply key raw materials used in EV batteries, such as cobalt and lithium, are in territories designated as having a high or very high risk of disruption.

For automakers, this increases already intense supply and demand pressures, as manufacturers vie to stay ahead of the competition and more governments impose electric vehicle targets. Ensuring security of supply is paramount to protect shareholder and brand value: therefore managing supply chain risk is becoming ever more business-critical.

Even for those with locked-in long term contracts, these growing pressures can be extremely challenging. Long and opaque supply chains make mitigating disruption no small task, given that true visibility along the chain and traceability of raw materials back to source can be hard to achieve.

This in turn throws up other important issues over provenance, in terms of how manufacturers demonstrate a responsible approach to environmental, social and governance (ESG) factors, minimising any adverse impact on people and place in producer countries.

DEALING WITH DISRUPTION: KEY AREAS OF RISK

Lack of supply diversity

Our finding that 8 out of 11 of the principal producer countries are in high risk disruption territories highlights the problems posed by lack of supply diversity. At present, automakers are heavily reliant on a small number of producer countries for the raw materials required in EV batteries. For example, the Democratic Republic of Congo (DRC) produces over 80% of global cobalt exports, while two-thirds of graphite comes from China.

Political interference

With supply so concentrated and national wealth often dominated by natural resources, the prospect of political interference looms large. A new mining code signed into law last month in the DRC is a case in point. This will double the government’s stake in mining new projects to 10%, and it is to renegotiate all contracts with international miners, with the guaranteed contract stability period halved to five years. This could elevate legal and operational risks, for instance if contract terms become less favourable or licenses are not renewed.

Political instability/social unrest

Political instability and social unrest in countries like DRC are also a major cause for concern, creating uncertainty over the investment environment for new operations and the outlook for existing mines, processers and distributors to continue to deliver the required volumes. Given that a cobalt deficit of 5,340 tonnes is already expected by 2020, maintaining and growing capacity – for all key raw materials – will be key.

Natural catastrophe risks

Many supplier countries are in areas of heightened risk of natural catastrophes that could hinder or halt supply. For example, the Philippines, a major source of nickel, is prone to flooding, landslides, earthquakes, and typhoons which can wipe out infrastructure and devastate populations.

Growing pressure to demonstrate commitment to ESG issues

Electric vehicles are widely seen as a key part of the overall race toward a “greener” future, an idea which feeds into customer expectations of a greater commitment wider environmental, social and governance issues. However, such ethical ideals may be harder to achieve in reality. For example, child labour in “artisanal mines” is common. Due diligence is key to ensure that a failure to meet ESG standards does not result in supply having to be halted.

Escalating costs and growing demand

Raw materials prices have spiralled – with copper up 39% and cobalt up 127% last year. DRC’s new mining code raises tariffs on “strategic” metals: cobalt from 2% to 10% and copper to 3.5% plus windfall taxes. Growing demand means prices are expected to remain high, as automakers rush to embrace EV, while tech giants such as Apple, Lenovo and LG require the same raw materials for laptops and phones.

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