The EU joins the cleantech supply chain localization race with proposals to adopt domestic manufacturing requirements for batteries and raw materials, but timely implementation of the targets remains a challenge.

Analysis

Manager, Clean Energy & Transport

Janire Riobello

Batteries

Enacted in summer 2022, the US Inflation Reduction Act (IRA) poses a significant challenge for the European battery and electric vehicle (EV) industry as it attaches the bulk of the value of available tax incentives to strict domestic content requirements. In particular, the so-called 45X Advanced Manufacturing Production Credit and the 30D EV Credit each provide up to US$3,750 respectively for the mining/ processing of critical raw materials and for the manufacturing of battery cells and battery modules, provided that domestic content requirements are met. Starting in 2023, critical minerals mined or processed in the US or in a US Free Trade Agreement (FTA) partner &ndash; or recycled in North America &ndash; must account for at least 40% of the total value of the minerals used in a battery, rising steadily to 80% by 2027 and beyond. Similarly, battery components (i.e., electrode active materials, battery cells, and battery modules) manufactured or assembled in North America shall be at least 50% by 2023, rising to 100% of the total value by 2029 and beyond. To qualify for the entirety of the credits, 100% of the final vehicle assembly must occur in North America. In all instances, the US IRA de facto bans the deployment of battery materials and components mined, processed, manufactured, or assembled by a &lsquo;foreign entity of concern&rsquo;, including Russia and China.
As a response, on March 16 the European Commission put forth a series of proposals enshrined under the Green Deal Industrial Plan, namely the Net-Zero Industry Act (NZIA) and the Critical Raw Materials Act (CRMA). The NZIA aims at increasing the EU&rsquo;s domestic cleantech production capacity to meet at least 40% of annual demand for each technology by 2030, although it eventually does not include sector-specific targets for selected industries, including batteries. In contrast, the CRMA would require 10% of the EU&rsquo;s consumption of critical raw materials to be mined within the bloc by 2030, with 15% of the annual demand for each material originating from recycling. The Commission raises the ambition when it comes to raw materials processing, requiring at least 40% of the annual consumption of each material to be processed in the Union. These targets serve to ensure the EU&rsquo;s security of supply of critical raw materials over the next decade and, more precisely, to decrease reliance on China, with an additional target to reduce the share of materials processed in a single third country to less than 65% by 2030.&nbsp;
This analysis assesses the feasibility of the EU proposals based on Stratas Advisors&rsquo; supply and demand projections on battery manufacturing, end-of-life recycling, and battery-grade materials processing including cobalt sulfate, nickel sulfate, lithium carbonate, lithium hydroxide, manganese sulfate, and spherical graphite.
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EU Proposes Domestic Targets for EV Battery and Cleantech Raw Materials in Long-Awaited Response to IRA

Enacted in summer 2022, the US Inflation Reduction Act (IRA) poses a significant challenge for the European battery and electric vehicle (EV) industry as it attaches the bulk of the value of available tax incentives to strict domestic content requirements. In particular, the so-called 45X Advanced Manufacturing Production Credit and the 30D EV Credit each provide up to US$3,750 respectively for the mining/ processing of critical raw materials and for the manufacturing of battery cells and battery modules, provided that domestic content requirements are met. Starting in 2023, critical minerals mined or processed in the US or in a US Free Trade Agreement (FTA) partner &ndash; or recycled in North America &ndash; must account for at least 40% of the total value of the minerals used in a battery, rising steadily to 80% by 2027 and beyond. Similarly, battery components (i.e., electrode active materials, battery cells, and battery modules) manufactured or assembled in North America shall be at least 50% by 2023, rising to 100% of the total value by 2029 and beyond. To qualify for the entirety of the credits, 100% of the final vehicle assembly must occur in North America. In all instances, the US IRA de facto bans the deployment of battery materials and components mined, processed, manufactured, or assembled by a &lsquo;foreign entity of concern&rsquo;, including Russia and China.
The goal of the IRA is straight-forward: boosting substitution of Chinese supply through the development of a North American industry which is still at its infancy. However, the &lsquo;Made in America&rsquo; provisions under IRA directly affect the competitiveness and development of localized EV supply chains in non-FTA partners in Europe, Japan, and South Korea, which fear a major subsidy-driven relocation of domestic businesses to the US. Since its adoption, major players along the EV supply chain are already planning to localize the bulk of their operations in North America, with European auto and battery OEMs such as Northvolt and Volkswagen&rsquo;s PowerCo considering future expansions across the Atlantic.
As a response, on March 16 the European Commission put forth a series of proposals enshrined under the Green Deal Industrial Plan presented in February 2023 which builds on the targets included in the European Green Deal, the Fit for 55 package, and the REPowerEU plan. The plan&rsquo;s ultimate goal is to simplify and strengthen the EU&rsquo;s regulatory framework on EV and clean technology (cleantech) supply chains, notably through the Commission&rsquo;s proposals for a Net-Zero Industry Act (NZIA) and a Critical Raw Materials Act (CRMA).
The NZIA aims at increasing the EU&rsquo;s domestic cleantech production capacity to meet at least 40% of annual demand for each technology by 2030, although it eventually does not include sector-specific targets for selected industries, including batteries. In contrast, the CRMA would require 10% of the EU&rsquo;s consumption of critical raw materials to be mined within the bloc by 2030, with 15% of the annual demand for each material originating from recycling. The Commission raises the ambition when it comes to raw materials processing, requiring at least 40% of the annual consumption of each material to be processed in the Union. These targets serve to ensure the EU&rsquo;s security of supply of critical raw materials over the next decade and, more precisely, to decrease reliance on China, with an additional target to reduce the share of materials processed in a single third country to less than 65% by 2030.
Though their respective schemes differ significantly in form and content, the domestic content requirements set by both the US and the EU risk a delay in EV adoption in the short term, as auto and battery OEMs operating domestically and in third/FTA countries remain unlikely to have the means to replace the current supremacy of Chinese supply. In 2022, China dominated the entire battery supply chain from raw materials processing (62.5% market share) and cell component manufacturing (81.7%), to battery assembly (69.1%) and recycling (75%). By the end of the decade, growth in North America and Europe is expected to offset a share of the net volume growth originating from China, although market share gains elsewhere are unlikely to result in any major losses for China, which is projected to continue to produce almost half of global battery-grade refined materials and battery packs, 59% of end-of-life (EOL) battery recycling, and about 73% of total global electrode material supply.
<img alt="" src="https://cdn.aglty.io/stratas-advisors/reports/analysis/03162023-EU-Response-to-IRA.png?h=412&amp;w=773" style="width: 773px; height: 412px;" />
Note: Market share projections for 2030 account for probability-weighted implementation of planned projects at an early and advanced development stage before NZIA/CRMA proposals.
Note: Materials assessed for the mining segment include: cobalt, natural graphite, lithium, nickel, and manganese; Materials assessed for the processing segment include: battery-grade cobalt sulfate, spherical graphite, lithium carbonate, lithium hydroxide, nickel sulfate, and manganese sulfate; Battery cell components refer to electrode active materials, including: cathode active materials, anode active materials, electrolyte solution, and separators.
Source: Stratas Advisors, 2023
Overall, North America sees stronger market share gains than its European counterparts, driven both by IRA incentives and by the vast mineral resources available especially in Canada. In particular, North American mined supply is expected to grow exponentially for cobalt (+6.3 KT), lithium (+245 KT LCE), and natural graphite (315 KT), reaching a market share of 4% in global mined supply of key battery materials. Europe also sees a strong growth in the mining segment to see its market share increase from a negligible 0.5% in 2022 to 3.7% by 2030, with lithium extraction registering the strongest growth rates among multiple European countries.
However, because these are the segments currently controlled by China, both the US and the EU are focusing on upscaling their domestic midstream and downstream industries. North America&rsquo;s battery-grade material processing capacity is projected to quadruple over the coming decade to reach a market share of 7.3%, with the bulk of growth originating from domestic lithium hydroxide, nickel sulfate, and spherical graphite output. Growth in European refining capacity is even more accentuated after registering an almost six-fold increase from 2022 to 2030 to produce 6.6% of total global battery-grade refined materials supply. While European electrode active material and cell component manufacturing capacity is set for strong growth too, North America is projected to witness the most aggressive net growth to account for 9.4% of total global production by 2030, supported mainly by its booming cathode active material industry based primarily in the US. Further downstream, large-scale investments are flowing towards the domestic development of the battery assembly industry, where the US and the EU see the strongest market share gains: from a relatively minor combined share of 18.9% in 2022, planned projects by auto and battery OEMs could bring this share to almost 43% of total global battery production by 2030, significantly shrinking China&rsquo;s current dominant market position. To respond to booming EV demand, end-of-life (EOL) battery recycling is also expected to register strong growth in the US and the EU, accounting for almost one-third of total global recycling capacity by 2030 &ndash; with the US seeing a net 265 KT increase from 2022 to 2030.
From a current battery manufacturing capacity of about 110 GWh, the EU is projected to exceed 1 TWh of battery production capacity by 2030 with Germany (28% market share), Hungary (20%), and France (14.5%) as the regional leaders. This exponential increase follows the commissioning and gradual ramp-up of gigafactories led primarily by Northvolt (Sweden, Germany), CATL (Hungary), Samsung SDI (Hungary), LG Energy (Poland), Tesla (Germany), Envision AESC (Spain), Volkswagen&rsquo;s PowerCo (Germany, Spain), and Automotive Cell Company (Germany, France, Italy), which could produce almost two-thirds of total EU battery supply by 2030. With domestic battery supply growing at a CAGR of 32.5% from 2022 to 2030, Stratas Advisors estimates that EU production could potentially cover 55% and 83% of regional battery demand by 2025 and 2030 respectively, provided that all existing and announced projects achieve their full ramp-up capacity by 2030. The remainder could potentially be met by an increasing number of trading partners including Norway and Turkey, which plan to reach a combined battery capacity of 155 GWh by 2030.
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With only a handful of greenfield refining projects in the pipeline however, meeting the 40% domestic materials processing requirement under CRMA remains a challenge. Cobalt and nickel sulfate refining capacity in the EU is set to double by 2030 thanks to expansions to existing facilities in Finland, Belgium, and France, although the pace of growth lags significantly behind that of demand. In fact, with nickel-manganese-cobalt (NMC) chemistries continuing to dominate the EV battery market, EU supply is currently projected to meet 31.7% and 27.5% of the bloc&rsquo;s nickel and cobalt annual demand by 2030, respectively, falling short of the CRMA&rsquo;s 40% target. However, provided that the adoption of CRMA spurs investments in the field, an additional 2.8 KT of cobalt sulfate refining capacity would suffice to meet the 40% requirement, which compares with the planned ramped-up volume of Terrafame&rsquo;s Sotkamo refinery in Finland, expected to reach 3 KT when fully expanded. Based on Stratas&rsquo; analysis, an additional volume of almost 17 KT would be required to meet the CRMA target for nickel sulfate. Besides the planned expansion of Sotkamo, Norilsk Nickel&rsquo;s existing nickel refinery in Finland remains the only facility with the ability to increase its sulfate output out of total volumes, although its real scalability remains uncertain due to the risks arising from economic sanctions against Russia.
Similarly, EU-based high-purity manganese sulfate and spherical graphite refining remain unable to meet the CRMA requirements due to the sharp lack of projects planned in the bloc. Talga Resources&rsquo; Vittangi integrated project in Sweden is the only graphite operation planning to expand production of battery-grade spherical graphite. While spherical graphite demand for battery anodes grows at a CAGR of 27.8%, EU supply growth remains comparatively small at a 5.1% CAGR &ndash; which results in domestic supply meeting only about 9.3% of the bloc&rsquo;s annual demand by 2030. On the other hand, the contribution of European markets to global high-purity manganese sulfate supply remains marginal throughout the entire forecast period: Euro Manganese&rsquo;s project in Czechia, scheduled for commissioning in 2027, is the only large-scale project for battery-grade manganese refining in Europe, and has the potential to produce 33 KT annually when fully ramped up. However, as demand for the metal soars, EU supply is projected to meet less than 20% of regional demand by 2030.
<img alt="" src="https://cdn.aglty.io/stratas-advisors/reports/analysis/03162023-EU-Response-to-IRA1.png?h=449&amp;w=744" style="width: 782px; height: 488px;" />
Note: Supply projections for 2030 account for probability-weighted implementation of planned projects at an early and advanced development stage before NZIA/CRMA proposals. Demand projections for each material are based on Stratas' forecasts on EV new registrations, battery size, cathode type, and material intensity per battery chemistry.
Source: Stratas Advisors, 2023
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The outlook is equally dim for the Commission&rsquo;s 15% recycling requirements under CRMA despite the EU&rsquo;s bullish forecasts for regional battery EOL project growth. Based on Stratas&rsquo; assumptions for recycling efficiency and metal recovery per tonne of battery recycled, the EU&rsquo;s projected EOL capacity has the potential to supply less than 7% of annual demand for each raw material. In particular, EOL projects are expected to recover some 13.3 KT of nickel and 1.2 KT cobalt, equivalent to 6.6% and 5.2% of the EU&rsquo;s demand in 2030 respectively, as well as about 4.6 KT of lithium &ndash; or 4.8% of projected battery-grade lithium demand in 2030. Graphite and manganese recovery from EOL projects remains marginal, supplying less than 0.4% of annual demand from batteries in both cases.
In contrast, the EU could exceed the 40% requirement for battery-grade lithium refining by 2026, reaching a supply-to-demand ratio of over 55% by the end of the decade. In fact, with virtually no production currently, lithium hydroxide projects are planned in Germany, Finland, and Portugal, and lithium carbonate volumes are also expected to originate from Czechia and France. Provided that all planned projects reach their full capacity by 2030, the EU could produce 53.7 KT of battery-grade lithium annually in Li content (equivalent to 286 KT LCE), or 8.3% of total global supply.
While the European Commission&rsquo;s NZIA and CRMA proposals do not envisage the roll-out of direct tax credits similar to those implemented under the US IRA, the adoption of domestic requirements do send a clear signal to a European battery industry risking a dramatic loss in global competitiveness. Individual EU Member States however are entitled to set out additional support in the form of tax credits and other incentives, and to lay down rules on applicable penalties in case of non-compliance with the provisions of the NZIA and the CRMA. In addition, the European Commission also extended the Union's Temporary Crisis and Transition Framework allowing Member States to subsidize a share of the total investment costs until 2025 in multiple technologies, including battery and component production and raw material recycling. To avoid a major re-location of key industries, the Framework also allows Member States to provide the same level of support as that offered in an alternative location. Mirroring the wave of project announcements in the US following the adoption of IRA, the NZIA and CRMA targets are likely to drive additional investments in the EU, particularly in the materials refining and battery production segments, as so-called Strategic Projects and Net-Zero Resilience Projects, respectively, would benefit from accelerated permitting processes of up to 12-18 months. Assuming that planned projects endure some degree of delay or cancellations, however, the EU may struggle to ensure domestic security of supply of certain elements, particularly raw materials.