Competition to secure the supply of the key battery metals is ramping up and we’re seeing a lot more OEMs and other kind of end users looking directly into mining as a way to ensure that they can maintain access to key metals, such as nickel and lithium and copper. Do you see the battery metal supply chain situation stabilizing now, or are we entering into a new environment where metal supply is going to become more localized?
There is definitely a push to localization for several reasons. You have CO2 emissions, which can be significantly reduced when you localize those supply chains. And something that we all learned the hard way with the pandemic, is how the logistics can be complicated and play a key role in commodity and industrial markets.
We still see maritime freight rates at very high levels – well above the historical averages – which is also an incentive for localization. And I mean, that ends up becoming a booster for some policy in that direction as well.
So I think we’re definitely going in that direction towards more localization of the entire supply chain. But something that I think is very important to emphasize is that the existing Chinese ecosystem is up and running already. So I really don’t see the world completing the whole energy transition story without significant support from the existing Chinese ecosystem, at least in the foreseeable future, despite this very strong push towards localization.
What we’re starting to see is these electric vehicle (EV) and battery companies begin to fan out. We’re looking at cobalt coming from the Congo, we’re looking at nickel coming out of Indonesia, and lithium coming out Australia and Chile primarily. And to Henrique’s point, China dominates most of those mining rights.
In the short term we’re going to see a large scramble to purchase rights for these raw materials from Korean and Japanese battery makers. And the Inflation Reduction Act (IRA) really tightens the screws over the next several years as to where these raw materials and battery components can come from in order to receive these subsidies.
In China where there’s a mature market for EVs, everything’s fallen into place and it’s more of a market competition. But in the U.S, and Europe, there’s still investment into increasing capacity in battery cell manufacturing.
But if you have to buy the lithium from a Chinese mining company or you need to refine it in China, that really doesn’t help you on the subsidies and the rebates.
George Q Fang:
A key issue is about the battery metal supply chain, and whether the situation will stabilize or not. We say the simple answer is yes and no. Why yes? That’s because supply becoming stabilized, because of pricing mechanisms for cobalt, nickel, lithium, phosphate, and manganese.
But why say no? That’s because the supply and demand gap is fundamentally still there. So this needs time to stabilized. Nowadays, we take a slightly different view: major lithium resources today are from two areas. One is Australian rather than of China, second is the Lithium Triangle [in South America]. China remains one of the biggest end user of lithium.
Looking specifically at the roles of OEMs, we see them getting a little bit more involved in the upstream. What are some of the trends that you’re seeing here? Is it mostly offtake agreements? What types of partnerships are you seeing? And I guess what role do you see for the OEMs within this industry? What do you think makes sense?
George Q Fang:
At Huayou we have signed an MoC with Vale and Ford. Ford and Vale have nickel and cobalt resources in Indonesia. The resource is quite huge. Ford is also very capable and ambitious within in EV industry. At Huayou, we use our technology to develop the resources. For example, during refining, we produce precursor and cathode material to fit the battery. So in that case we are working together to secure a long-term, sustainable, secured supply chain.
I see a few different things going on with the OEMs. The trend in the past during the ICE phase was to outsource everything to the suppliers. But now what we’re seeing is the simplification of the actual product, the EV, there’s many less parts, but there’s key components, chips, batteries that really drive IP and the value. And so we’re seeing a reverse trend of companies now wanting to become chemists or OEMs wanting to become chemists, wanting to become chip designers. And so that’ll play out over the next several years.
Because currently with the IRA, in order to receive the subsidies or the rebates, the OEMs need to have parts, raw materials that either come from a free trade country, a partner, or effectively not Russia or China. What we will likely see is OEMs try to get loopholes or carve outs until they’re able to increase the capacity from non-Chinese suppliers three or four years down the line.
And that’s the most interesting part of this entire sector, is that the dynamics change constantly. And the two or three big things that are happening over the next few years, China EV Inc., China AV Inc is entering the U.S. Before, for the last 35 years, most foreign automakers wanted to enter China. So they looked past some of the difficult rules and regulations that the Chinese economy had for entering.
I was just going to say something very briefly about what OEMs, particularly automakers, have been doing in terms of securing their supply of raw materials. I think we’ve been seeing a lot of non-binding MOUs quite recently – some offtakes as well. But I think that the industry will inevitably need to support new mining more consistently. Of course, I’m not saying that OEMs should integrate into mining and be responsible for that, but it’s also very clear that if the investments on mining don’t come adequately and in timely fashion, it’s the OEMs massive investments in battery plants and in the modernization of their facilities that will be at risk.
Does working with OEMs – and having more of a global view on mining – strengthen ESG standards within the industry?
Scrutiny of battery metals tend to be higher than for other metals, probably because they serve an ESG purpose. When you think about battery metals’ role in the energy transition story, people will naturally have higher expectations when it comes to battery metals. I think it is a good thing, because you can develop this industry with high standards from the very beginning.
But despite the very strong scrutiny of battery metals in general, they tend to perform very well compared to other metals when it comes to ESG credentials, particularly when it comes to lithium. Cobalt has been improving significantly as well, despite the human rights challenges that still exist around the cobalt industry.
But despite the strong interest in ESG, there is still a lack of clear directions and regulations. There are many different guidelines, so OEMs tend to rely on documents from the OECD or from the United Nations or from different bodies, but there isn’t a standardized set of rules or set of requirements to guide the mining industry.
George Q Fang:
I have another three points relating to this question. Firstly, joint efforts from OEMs and miners will be good for strengthening the ESG situation.
Secondly, we are working in the new energy industry. So Huayou is a precursor and cathode material producer, and in our case we try to make our own contribution to the energy revolution. ESG is a top priority, as is reducing our carbon emissions and moving towards carbon neutralization.
Finally, before I’ve joined Huayou, I worked for Zijin Mining – a gold and copper producer, and which was still carrying out green mining operations. So for the mining industry today in China, ESG is highly valued, whether we are in the new energy industry or not.
Now that we’re starting to see EVs become a global phenomenon, I’m hoping to see these publicly traded companies get their feet get held to the fire regarding ESG. Because ESG has become part of publicly traded companies’ KPIs, and there currently isn’t much visibility on mining across these countries that we don’t know very much about. And so we have an opportunity to get in front of this before global demand hits.