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The EV Battery Conundrum: Commodity Rally Could Reverse Cost Curve

At the end of last year, BloombergNEF reported that the price of electric vehicle batteries had for the first time fallen to $100 per kWh. This is widely considered the tipping point for EV adoption because this battery price level makes the vehicle as cheap as an internal combustion engine car.

Yet before anyone could really celebrate the news, other reports started coming in: a shortage of semiconductors, used generously in EVs as well as ICE cars; a looming shortage of steel because of supply chain disruptions resulting from the pandemic; but worst of all, warnings about a supply crunch in battery metals and minerals because of the projected boom in demand.

“When the chip shortage is over, the major supply shortage the industry faces would be batteries,” Yang Hongxin, chairman of Chinese battery maker SVolt Energy Technology Co., told Bloomberg in an interview this month. “The production capacity of battery cells will be tight in the next few years because expansion takes time.”

All global carmakers are in a rush to secure enough battery materials for their ambitious EV programs, many of them driven to these programs by EU governments that have tightened emission allowances for the car industry significantly. Demand from drivers in Europe is also on the rise: last year, 11 percent of all car sales on the continent were all-electric and plug-in hybrid vehicles. Governments provide generous incentives to stimulate this demand and their efforts are paying off. But commodity prices are rising.

The Wall Street Journal’s Jacky Wang reported last week that the prices of metals and minerals used in EV batteries have soared this year amid various shortages. And the pandemic and the resulting fallout on supply chains is not the biggest culprit.

“The [lithium] oversupply that crashed prices from mid-2018 to mid-2020 caused multiple projects to be put on care and maintenance with other newer projects stalled,” the head of battery-metals pricing at S&P Global Platts, Scott Yarham, told the WSJ’s Wang.

This year, however, has been strong for battery metals from the very beginning. As early as January, according to, some $290.5 million worth of lithium, cobalt, nickel and graphite “hit the roads” in EV batteries in January, up by 124.6 percent on the year and the fourth-best month on record for EV sales. The supply crunch warnings started coming in soon after.

Pledges from governments about a “green” recovery have stoked fears of shortages as EVs invariably constitute a key element of these green recovery plans. Unfortunately, it is these plans that are driving prices up for the time being.

President Biden has promised $174 billion for EV infrastructure and sales. In Europe, national governments are heavily subsidizing EV sales. Some countries—Norway, the UK, and France—are planning to phase out internal combustion engines completely within the next two decades. That would theoretically create the massive demand for EVs that carmakers, who have been pouring billions in EV production, need to sell their products, with some of them, including Mercedes, pledging to become all-electric before too long.

Related: Oil Opens Lower As Delta Variant Fears Clash With Tight Supply

All this means a massive—actual, not theoretical—increase in demand for lithium, cobalt, and nickel, as well as copper. Naturally, these demand prospects are causing concern about shortages.

In lithium, the shortage could become permanent, according to Macquarie Bank and Credit Suisse. As a result, by 2025, according to Credit Suisse, lithium prices could rise threefold. What’s more, not all large producers have a strong enough incentive to boost production capacity right now because of several long-term supply deals sealed last year.

“Batteries could be the next EV component facing a potential shortage,” a Hong Kong analyst for Daiwa Capital markets told Bloomberg. Dennis Ip added that he expected a deficit in the lithium market for the next two to three years, which would understandably lead to higher EV prices.

Higher EV prices will lead to one of two things: greater subsidies to keep sales climbing or demand depression. Given the EU’s green recovery ambitions, greater subsidies are definitely a likely option. The only problem with this is that it is not a long-term option.

The supply crunch in battery minerals was not difficult to predict. When governments and automakers make plans for bringing millions upon millions of EVs to market, it makes sense to expect a substantial increase in the demand for the things these EVs are made of. Price parity projections for EVs and ICE cars used to be made on a theoretical basis. 

One recent projection cited Wright’s Law, which states that “for every cumulative doubling of units produced, costs will fall by a constant percentage.” It’s worth noting, however, that Wright formulated this law about aircraft manufacturing. Even with Wright’s stipulation that we learn by doing and therefore the cost of doing falls eventually, it appears that the law cannot be fairly applied to the production of something so heavily reliant on raw materials that can so easily swing into a shortage.

The commodity industry is a cyclical one. It appears the EV industry might become cyclical as well.

By Irina Slav for

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