Supply from Europe, US battery makers likely to undershoot demand: S&P Global Ratings

Battery makers in Europe and the US are aggressively building battery capacity, but supply will likely undershoot demand, S&P Global Ratings said in a new report published June 21.

In the report, High-Flying Battery Makers Have Much To Win And Lose, Ratings said the two regions still had a way to go, even though regulatory inducements and government subsidies had made Europe the fastest-growing EV market in 2020, and the Biden Administration in the US had proposed tax incentives and new infrastructure to increase the ratio of EVs to new auto sales to about 10% by 2025.
"The battery supply chains in the US and Europe are underdeveloped, and would need years to catch up to players such as China," S&P Global Ratings credit analyst Stephen Chan said.

According to the report, China has built sophisticated battery supply chains as part of its plan established as early as the 1990s to support development of the country's EV industry.

"In our view, more global carmakers will utilize China's robust battery supply chain. They may leverage on their existing EV manufacturing plants in China to build vehicles for export," Ratings said.

It pointed out that Tesla had been exporting its Model 3, made in Shanghai, since 2020, while BMW was also going to export its electric SUV, iX3, to 39 countries from its Shenyang plant under its joint venture with Brilliance China Automotive Holdings.

According to the report, global automakers were also leveraging on their partnerships with Korean and Japanese battery suppliers, which had larger capacity available in Europe and the US, to secure battery supply in their home countries.

"We anticipate the cost of lithium battery packs could fall to $100/kWh as early as 2024. Those in the industry often say the level is an inflection point for mass adoption of EVs. It would make EVs about as cheap as equivalent combustion-engine vehicles," Ratings said.

It added that economies of scale would kick in as demand rose, with resulting higher sales, lower costs, and increased efficiency due to lift automakers and their suppliers.

Growth opportunities
Ratings said that, while battery makers' growth opportunities were significant, they would need to navigate fast-moving technology, heavy expenditure, geopolitical forces shaping trade lines, and environmental strains.

It said that battery demand for light EVs, including battery EVs and plug-in hybrids, could grow as much as eightfold by 2025 from 139 GWh hours in 2020, with many countries encouraging battery production to foster their own domestic EV industry.

"The battery sector has entered an extremely dynamic phase. Firms face substantial growth opportunities as EVs rapidly replace legacy autos," Chan said.

He added that this would require heavy upfront investment in a battery standard that may be quickly eclipsed by superior technology.

With battery technology moving quickly, Ratings said it believed the competitive order of this sector would be dynamic for the next five to 10 years as entities perfected the technology and converged on a standard.

"As the EV market continues to boom, entities will need to manage substantial environmental, social, and governance risk. This will include managing an increased need to extract precious metals from retired batteries for reuse in energy storage stations, mobile chargers, etc," it said.

S&P Global Ratings credit analyst Minjib Kim said this would "soon become a critical environmental issue, given the toxicity of materials and the soon-to-be massive scale of the industry. Large firms and battery suppliers will face growing pressure to shoulder this environmental responsibility."