Ukraine war intensifies low-carbon supply-chain disruptions
Trade tensions due to the Russia-Ukraine conflict and tightened Covid-19 restrictions in China will exacerbate supply disruptions of key metals for low-carbon technologies, Fitch Ratings says.
This will affect end-users, such as solar and wind energy, as well as the automobile industry that is transitioning to electric vehicles (EVs), but higher metals pricing will benefit mining companies’ performance.
Russia is one of the largest suppliers of key metals used in low-carbon technologies. It accounted for about 7% of total nickel production and 15% of class 1 nickel in 2021, according to CRU. Nickel is central to many types of lithium-ion batteries. Russia produces 4% of both mined and refined copper, which is key for all electricity-related technologies (including batteries and renewables, particularly in wind technology).
Aluminium (Russia is the second-largest producer, accounting for 6% of primary aluminium production) is used in batteries and electrical transmission lines. Palladium and platinum (Russia accounted for 35% and 10%, respectively, of global production in 2021) are used in automotive catalytic converters and hydrogen fuel-cell vehicles.
Sanctions imposed on Russia and self-restrictions of buyers are disrupting metals exports from the country. This is exacerbating supply-chain pressures and market tightness.
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Meanwhile, a surge of Covid-19 cases in China’s key manufacturing hubs of Shenzhen and Changchun has led to factory shutdowns, aggravating supply-chain pressures on autos and electronics manufacturers.
With prices of copper, nickel, aluminium and zinc now close to or reaching new all-time highs, battery and renewables equipment manufacturers will face escalating production costs and significant challenges to secure supply from elsewhere. Battery manufacturers, such as BASF, which in 2019 entered into a long-term contract with Russian Norilsk Nickel for nickel supply, could be forced to diversify.
Raw materials account for up to 80% of battery costs; therefore, the magnitude of the ongoing metal price rally will likely reverse the long-term trend of falling battery costs in 2022, which are the most expensive component of EVs. Climbing manufacturing costs, coupled with the lingering autos chip shortage, could curb EV production capacity this year.
They could also dampen the ongoing strong momentum of EV sales, should manufacturers pass price increases onto consumers, particularly in emerging markets, where governments provide little-to-no subsidies for EV adoption.
The elevated cost of new EVs relative to internal combustion engine vehicles remains one of the biggest barriers for EV adoption, according to consumers’ surveys. Cost increases affecting profitability are particularly likely for manufacturers with ambitious near-term targets for EV deployment, such as Ford and GM.
Renewable equipment manufacturing could also be affected, as most components require copper, while some also need large quantities of zinc (wind equipment) and polysilicon (solar technologies). This delays installation of new renewable projects: nearly a quarter of planned solar projects in Europe were cancelled in 2021 because of rising raw material costs.
These acute supply challenges could change trends in low-carbon technologies. Battery and renewable equipment manufacturers could be incentivised to secure supplies through long-term agreements with producers in stable markets with better sustainability records.
Increased materials prices will also encourage public support and private investment in recycling. Investments in battery recycling capacity have increased since 2020, with autos companies looking to take an active role.
Rising costs could shift the focus to alternative battery chemistries that exclude nickel, namely the lithium-iron-phosphate chemistry, which has been gaining popularity recently in China. Meanwhile, strong demand for high nickel content nickel-manganese-cobalt batteries could wane.
