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Entering 2024, automotive sector health shows mixed
messaging, fractured markets, and significant implosive forces
affecting major megatrends. For all four CASE systems (Connected,
Automated, Shared, and Electrified), 2023 showed cracks in the
expansion rates and long-term outlooks of these development focus
areas. But where does battery raw materials acquisition by OEMs and
suppliers fit into the picture?
As market level indicators such as interest rates, loan to
value, loan delinquency, and return to market all show headwinds –
OEM messaging has changed from confident expansion toward one of
value proposition. Suppliers with excessive debt coming to term
will need to rebalance their near-term strategy toward making
payments on increased interest rates instead of long-term
investments.
Underpinning all OEMs and Tier 1 suppliers are material supply
chains that directly determine which efforts will succeed by
changing the economic feasibility, market reach, and technical
prowess of their investments.
EV Battery Raw Materials
For example, Rare Earth Elements underpin the magnets in many
electrical motors, improve the material characteristics of legacy
materials, and enable ubiquitous technology such as touch sensitive
displays. This one category of minerals development feeds many of
the advanced technology packages seen as luxurious or even simply
competitive by consumers.
But also under scrutiny is a relatively mundane mineral: copper.
The mining of copper is currently underinvested and pivotal within
energy transition efforts, but we’re already seeing tier 1
suppliers and OEMs looking to replace this material in electrified
vehicles. Battery bus bars and charging cables are moving toward
aluminum in a cycle long known to the infrastructure-based use
cases. In those applications, a 4:1 price ratio will drive material
changes to infrastructure builds, and vehicle-based applications
may see a similar tipping point. Teardown services are identifying
improvements in assembly and cost which come from this material
change.
The materials supply chain currently stands as the second major
blockade to mainstream battery electric vehicle adoption rates. The
mining sector faces a struggle to convince a widening ethical
investor base of its ESG credentials.
Investments and crossing the chasm
Due to some investors holding back commitment to the mining
sector it has not yet garnered the investment required in mineral
exploration and extraction to support a mainstream transition to
electric vehicles. For every voice proclaiming the future of
automotive to be electric, there remains a chasm in investment
which bolsters the validity of Main Street hesitancy toward EV
adoption. While industry experts, business leaders and marketers
all point toward battery electric vehicles, mainstream consumers
have yet to find the problem that electric vehicles solve in their
daily lives.
The timidity of institutional investors may come from the
realities of EV adoption rates in the market – especially in North
America. Or it may point to the difficulties in getting raw
material markets to move forward – a task that takes decades of
approvals and remains highly sensitive to market demand.
For instance, the chart below shows North American demand for
aluminum – a standard ingredient for the battery to live on, but
also a supply pinch point. Propulsion demand across multiple
components shifts from the lower value castings of traditional
systems towards extrusions, high-quality castings, and even foil
sheets. All these forms require aluminum with fewer impurities,
which influences scrap costs and may require dilution with
additional primary aluminum.
In 2023, the Platt’s Aluminum Symposium noted that high-quality
sources of aluminum recycling such as beverage cans would not be
able to bridge the demand gaps for North America, and the latest
trade deficit numbers reflect the accuracy of this prediction.
In primary markets there are still significant hurdles to
overcome in popularizing the re-processing of bauxite residue, also
known as red mud, and other mining waste to provide additional
market value with improved environmental impact. Low profit
margins, long duration payback, high planning risk, and high
sensitivity to operational excellence may be why investors have not
supported the minerals extraction market as much as may be
required. But it could also be baking in consumer-adoption
headwinds. Research conducted by S&P Global Mobility in in 2023
found expressed interest in refining tailings to extract high value
minerals while improving environmental <span/>stewardship, but voiced the difficulty in
finding investors.
Country Risk Assessment
In the last few years, several supply chain disruptions to major
material sources have fundamentally changed the way OEMs evaluate
the risk of accepting a new material within vehicles. And sometimes
the causes of supply chain snarls are unusual. As an example,
preparations for the winter Olympics in Beijing, mainland China
resulted in shortages in Magnesium (due to power plants being
forced to close around the event to comply with tougher clean air
rules which caused a reduction in smelting capacity). This
illustrated how the reliance on a single city for 80% of the global
supply of a commodity could result in shortfalls – causing
suppliers to frantically hunt for recycled materials.
Regional sourcing of materials such as Nickel, Manganese and
Cobalt have become more sensitized within OEMs. Some companies have
signed <span/>ESG
declarations regarding the origin of their material sourcing, to
avoid the brand-damaging effects of societal risks associated with
certain regions of production. Best-in-class materials may be
replaced by “best in risk aversion.”
Despite the sometimes cumbersome decision-making processes at
OEMs, alignment of cost and risk reduction can move quickly. With
the recent graphite shortfall of the battery industry, supply chain
localization efforts are looking further into the raw material
sourcing strategies to ensure risk is minimized.
ESG and Sustainability
For most people in business, “sustainability” usually concerns
the longevity of financials, product performance, and the reduction
of waste within systems. Messaging around sustainability has, in
some circles, become equivalent to carbon accounting.
Performance of materials in real-world conditions will be
contrasted with marketing messages and idealistic scenarios. For
engineers being asked to improve recycled material content in
components, reduce carbon footprint, or integrate biomaterials into
their components, the task is typically associated with cost
neutrality. But with the current macroeconomic conditions,
automotive product portfolios, and changing optics of high-level
initiatives, sustainability may evolve toward its initial
definition of overall environmental responsibility.
OEMs in Europe are currently working to meet recycled material
content regulatory requirements prior to formal approval. However,
there are major problems with the incumbent regulations from the
perspective of OEMs and material suppliers.
The EU mandate of recycled content is not a fine-based system,
but rather a compliance-based metric which will determine whether a
vehicle can be sold in the region. In cases of fine-based systems,
OEMs can tolerate a blended changeover plan whereby they may inch
toward compliance within a regulatory framework while accepting the
increased cost of doing business in the short term. However, in
this case, any vehicle with less than 25% recycled plastic will not
be permitted for sale in the EU market.
Component engineers are looking to their suppliers for recycled
content which can be quickly integrated into existing vehicles –
and this is a main friction point in the materials industry.
Chemical companies have existing recycled content compounds
available for commercial use, but they have not made it through
validation processes.
It’s possible the OEMs have not allocated enough budget for
these extensive and costly recertification processes, based on
S&P Global Mobility research within the supply base. One
component redesign researched was in the budget range of $50-80
Million, and these activities have slowed due to budgets being
reallocated to battery system development, according to the
supplier. Additionally, S&P Global Mobility has learned that
these material suppliers are highly reluctant to invest in new
processing systems that allow for integration of post-consumer
waste into the feedstock. Although it is a state-of-the-art
process, many of these publicly-traded suppliers are risking
profitability in the process.
Fully loaded or decontented?
While materials can be a geopolitical and regulatory risk, there
are unsung benefits of proper material selection when evaluated
from a bottom-up perspective.
Some groups view material selection as infrastructure: If it
works, a company will only invest the amount needed to keep the
wheels rolling. For others, material selection is the tip of the
innovation spear affecting customers directly. Use cases of
vehicles are the ultimate group of demographics, intersectionality,
and practicality.
Automakers make big investments in tactile surfaces, but
decontenting a vehicle with the removal of items such as carpet, or
using cloth or exposed non-woven surfaces, may produce a vehicle
that gives the impression of rugged luxury. For another consumer,
seeing a vehicle with an eco-conscious pledge of zero landfill
waste, biopolymer use, or metrics reflecting the amount of recycled
content, may align with their core values and emotional sentiment
of why they purchase the vehicle.
Materials priorities in the supply chain
So, are materials considered as infrastructure or innovation?
Both definitions are correct. Raw materials support the systems
groups formally labeled as infrastructure, possibly putting
minerals as the grandparents to these systems.
OEMs have attempted to secure the expansion portfolios in
lithium, foreseeing an undersupply of this mineral in comparison
with their product plans. However, this is not the only at-risk
material for OEMs, as geopolitical, compliance, and market
sentiment are dictating different terms. OEMs need to bring raw
material supply chains back toward assembly plants, improve the
material’s internal visibility, and keep inflationary pricing in
check.
The automotive industry is no stranger to complex systems,
logistical sensitivities, or even vertical integration. Many of the
stated goals for OEMs are currently competing for budget, talent,
and marketing attention.
2024 may show the priorities of OEMs in a competitive goals
environment, whereby single-metric grading scales are no longer
appropriate methods of gauging their market performance. Some
stretch goals of corporate performance may focus on core value
propositions, consumer needs, and profitability. Strong business
cases that embrace grit, efficiency gains, and waste reduction are
expected to be winning topics.
FOR MORE ON MATERIALS AND LIGHTWEIGHTING
FEATURES AND TECHNOLOGY BENCHMARKING
THE LOOMING EV SUPPLIER SHAKEOUT
AUTOMOTIVE PLANNING AND FORECASTING
COMPONENT FORECAST ANALYTICS
This article was published by S&P Global Mobility and not by S&P Global Ratings, which is a separately managed division of S&P Global.
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