Pending Co2 Footprint for EVs Puts Mineral Suppliers on Notice

By Mark Story | More Articles by Mark Story

New regulation by the European Commission Regulation on Sustainable Batteries and Carbon Footprint, includes mandatory requirements on footprint rules and responsibly sourced materials used in lithium-ion battery production in the EU. From 1 January 2026, lithium-ion batteries will have to bear a carbon intensity performance class label and from 1 July 2027, must comply with maximum carbon footprint thresholds, with the EU planning to ban batteries unable to satisfy new regulations.

Late last week the US followed suit, with the Biden administration announcing it will sign an executive order to help create more resilient and secure supply chains for critical and essential goods. As a result, building a local EV ecosystem will become as important in the US as it is in Europe.

Implications for suppliers

With the onus on manufacturers to demonstrate that they are sourcing raw materials in a responsible way, Lake Resources (ASX: LKE) Managing Director Stephen Promintz says there are huge implications for Australian miners, a major provider of minerals – such as manganese, cobalt, graphite, lithium, nickel, aluminium and copper – that go into batteries of EV vehicles globally.

Through a digital passport, tracking all materials used in the battery composition from upstream, all suppliers will have to provide mandatory third party verification. With the battery alone accounting for 30%-plus of a total (entry level) EV vehicle cost, Promintz says the ramifications of having to disclose carbon intensity performance class labels by 2026 is something all miners providing these materials will need to think long and hard about.

He also notes that while pending legislation relates exclusively to the Co2 footprint, this may extend to other areas going forward.

From price to quality

One of the more obvious fallouts for the EV industry at large is the refocus away from the previous preoccupation with price as a primary factor. To help put the price consideration in the right context, investors should recognise that in last few years the cost of a Lithium-ion battery pack has reduced threefold to now be nudging the all-important $100/kWh level.

According to BloombergNEF’s annual battery price survey, which considers passenger EVs, e-buses, commercial EVs and stationary storage, average pack prices will be $101/kWh by 2023. It is at around this price point at which automakers (subject to commodity price increases) should be able to produce and sell mass market EVs at comparable prices (and margins) to the internal combustion engine vehicles in some markets.

Winners and losers

Not all miners of materials to the EV battery market were made equally, and here’s just one example. To feed the growing lithium-ion battery sector, most lithium is sourced from closed-basin brines (58%) or hard rock deposits such as pegmatites and related granites (26%), which have two diametrically different extraction processes.

As a result, there are some more obvious casualties and beneficiaries from the pending EU and US legislation around carbon footprints. For example, while Vulcan Energy (ASX: VUL) expects to commence production of Zero Carbon Lithium in 2024, and is well positioned for when the EU introduces maximum carbon footprint thresholds for industrial and EV batteries in 2027, the vast majority of its mining contemporaries who feed into the EV ecosystem are not.

While the cost of inputs for EV manufacturers might be same, the Co2 footprint that goes into providing those materials will differ significantly, depending on the processes being used. As a case in point, Vulcan Energy is developing its deep geothermal and lithium brine resource in the Upper Rhine Valley in Germany. Vulcan will use its unique zero-carbon lithium process to produce both renewable geothermal energy and lithium hydroxide from the same deep brine source.

Then there’s lithium extraction from brine via a process called solar evaporation (used by companies like Lake Resources or Anson Resources (ASX: ASN)), which could be up to a fifth more Co2 friendly than the process associated with extraction of lithium from Spodumene, an aluminium silicate mineral (LiAlSi2O6) in the pyroxene family.  Spodumene players in the lithium space, including companies like Albemarle Corporation (NYSE: ALB), and Orocobre (ASX: ORE) are required to use much greater heat and energy to drive the extraction process.

Lithium is just one example

While the lithium example is useful, it’s important to remember that the different extraction methods applied across other rare earth minerals will, over time, separate the winners from the losers in the quest to satisfy pending EU and US legislation around carbon footprints.

Given Australia is an upstream provider, and neither has an EV/battery manufacturing base locally nor is likely to have one anytime soon, there is no way for the local mining sector to avoid the impost associated with reducing its Co2 footprint.

Owing to the sheer size of demand, it’s conceivable over the next 10 years that every listed miner within the EV ecosystem – be it of lithium or other minerals – will be able to find a battery developer to accept its product, regardless of the process.

But in the medium term, as growing discretion on the choice of materials is coupled with the weight of money going toward ESG investing, some developers will need to look closely at their energy sources, and how they fit into the supply chain.

All investors in these rare earth companies need to watch this space closely.

About Mark Story

A former editor, columnist, and chief reporter on business and financial publications across NZ, Australia, Hong Kong and the US, Mark operates Prime Strategy Media. He divides his time between share market commentary and analysis, B2B, financial, mainstream media, and high level content and strategy for financial institutions.

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