Cobalt refining power gives China an advantage in the race for EV battery dominance

Both Europe and the US are building gigafactories to produce lithium-ion batteries faster than ever before – partly to reduce their reliance on China’s manufacturing base. However, more factories will not in isolation deliver reliable domestic EV battery supply.

New Chatham House analysis shows that Western nations suffer a significant disadvantage in the crucial midstream step of refining the raw materials required for lithium-ion batteries. Instead, China looks likely to dominate refining capacity up until 2030.

This refining ability gives China a significant structural advantage in competition for access to crucial metals for lithium-ion batteries. Without significant investment in refining capacity, particularly for cobalt, many brand-new Western battery factories may sit idle in 2030, starved of refined metals, with EV battery manufacture still dominated by China.

There is increasing recognition of the importance of securing a few critical raw materials (CRMs) required to power the green economies of the future. For example, the US-UK Atlantic Declaration paves the way towards increased trade of CRMs for EV lithium-ion battery manufacturing, including cobalt, lithium and nickel.

Negotiations over the details will continue, but the declaration highlights the importance Western nations place on securing these materials for domestic markets.

The economic risk of failing to secure sufficient supplies is enormous: in Europe, the automotive industry represents over 7 per cent of GDP. In the US, automakers and their suppliers represent 3 per cent of GDP and in China automobile gross output contributes around 10 per cent. In 2022, global EV sales accounted for 14 per cent of all car sales and are set to increase to at least 40 per cent by 2030.¹

However, in 2022 price spikes for cobalt and nickel contributed to a 7 per cent increase in battery prices.² Future supply constraints could drive prices even higher. Under an economic transition scenario, this could put at risk $8.8 trillion of cumulative EV sales, $2 trillion in the US and $1.8 trillion in Europe.³ Under a net zero scenario this economic opportunity risk substantially increases.

Chatham House analysis has focused on how lithium-ion battery trade dependencies are likely to evolve out to 2030, across the entire supply chain, from mining through refining to manufacture, and finally to supplying demand for lithium-ion batteries.

We forecast future mining, refining and battery manufacturing capacity using Bloomberg New Energy Finance (BNEF) data, and calibrate current mining and refining capacities against US Geological Survey data. Details of the analytical steps and assumptions can be found in the attached presentation.

The analysis assumes that:

• Due to cobalt refining and mining potentially becoming a supply constraint in the latter half of the decade, battery manufacturing follows cobalt supply.
• Along the supply chain, whilst domestic demand is supplied first, exported excess supply proportionally follows the greatest import demand. This follows the logic that the bigger a country’s manufacturing base, the higher purchasing power they will have.

As such, export controls, bilateral trade agreements, and foreign ownership of production assets is not considered.

In 2022, around 83 per cent of global lithium-ion battery manufacturing capacity was located in China, 10 per cent and 4 per cent in Europe and the US respectively.

By 2030, the expansion of European and US battery manufacturing capacity is set to increase by a staggering six and 14 times , respectively. This means that China’s market share decreases to 69 per cent, Europe increases to 14 per cent and the US to 11 per cent.

However, Figure 1 shows that in 2030 under an economic transition, China’s battery manufacturing will likely remain dominant. 74 per cent of Europe’s and 78 per cent of the US battery cells could be imported from China.

The primary reason for this continued reliance on China is the lack of cobalt refining capacity in Europe and the US. In this scenario, battery manufacturing expansion efforts by Western nations are akin to Formula 1 engineers competing to produce the fastest car, but forgetting to ensure they have enough fuel (in this case, refined cobalt) to complete the race.

As was highlighted by S&P Global in 2022, global battery cell plant utilization rates were around 30 per cent in 2021, meaning that significant manufacturing capacity is currently sitting idle.

Setting aside potential cobalt supply constraints, Chatham House analysis indicates that by 2030 global utilization rates – simply based on demand for lithium-ion batteries – is likely to be around 40 per cent under an economic transition, and 60 per cent under a net zero compliant scenario.

More importantly, both Europe and the US are likely to have sufficient domestic manufacturing capacity in 2030 to almost fulfil all domestic battery demand under the net zero scenario (based on existing, announced, and under construction battery manufacturing plants). In other words, the West is already producing a fast enough car. Their priority must now be the fuel.

There is little that Europe and the US can do to change the geographic concentration of resources in the ground. Cobalt and lithium are geographically concentrated in a handful of countries. This is particularly true of cobalt, where around 70 per cent of mined cobalt is produced in the Democratic Republic of the Congo (DRC). Europe and the US are developing their own mining operations, but cobalt mining is likely to remain dominated by the DRC.

However, the crucial intermediate step of refining the raw metals can be located anywhere.

In 2022, Chinese companies accounted for around 68 per cent of global cobalt refining capacity, and 72 per cent of global lithium refining capacity. By 2030, our analysis indicates this is likely to only marginally decrease, by around 2 percentage points for cobalt and 10 percentage points for lithium.

Thus the West’s likely continued dependence on China in battery supply chains is much more a function of Chinese cobalt and lithium refining dominance (and their associated purchasing power) than it is of Chinese battery manufacturing capacity.

Returning to the F1 analogy, the West is unlikely to have enough fuel (refined cobalt and lithium) to power their increasingly fast car (battery manufacturing factories).

Yet this supply bottleneck for the West is readily addressable. Refineries can be built relatively quickly and in close proximity to the gigafactories they supply, regardless of where geological deposits are located.

There is one incredibly important obstacle in the development of cobalt refining capacity that Western policymakers need to consider.

In 2008, the DRC and China signed the Sicomines pact, which gives Chinese signatories mining rights to DRC’s cobalt and copper in exchange for Chinese investments in Congolese infrastructure projects. The copper and cobalt are together estimated to be worth around $50 billion over the 25-year period of the agreement, with China receiving 600,000 megatonnes (Mt) of cobalt alone.

President Felix Tshisekedi of DRC indicated frustration with the deal at the 2023 World Economic Forum, saying ‘we’re happy to be friends with the Chinese, but the contract was badly drawn up’ – but the pact represents a potential obstacle to European and US cobalt refining development.

Regardless of the Sicomines pact, if Europe and the US do not invest in expanding their own cobalt and lithium refining capacity, there will be little point in developing trade agreements with any country to supply the raw metals. This said, in December 2022, the US, DRC and Zambia signed a Memorandum of Understanding to develop ‘an integrated value chain for the production of EV batteries in the DRC and Zambia, ranging from raw material extraction, to processing, manufacturing, and assembly’.

To ensure supply chain constraints do not encumber growing Western battery demand, policymakers will also need to pay careful attention to the type of battery chemistries that they incentivize manufacturing.

Low-cobalt lithium-nickel-manganese-cobalt-oxide (NMC) and cobalt-free lithium-iron-phosphate (LFP) batteries offer the potential to significantly reduce reliance on cobalt. LFP batteries have disadvantages: while lower cost, their lower energy density means EV range decreases, especially in cold weather. They are also more expensive to recycle than other lithium-ion battery chemistries.

Although many EV manufacturers are already shifting to LFP, cobalt will remain the biggest limiting factor in supplying demand for lithium-ion batteries even under the net zero scenario, where a greater share of low and no cobalt batteries are manufactured.

As such, policymakers in the EU and US will need to focus their efforts on increasing cobalt refining capacity, ensuring battery manufacturing plants are future proofed to be able to manufacture increasing volumes of low cobalt battery chemistries, and increasing recycling rates of end-of-life batteries.