Europe's battery supply chain faces hurdles on path to self-sufficiency

The European battery industry is grappling with significant challenges hampering its competitiveness and progress toward self-sufficiency.

Ten planned battery factories have been canceled in Europe since 2018 to the first half of 2024. These cancellations, alongside the anticipated battery demand growth, point to a projected 72% undersupply to electric vehicle demand alone, according to S&P Global Commodity Insights. With domestic production unable to meet nearly three-quarters of the demand, Europe will be forced to continue relying heavily on imports.

While established players have had no difficulties expanding, new entrants are struggling and facing cancellations. Here are five challenges shaping Europe's battery metals sector:

1. Slowing growth in electric vehicle demand

In August, S&P Global Mobility said it expects European battery demand in 2028 to hit 1,852 GWh. This is 22% lower than the forecast of 2,382 GWh it released in August 2023.

A lack of comprehensive incentives for both EV producers and buyers, coupled with rising car prices, are hampering the growth of Europe's electric vehicle market, consequently affecting battery demand and investment in local battery manufacturing. European automakers have had to change strategies by reducing production capacities and relocating to the US or Southeast Asia.

2. Shift in battery chemistry

As much as 91% of operational plants in Europe produce nickel-manganese-cobalt (NMC) batteries. Cancellations in Europe have been primarily focused on plants geared to produce these types of batteries, reflecting a growing market preference for lithium-iron-phosphate (LFP) batteries.

While LFP batteries are inferior in energy density, they are significantly cheaper and have a more stable chemical structure, making them safer and more suitable for short-range vehicles.

3. Inconsistent government support and regulatory frameworks

The lack of government support has hindered the potential for domestic battery production. Numerous bankruptcies among new battery makers prior to completing factories highlight the need for strong investment and clear regulations to support the battery supply chain.

The process of obtaining planning approval for battery manufacturing facilities in Europe can be lengthy and complex, with each country having its own set of regulations and procedures, further complicating the approval process. In Germany, for example, a two-year final environmental approval is considered quick. However, actual timelines often extend to three to five years, depending on the complexity of the project.

4. Limited development in regional critical raw materials supply

Europe's efforts in becoming self-sufficient in critical raw materials is also hindered by challenges, according to S&P Global Commodity Insights analysts, including lengthy permitting processes, opposition from local residents in developing lithium output, reserve constraints in cobalt and nickel, and dealing with process-waste and environmental impacts in the case of graphite.

EU's Critical Raw Materials Act mandates regional production to account for 40% of EU's consumption for processing and 10% for extraction by 2030 for these key metals. However, there is no new funding dedicated to critical minerals supporting the ambitious targets. The limited availability of these materials within Europe creates vulnerabilities in the supply chain and lack of clarity for those looking to invest.

5. US subsidies attracting manufacturers

Battery manufacturers are increasingly relocating to the US due to clear regulations and strong support mechanisms established by the Inflation Reduction Act, which includes initiatives like the investment tax credit and tariffs to enhance local production. However, the landscape in the US has become uncertain, with policy changes likely to follow former US President Donald Trump's re-election. There is a strong possibility that import tariffs will be increased, raising cost for Chinese imported batteries, making domestic production in the US more competitive. New measures also impose tariffs on key inputs to the EV supply chain, for which China is a major -- if not the sole -- source, including lithium-ion batteries and critical minerals.

As manufacturers struggle to compete with China's low-cost batteries, these incentives are attractive for manufacturers seeking to remain competitive.

With analysis from Alice Yu, Gavin Montgomery, Jason Sappor and Francesca Price