Disruptions to EV battery materials may extend oil demand

by Joseph Chang, global editor, Indepdenent Commodity Intelligence Services (ICIS)

The global energy transition will be bumpy to say the least with the Russian invasion of Ukraine adding additional roadblocks as well as incentives.

Electric vehicles (EVs) are a key facet of the transition, and the disruptions to key minerals supply could slash EV production targets and keep more internal combustion engines (ICE) on the road, thus propping up crude oil demand and prices for longer.

The spike in crude oil prices in the wake of the Russia/Ukraine war is slamming petrochemicals and plastics margins in Europe and Asia in particular, as these producers rely on crude-based naphtha feedstock. If oil prices stay higher for longer, this would exacerbate their structural disadvantage versus US and Middle East producers which predominantly use natural gas liquids (NGLs) feedstock.

A slower EV transition also has implications for chemicals companies developing battery materials as well as specialty polymers and adhesives for EVs.

The big issue is nickel and cobalt, critical components in EV batteries. Russia’s Norilsk Nickel (Nornickel) is the world’s largest producer of nickel with 236,000 tonnes/year of capacity, according to Elements newsletter.

On 8 March, the London Metal Exchange halted trading in nickel as prices doubled to over US$100,000/tonne on Russia supply fears as well as a reported short squeeze.

Cobalt, much of which is produced as a byproduct in nickel refining, may be a bigger issue than nickel itself, according to a chemical company senior executive familiar with the situation.

Most nickel is used in stainless steel, so if there’s a major shortage, the material would go to the higher value EV battery side at the expense of lower value stainless steel production, the executive noted.

EV’s delayed

If nickel and cobalt supply from Russia is disrupted and prices become prohibitively expensive, this will threaten global automakers’ aggressive EV production targets.

Ford is targeting over two million EVs in 2026, or about a third of its total global production. By 2030, it expects EVs to comprise half of production. GM plans to completely phase out gasoline and diesel vehicles by 2035. Germany-based Volkswagen sees EVs making up half of sales by 2030, and zero emission vehicles comprising almost the entire fleet by 2040.

Morgan Stanley’s auto analyst Adam Jonas said investors should cut their expectations for EV penetration in the coming years based on the nickel price surge, which could add about US$1,000 to the cost of producing an EV.

UBS battery analyst Tim Bush raised his nickel/iron battery cost assumptions by 17 to 24 percent to reflect price increases, and estimates EV producers would have to raise prices by around three percent to offset inflation.

While nickel prices are rising on fears of Russia supply disruptions, the long-term impact may not be as severe if Russia can continue selling into China.

“Russia accounts for 17 percent of battery grade nickel output and at this stage we do not see issues with China continuing to buy from Russia,” said Bush in a research note.

“In the next few years we expect significant growth in battery grade nickel supply from Indonesia and could see rebalancing where China consumes more class 1 nickel from Russia and the West relies more on alternative sources,” he added.

Production forecasts

Global production of EVs is expected to surge from 5.9 million units in 2021 to 17.1 million in 2025 and 25.5 million by 2028, according to Oxford Economics. Hybrid EV production would also rise from 7.1 million in 2021 to 19.0 million in 2025 and 22.2 million in 2028.

By 2028, EVs are expected to comprise 23.8 percent of total light vehicle production. Together with hybrid EVs, they would account for almost 45 percent of global light vehicle production, according to Oxford Economics.

That would take a good chunk of oil demand out of the system, as auto transportation fuels drive about half of oil demand.

However, if this EV transition is delayed, a greater number of traditional internal combustion engine (ICE) vehicles on the road would keep transportation demand for oil elevated for longer.

Wire harnesses

For the automotive market overall, the Russia/Ukraine war stands to cause or exacerbate supply constraints in neon gas for semiconductor production, palladium for catalytic converters, aluminum and steel for auto bodies, and more immediately, wire harnesses which are the cable and wiring that makes all the electrical connections.

“The most imminent problem for the car producers is that the wire harness supply that is needed for European cars is currently on hold in Ukraine, and Ukraine makes up a significant part of European wire harness production,” said Patrick Hummel, European auto analyst at UBS, on a 9 March UBS podcast on the Russia/Ukraine impacts across sectors.

However, the good news is that since wire harnessing is a low capital intensity (and high labour intensive) business, supply chains can be reshuffled in several weeks or a couple months with other regions boosting production, he added

“But right now this is the biggest bottleneck for the European industry,” said Hummel.

Thus far, major automakers have not sounded the alarm on nickel, aluminum, palladium or other material supplies “but if anything were to happen on these fronts with supply slowing down significantly, we would see a global production impact”, the analyst pointed out.

The global automotive market has been under supplied for the past 18 months, largely on semiconductor constraints. Worldwide car production of 75 million units in 2021 was well below normal levels of about 90 million, said the UBS analyst.

“So I’m not sure how much additional volume destruction we’re going to see from these current levels, even with a more bearish macro outlook,” said Hummel.

However, already one automaker is being directly impacted by sanctions.

Russia’s Lada, whose parent company AvtoVAZ is owned by France-based Renault Group, has shut down production on lack of parts and supplies because of international sanctions, reported the Wall Street Journal on 9 March.

Additional contribution from Michael Connolly