22 Sep 2023
Travis Tucker
HSBC Asset Management, Research & Insights Senior Manager
Ed Conroy
HSBC Asset Management, Head of Active Equity Research
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Recent policy initiatives from the US and EU underscore the importance of batteries. Both the US Inflation Reduction Act and EU Net Zero Industry Act include strong commitments to boost investment and self-sufficiency in battery technologies.
This comes amidst a more fragmented world, where competition has been overcoming global cooperation. Consequently, local battery capacity has emerged as an area of strategic importance as global powers prioritise resilient infrastructure and accessibility of key resources. The investment required is significant, with roughly USD165 billion of capital expenditure estimated to be needed in the EU and US to localise battery supply chains[@wood-mackenzie] - an area that China currently dominates, per the chart below.
Lithium batteries are typically associated with electric vehicles (EVs), with efforts to extend mileage per charge supporting mass adoption. Yet, their use extends across the spectrum of green infrastructure, also being vital to greater adoption of renewable energy. Since renewables generate power intermittently, more reliance on them requires greater ability to store the power generated.
The chart below shows the declining costs of green infrastructure as investment has picked up. Clearly, none has been as pronounced as the drop in EV battery costs. Driven by the surge in adoption, investment in EVs has grown at an average annual rate of over 50% since 2015. In conjunction, investment in battery storage technology has likewise grown by 50% per year over this time[@iea].
The attention on electric vehicles has been warranted, given a remarkable surge in demand that’s projected to increase by over one-third this year, following a record-breaking 2022[@international-energy-agency-july-2023]. With the growing scale and investment, EV battery costs have declined by over two-thirds in less than a decade. BloombergNEF’s Electric Vehicle Outlook predicts EVs will constitute nearly 60% of global passenger car sales by 2024. This will be facilitated by a projected fourfold increase in lithium-ion battery manufacturing capacity by 2030, led by China.
While China’s battery capacity expansion could lead to a global surplus over the next decade, ex-China battery supply should remain tight through the middle of this decade due to the combination of low existing capacities and fast demand growth. As EV demand picks up more broadly in the EU, US, India and other markets, China’s share in global EV battery demand is set to decline from roughly 60% currently to around 30% by 2030.
Given ambitious regulatory targets supporting electrification, Europe may become the new leader in EV penetration before the end of this decade. In the US, where penetration is currently lower, EV battery demand is expected to grow at a compound annual growth rate of 30%, gradually catching up with China by around 2030.
Projections suggest that the EU and US could achieve localised supply in battery cell manufacturing by 2027. ‘Home grown’ companies in the US should be particular beneficiaries from the changing regulation to support local manufacturing, while Korean battery makers should benefit from efforts aimed at reducing reliance on supply from China.
Achieving battery self-sufficiency poses specific challenges that need to be addressed, including:
Additionally, Chinese manufacturers have had the upper hand through access to royalty-free patents and more aggressive R&D spending. However, Korean and Japanese manufacturers are narrowing the gap in current technologies and are even well-ahead of the curve in some newer technologies.
To address the raw materials access issue, adopting alternative battery compositions becomes imperative, alongside the recycling opportunity. Sodium-ion battery technology has emerged as a commonly explored alternative to lithium-based batteries, offering a potential solution.
Today, sodium-ion batteries are more expensive than their lithium-ion counterparts due to low volumes and underdeveloped supply chains. However, future materials savings and energy density improvements offer a viable pathway for them to cost half of today’s lithium battery prices.
The other major advantages of sodium-ion are a more geographically diverse distribution of raw materials, better low-temperature performance and safety. BloombergNEF projects uptake of sodium-ion batteries to gain momentum from 2026, initially in the stationary energy storage market — supporting larger-scale renewable energy power storage.
Whether supporting EVs or clean energy, advancements in battery storage technology will serve as the backbone of the green transformation. Key shifts in this market will create less obvious, but interesting opportunities to invest in the transition.
US Inflation Reduction Act: The act was passed in 2022, with investment in manufacturing, clean energy and significant reduction in carbon emissions as key priorities.
EU Net Zero Industry Act: Intended to accelerate Europe’s green transformation, with an overall goal to put Europe on a path to domestically manufacture at least 40% of its clean energy technology needs by 2030.
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