Demand for battery raw materials will outpace base-case supply for certain materials, requiring additional investment and leading to fear of shortages and price volatility, among other challenges, strategy and management consulting company McKinsey projects.

The fast-growing demand for batteries, for example from the automotive and energy sectors, has caused unprecedented levels of investment by raw materials producers and battery manufacturers.

However, based on current market observations, battery manufacturers can expect challenges securing supply of several essential battery raw materials by 2030, McKinsey notes in its 'Toward security in sustainable battery raw material supply' report.

Battery producers use more than 80% of all lithium mined today. This share could grow to 95% by 2030. Some of the announced supply growth is supported by the adoption of direct lithium extraction technology, which is a cost-efficient source of lithium that unlocks large, previously inaccessible deposits.

With technological advancements shifting in favour of lithium-heavy batteries, lithium mining will need to increase substantially to meet 2030 demand, McKinsey estimates.

“The net-zero transition will require vast amounts of raw materials to support the development and rollout of low-carbon technologies.”

Battery electric vehicles (BEVs) will play a central role in the pathway to net-zero. McKinsey estimates that worldwide demand for passenger cars in the BEV segment will grow six-fold from 2021 through 2030, with annual unit sales increasing to roughly 28-million from 4.5-million.

“For producers of battery cells and raw materials, ensuring a reliable and ample supply of sustainable and affordable materials will be crucial to their competitiveness, the ongoing rollout of BEVs, and the net-zero transition overall,” says McKinsey.

Because the adoption of BEVs is central to decarbonisation of the transportation segment of the economy, it is vital to reduce greenhouse gas emissions along the full value chain. On average, about 40% of battery emissions stem from upstream raw materials mining and refining processes.

Over time, as the industry reduces emissions from the most emission-intensive materials, the relative emissions intensity of smaller materials will increase. For example, manganese currently accounts for 4% of emissions a lithium nickel manganese cobalt oxide (Li-NMC) battery.

However, decarbonisation efforts already under way are estimated to substantially reduce emissions from lithium by 50%, nickel by 50%, and aluminium by 70%, thereby earning them a low-carbon classification, the report says.

“If these reductions are achieved, then manganese’s contribution to total remaining emissions could nearly double. Targeted abatement strategies, based on a solid understanding of emissions sources and decarbonisation levers, will be required across all materials used.”

McKinsey identifies opportunities for best-in-class battery producers to substantially reduce emissions over two horizons by taking actions to decarbonise in each step of the value chain.

By 2030, which is horizon one, producers could potentially reduce emissions by more than 70%, to less than 24 kilograms of CO₂ equivalent per kilowatt-hour (kg CO₂e/kWh). By 2040, which is horizon two, they could further reduce emissions to less than 12 kg CO₂e/kWh.

Most ambitious battery makers have set goals to reach 10 kg CO₂e/kWh as early as 2030, the company says.

Further, despite the forecasted rise in battery materials demand, 2024 has been a challenging year for the industry, owing to the slowdown of economic growth and pressure on price levels, especially for battery materials, such as nickel and lithium.

Although overall demand for batteries and raw materials is increasing rapidly, supply is and will remain largely concentrated in a few naturally endowed countries, including Indonesia for nickel; Argentina, Bolivia, and Chile for lithium; and the DRC for cobalt.

Refining typically takes place elsewhere, often in China for cobalt and lithium, Indonesia for nickel, and Brazil for niobium.

This value chain setup poses additional considerations for regions such as the European Union (EU) and the US, both of which have high demand for imported materials and often rely heavily on single-country sources. For example, the EU imports 68% of its cobalt from the DRC, 24% of its nickel from Canada, and 79% of its refined lithium from Chile.

Recent supply chain disruptions, such as those affecting magnesium, silicon and semiconductors from 2021 to 2023, have increased buyers’ needs to boost supply chain resilience for critical battery raw materials, McKinsey says.

Buyers’ risks of import dependency are further heightened by recent trade restrictions introduced by exporters, including China’s export controls on some materials, such as synthetic graphite and natural flake graphite products used in BEVs, and Indonesia’s ban on nickel ore exports.

Meanwhile, with increasing feedstock supplies and regulatory support for recycling, recycled-materials supply for battery manufacturing is expected to reach, depending on the material, up to almost 50% of total demand by 2040.

“Short- to mid-term challenges, such as price volatility and materials shortages at a regional level, will likely continue. In addition, serious sustainability challenges concerning emissions and other environmental and social effects of battery materials and battery disposal are emerging.

“All these challenges create opportunities for battery cell and automotive OEMs producers in terms of sourcing of battery materials and collaborating with materials producers in this highly dynamic sector.

“Collaboration will be critical to ensure the attainment of low-carbon battery consumption and traceable production and to contributing to the reduction of emissions in electric vehicles to reach corporate and country net-zero targets,” McKinsey says in the report.