The auto industry has placed a multibillion-dollar bet on electric cars based on one assumption, that battery prices will continue to fall.
In 2019, Volkswagen executives showed charts predicting a steady decline in battery costs, as they outlined their ambition for the combustion engine to be a thing of the past.
For years, the industry has proven right that battery costs have fallen over a decade ago, from $1,000 per kilowatt-hour for early models to about $130 in 2021, paving the way for them to become affordable for middle-income families.
But the Russian-Ukrainian war threatens to stop the price drop.
Prices of nickel, lithium and cobalt – the main raw materials for manufacturing batteries – were already on the rise due to global demand. But with Russia accounting for 11 percent of the world’s nickel stock, and supply chain stresses, the war drove the prices of these commodities sky high.
The price of those three minerals used in 60-kilowatt-hour batteries, which powers a large family sports car, has risen from $1,395 a year ago to more than $7,400 in early March, according to battery group Varasis Energy.
Battery companies, automakers and suppliers are all grappling with the possibility that the profitability of electric cars will decline, or they will now require cheaper materials, if they are to stay competitive financially.
“At the moment, raw material prices are a drag on our goal of lowering battery costs,” said Jürgen Rittersberger, chief financial officer of Audi, whose brand has pledged to launch battery-only electric cars from 2026.
Yet neither Rittersberger nor most of his fellow European auto executives have warned about the impact of higher prices on the introduction of electric cars.
For a start, the price of battery materials hasn’t risen in isolation—since the war the costs of aluminum, steel, and copper, all of which are used in models of motor cars, have also gone up.
“We have to keep in mind that we need specific materials for the batteries, but we also need, say, rhodium, palladium, and platinum for the catalytic converters in our ‘combustion engine’ cars, so we have to expect cost increases in both cars,” he said. Arno Antlitz, chief financial officer of Volkswagen.
Thomas Becker, head of sustainability at BMW, said the Munich carmaker was not worried either. “We have long-term supply contracts with all battery cell suppliers. So I wouldn’t say there is any imminent impact on our supply structure,” he explained.
“It would be premature to make any predictions about a systemic and long-term impact on our supply chains at this point,” he added.
In addition, the potential for electric car prices to rise comes as the demand for battery-powered cars increases, which has been boosted by a significant increase in the cost of gasoline.
More than 1.1m battery-powered cars were sold in the first two months of this year, according to figures compiled by Bernstein, an increase of nearly 90 per cent over the same period last year.
This interest has risen faster since the war in Ukraine, as higher fuel prices have heightened consumer concerns about the operating costs of vehicles.
“Demand for electric vehicles has been tremendous over the past few weeks,” said Paul Philpott, head of Kia UK.
Autotrader, Britain’s largest online car market, found that almost a quarter of searches in March were for electric cars, up from 15 per cent the previous month.
Ian Plummer, the company’s commercial director, said fuel prices continue to be “the single biggest driver of consumer interest in electric vehicles”.
But in the long term, electric car prices may continue to climb, with battery material costs accounting for about a third of the price of electric cars paid for by motorists, according to industry estimates.
Chang Jung-hoon, an analyst at Samsung Securities, estimated that a 10 per cent rise in nickel prices would lead to a 2.4 per cent rise in the cathode price. If the spot nickel price of $42,995 on March 7 had a direct impact on battery prices, the cathode price would rise 26 percent and the price of the entire battery would rise 6 percent.
Much of that depends on whether higher raw material prices affect the price of batteries and cars, which will ultimately fall on consumers.
SK ON, one of the world’s largest producers of high-nickel batteries, “is actively hedging against price fluctuations for these metals, but higher prices will certainly have a negative impact on our profitability,” said company chief procurement officer YJ Kim.
“If this uncertainty persists in the long term, it will have a negative impact on the battery and electric vehicle industry as a whole, so we are monitoring the situation closely,” said LG Chem, another battery maker.
Negotiations between automakers and suppliers, known for their strength at best, will be key in determining who will bear the higher prices.
Werner Fölls, chief financial officer of Vitesco, a German car supplier that makes powertrains, said the company is assuming that about 80 per cent of the excess costs can be passed on to manufacturers.
Analysts say the enthusiasm of modern manufacturers of battery cars may be waning because they realize they cannot make as much money from them, as previously expected.
“Car makers are likely to switch to premium gasoline cars for higher profitability, as their profitability from electric vehicles is likely to get worse,” Kim Young-woo, an analyst at SK Securities, predicted.
“So higher prices for nickel and other metals are likely to raise concerns for electric and battery makers alike because higher prices will dampen consumers’ appetite for electric vehicles.”
Volkswagen still expects a mass market launch, along with its collaboration with Ford, to help rein in electric vehicle costs.
But Andy Palmer, chief executive of Hinduja-backed electric bus maker Switch Mobility, who oversaw Nissan’s launch of the Leaf electric car in 2010, says the long-term battery price trajectory is still downward.
“Over time, I think we will continue to see some reduction in the cost of batteries through technology-led change and economies of scale,” he said.
“When we started producing the Nissan Leaf, we were paying about $1,000 per kilowatt-hour,” he added. He continued, “The price is now around $100 per kilowatt-hour. So over time, you will definitely notice a drop in battery prices, and obviously what’s driving that is demand and supply.”
Even if prices rise, sales of electric cars have a momentum that makes them almost difficult to stop.
“Electric cars and batteries are linked to the industry trend in regulating carbon emissions,” said Kim of SK ON. “So it simply cannot be approached from a profitability perspective,” he added.
“High nickel prices could have an impact on the demand for electric cars, but it is unlikely to assume that the demand for electric cars will decrease.”