Nothing is certain but death and taxes, but in 2023 it seems close to a sure thing that the automotive industry’s future can and must be a greener one. Electric vehicle (EV) sales are growing quickly in key markets, including China, North America and Europe. However, even as the industry’s future appears to be greener, in places it remains worryingly opaque. Even in 2022, automotive OEMs are challenged to fully understand the provenance and emissions profile of certain materials, including key battery metals such as cobalt. This opacity fundamentally undermines strategic decision making in the context of the energy transition. More transparency is needed, which demands deeper price and emissions data, analysis and expertise. So, what can be done to shine a light into the dark spots of the supply chain, and to gain a more nuanced understanding of the emissions profiles of key automotive commodities?
Dark spots in the battery metals supply chain
The most glaring dark spots for the automotive industry relate to the provenance of some of the materials on which they rely—most famously cobalt. Cobalt is a vital part of today’s lithium-ion battery chemistry, with 6-9kg contained in a typical EV battery. Approximately 70% of the world’s supply is sourced from the Democratic Republic of Congo (DRC) and the country boasts 46% of proven reserves. Despite recent knocks from inflationary pressures and COVID lockdowns in China (prices dropped 35% from June to September 2022), demand is expected to grow significantly in the medium term as EV sales increase, leading to substantial supply growth through to 2027 of +57% or 113kt of cobalt vs 2022 levels.
The problem is that it can be difficult to trace the origin of the unrefined ore. Approximately 20% of DRC supply today comes from the informal artisanal mining sector (ASM), within which there are documented problems with hazardous conditions and reliance on child labour. Worryingly, ASM supply is an important source of swing capacity that is capable of balancing the market when the price is high. Over time, larger mines are expected to increase in importance from 57% to 70% of supply in 2027, which will help diminish ASM supply’s swing production role. However, it will not be entirely eliminated.
This is a source of anxiety for battery producers that want to demonstrate high ESG standards in their supply chain. The difficulty is compounded by the fact that the DRC market is somewhat opaque, with no disclosure requirements with respect to reserves and details of production. Moreover, once ore has been refined, it is impossible to distinguish the original source. For an automotive OEM trying to produce a sustainability or ESG report, this leaves a question mark that may be noticed by investors and consumers.
There are no quick fixes for the root problems, but various initiatives are underway to improve conditions in the cobalt supply chain. In the meantime, concerned OEMs must arm themselves with the best available data and expertise to support their procurement and design decisions.
Beyond batteries: mainstream material emissions
However, the uncertainty for automotive manufacturers does not stop with provenance. They must also contend with the relatively new phenomenon of emissions measurement. This applies for all materials in the supply chain, and remains relevant to internal combustion engine (ICE) vehicles and new EVs.
Two key examples are steel and aluminium. EVs use approximately 63kg more aluminium than ICE counterparts, largely due to the drive to lightweight car design to offset the additional weight of the battery. Nonetheless, steel remains important to the market. For example, when Tesla released the Model 3, it surprised some commentators by reducing aluminium and increasing steel use versus the Model S and Model X in order to lower the price point.
Concerned OEMs must arm themselves with the best available data and expertise to support their procurement and design decisions
However, the emissions profiles of the metals vary hugely from source to source. Globally, producing a tonne of aluminium creates an average of 9.63 tonnes of CO2 , and the industry as a whole accounts for around 830M t CO2 or 2% of global emissions. This is largely due to the gargantuan electricity demands of aluminium production, and many of the cleaner sources are therefore hydro-powered. A tonne of aluminium produced using hydropower could create less than two tonnes of emissions, according to the CRU Emissions Analysis Tool, while one reliant on coal-fired generation could create more than 19. The range is wide, and the complexity of trying to source only cleaner aluminium is illustrated by the fact that Russia is one of the major producers of low-carbon product, with roughly 4.4Mt—a source that many Western automotive OEMs either can’t or won’t access in light of the war in Ukraine.
Low-carbon steel is a similar hot-button topic. The average emissions intensity of steel was 1.89 tonnes of CO2 per tonne of steel in 2020 (7-9% of global emissions), but can vary from as little as around 0.1 tonnes for steel produced using a renewably supplied electric arc furnace, to more than four tonnes for traditionally produced material. The real world is more complex. US steel mills with onsite power generation can sell excess power externally. The emissions associated are subtracted from reported operational emissions. This approach is not incorrect but complicates like-for-like comparison with a mill with different reporting practices. Automotive OEMs are unlikely to have such granular insight, meaning that—without help—major question marks remain around the emissions intensity of their vehicles even when data is available.
It is not enough for automotive manufacturers to invest in a greener future: they must also invest in a more transparent one
The role of finance in forcing transparency
ESG is the new watchword of the financial world, despite what sceptics might argue. In Europe, the EU’s upcoming Sustainable Finance Disclosure Regulation (SFDR) and Corporate Sustainability Reporting Directive (CSRD) mean that mandatory scope 3 emissions disclosure will begin in 2023 for financial institutions. That means those funds which hold shares in major automotive manufacturers will be mandated to report the scope 3 emissions of those holdings—those emissions not directly under the control of the company but embedded in it supply chain. According to Transport & Environment, in the automotive industry scope 3 can account for as much as 98% of total emissions. There can be little doubt pressure to improve emissions data will be exerted downwards from these major shareholders to the boards—at which point clarity and transparency will be invaluable.
For these reasons—operational, regulatory and financial—it is not enough for automotive manufacturers to invest in a greener future: they must also invest in a more transparent one, and that means far-reaching data, expertise and micro- and macro-analysis.
About the authors: Arthur Wang is End Use Economist and Alex Christopher is Multi Commodity Analyst at CRU Group
