The global supply chains of companies in many industries have faced significant pandemic-driven challenges over the last couple of years, and the electric vehicle (EV) industry has been no exception.
But soon, that industry in particular could face a new hurdle unrelated to the pandemic: A European Union regulator is weighing a move to classify the lithium compounds used to produce lithium-ion batteries for EVs as hazardous to human health.
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The European Chemicals Agency's proposal regarding lithium
The European Commission is considering a proposal from the European Chemicals Agency (ECHA) to classify lithium chloride, lithium carbonate, and lithium hydroxide as hazardous to human health.
"EU member states are currently giving their views on the proposal to a committee which meets on July 5-6 to discuss chemicals including lithium that have been recommended for classification as dangerous," according to an early June Reuters article, which stated that a "final decision is expected at the end of 2022 or beginning of 2023."
I searched the ECHA's website to see if I could find some specifics. There was too much recent data about the "simple lithium compounds" group to review it all. My speculation, based on the data I perused, is that the agency is concerned about potential reproductive toxicity. It might have other concerns, too.
How do lithium chloride, carbonate, and hydroxide fit into the EV battery supply chain?
Lithium chloride is extracted from underground brine reservoirs, most of which are located in South America. It is processed into lithium carbonate, some of which is further processed into lithium hydroxide. Both lithium carbonate and lithium hydroxide can be used to produce lithium-ion batteries, though recently, lithium hydroxide has become the preferred choice for manufacturing EV batteries.
Two major U.S.-based lithium producers, Albemarle (ALB +0.13%) and Livent, have brine operations in South America, as does Chile's Sociedad Quimica y Minera de Chile, also known as SQM.
In hard-rock mines, an ore containing a lithium-bearing mineral -- usually spodumene -- is recovered. Spodumene concentrate can be processed directly into lithium hydroxide, as well as into lithium carbonate. Most of the world's lithium hard-rock mines are in Australia and China.
Country-wise, China is the biggest player in lithium processing, which involves the conversion of a feedstock such as lithium chloride or spodumene concentrate into lithium carbonate or lithium hydroxide.
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Potential ramifications for EV supply chains
Even if the regulator decides in favor of the ECHA's proposal, companies will still be able to import the impacted lithium compounds into the EU. However, they will have to comply with stricter rules with respect to their handling, packaging, and storage -- and that will add to their costs.
If these increased expenses are relatively significant, at least some companies that have EU-based operations along the lithium-ion battery supply chain will probably move their operations outside of the 27-country bloc.
Any way you slice it, it seems the end result would be higher costs to produce lithium-ion batteries that are used by EV manufacturing operations in the EU. And that would lead to higher EV prices in Europe.
Potential ramifications for investors
A European Commission decision to classify those lithium compounds as hazardous to human health would likely have many ramifications for investors in companies across the lithium-ion battery supply chain.
Albemarle investors, for instance, could be on the losing side of the equation. Chief Financial Officer Scott Tozier told Reuters that the company might have to close its lithium processing plant in Langelsheim, Germany, if lithium is classified as a hazardous material by the EU.
"With sales of approximately $500 million annually, the economic impact to Albemarle from the potential closure would be significant," Reuters quoted Tozier as saying. That sales figure for the Langelsheim plant is 8.1% to 8.6% of Albemarle's projected 2022 revenue of $5.8 billion to $6.2 billion.
Stay tuned -- I'll be following this story.
