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 sixfold from 2021 through 2030, with annual unit sales increasing to roughly 28.0 million, from 4.5 million, in that period. 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.
The industry is likely to confront persistent long-term challenges; it will need to address them to keep up with demand in 2030. This article explores those challenges—namely, reducing carbon emissions across the value chain and related adverse effects on nature and communities—and the actions that battery materials producers can consider to overcome them.
Supply and demand imbalances in battery raw materials occur at the regional level
The shift from internal-combustion engines to battery electric vehicles is greatly affecting the materials industry. The rise in battery electric vehicles will lead to an increase in demand for battery materials. For example, battery electric vehicles are typically 15 to 20 percent heavier than comparable internal combustion engine vehicles, with a large share of the additional weight coming from battery applications. Despite this forecasted rise in battery materials demand, 2024 has been a challenging year for the industry, due to the slowdown of economic growth and pressure on price levels, especially for battery materials such as nickel and lithium.
However, to meet net-zero transition goals, companies that produce and consume battery materials will need to balance the three dimensions of the “materials trilemma” by ensuring availability (meeting growing demand needs and ensuring regional security of supply), affordability (maintaining competitive prices to ensure affordability of materials and the products and applications that are built from those materials), and sustainability (complying with or exceeding the environmental, social, and governance (ESG) standards and requirements set out by governments, customers, and industry associations alike) of materials.
After a focus on tailpipe emissions, automotive OEMs are now starting to move toward reducing their Scope 3 emissions from material usage, which contribute a large portion of what batteries emit.
Within the battery market itself, the choice of battery chemistries determines demand for materials, driven by the need to balance battery performance and cost. There are currently two broad families of battery chemistries—lithium nickel manganese cobalt oxide (Li-NMC) and lithium iron phosphate (LFP). More manganese-rich battery technologies are also emerging. These chemistries vary with respect to material content and offer manufacturers the option of adjusting performance or cost based on the actual composition of the chemistry. With the attention given to Scope 3 reduction and sustainability at large, battery materials sourcing is an important decision for battery producers and automotive OEMs.
At a broader level, the fast-growing demand for batteries—from the automotive and energy sectors, for example—has caused unprecedented levels of investment by raw materials producers and battery manufacturers.
Although there is some uncertainty about the magnitude of the adoption of various battery chemistries, there is a clear trend toward LFP, as evidenced by OEMs adding it to their portfolios for entry level models or even transitioning to the chemistry entirely.
Based on the latest estimates, McKinsey analysis projects that demand will outpace base-case supply for certain materials, requiring additional investment and leading to fear of shortages and price volatility, among other challenges.
Based on current market observations, battery manufacturers can expect challenges securing supply of several essential battery raw materials by 2030 (Exhibit 1a). Beyond these materials, other minerals are also expected to play critical roles (see sidebar “Other necessary battery raw materials”).
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McKinsey_Website_Accessibility@mckinsey.comLithium. Battery producers use more than 80 percent of all lithium mined today; that share could grow to 95 percent by 2030. Some of the announced supply growth is supported by the adoption of direct lithium extraction technology, a cost-efficient source of lithium that unlocks large, previously inaccessible deposits. With technological advancements shifting in favor of lithium-heavy batteries, lithium mining will need to increase substantially to meet 2030 demand under our latest demand estimates.
Nickel. Fears of a nickel shortage prompted by the shift to BEVs have already triggered significant investments in new mines, particularly in Southeast Asia, but even more supply will need to be brought online as demand for Li-NMC batteries for EVs continues to increase over time. Although most demand for class 1 nickel today still originates from the stainless steel sector (about 65 percent), the battery sector is expected to increasingly vie with steel and other sectors for this nickel, raising the possibility of a slight shortage in 2030.
Cobalt. About 64 percent of cobalt, which is largely a by-product of copper and nickel production, originates in the Democratic Republic of Congo (DRC). While the share of cobalt in battery chemistry mix is expected to decrease, the absolute demand for cobalt for all applications could rise by 7.5 percent a year from 2023 and 2030. Supply, mainly from DRC copper mines and Indonesian nickel mines, is expected to increase. Shortages of cobalt are unlikely, but supply is driven by the performance of nickel and copper. Additionally, cobalt price dynamics and more-transparent value chains could lead to a resurgence of cobalt demand.
High-purity manganese. The supply of manganese is projected to grow moderately through 2030. However, increasing demand for battery-grade manganese is likely to outpace supply, requiring the development of new refineries. Although manganese ore is plentiful, battery applications require ore conversion into high-purity manganese sulfate monohydrate (HPMSM). And while bringing a refinery online may have a shorter lead time than building a mine, HPMSM production requires very good process control to separate manganese from some common impurities (such as magnesium, calcium, potassium, and iron), particularly with the direct precipitation purification process. When using the electrowinning route for purification, manganese does not plate as readily as other metals such as copper, therefore requiring tighter process control and operational experience to plate the metal and then to strip it.
To account for a rapid adoption of LFP technology, we have modeled supply and demand balances with two scenarios.
In the base case, using the latest demand estimates, McKinsey analysis projects that in 2030, only about 20 percent of the HPMSM supply will meet the requirements of battery applications (30 percent if all announced projects are realized), which themselves will account for only about 5 percent of total demand for manganese.
In a world where the rapid adoption of LFP technology is coupled with a lower growth in EV production, the demand of battery materials could look different (Exhibit 1b).
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McKinsey_Website_Accessibility@mckinsey.comMeanwhile, 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 (nickel), and Brazil (niobium).
This value chain setup poses additional considerations for regions such as the European Union and the United States, both of which have high demand for imported materials and often rely heavily on single-country sources. For example, the European Union imports 68 percent of its cobalt from the DRC, 24 percent of its nickel from Canada, and 79 percent of its refined lithium from Chile.
ESG standards and supply chain transparency are part of the transition
Moreover, although supply concentration for materials such as refined nickel, cobalt, and lithium are knowable, complete visibility into the origin of raw materials is sometimes unattainable. This is the case with high-purity manganese, of which more than 95 percent is produced in China and minor volumes come from Belgium and Japan; graphite, of which almost all is refined in China; and anode production, on which China has a near monopoly (anodes are a key component of lithium-ion batteries). Limited transparency into the origins of battery raw materials supply also poses broader ESG concerns and attention. For instance, the EU Batteries Regulation aims to make batteries sustainable throughout their entire life cycle, from material sourcing to battery collection, recycling, and repurposing. Pressure to address ESG concerns will likely increase moving forward.
Recent supply chain disruptions, such as those affecting magnesium, silicon, and semiconductors in from 2021 to 2023, have increased buyers’ needs to boost supply chain resilience for critical battery raw materials. 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.
As part of efforts to mitigate these risks and ensure security of supply, economic diversification, and employment creation, the European Union and the United States are enacting a range of policy and regulatory measures to produce critical raw materials domestically and ramp up local battery production. They are also using a range of incentives to attract domestic stakeholders, including tax credits and limitations on foreign entities of concern, to entice suppliers to shift activities from other regions to their own.
What is the emissions profile of battery raw materials today?
Because the adoption of BEVs is central to decarbonization of the transportation segment of the economy, it is vital to reduce greenhouse gas emissions along the full value chain. On average, about 40 percent of battery emissions stem from upstream raw materials mining and refining processes (Exhibit 2).
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McKinsey_Website_Accessibility@mckinsey.comFurthermore, the 40 percent of upstream emissions can be further defined by the core components of a typical EV battery cell. Different battery types have different emission profiles. For example, by nature of their design, cathodes in Li-NMC batteries are more emissive than those in LFP batteries (Exhibit 3). However, to calculate total emissions of both battery types, the extraction and refining practices of the miner and the sourcing strategy of the battery producers must be considered.
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McKinsey_Website_Accessibility@mckinsey.comThe raw materials needed to make cathodes account for about 50 to 70 percent of total emissions from battery raw materials (excluding electrode foils), with nickel and lithium contributing the most to Li-NMC emissions (about 40 percent and 20 percent, respectively) and phosphate to LFP emissions (about 30 percent).
Meanwhile, the raw materials needed to make anode electrodes account for an additional 10 to 15 percent of total emissions from battery raw materials. Looking solely at raw material emissions (not including emissions related to material transformation) for materials used to produce an anode electrode, graphite precursors such as graphite flake and petroleum coke are the most emissive materials, contributing about 7 to 8 percent of total emissions from battery raw materials. Importantly, emissions from graphite vary based on whether they are natural or synthetic. Typically, production of synthetic graphite is more emissive than natural because of much higher transformation emissions.
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 percent of emissions an Li-NMC battery; however, decarbonization efforts already under way are estimated to substantially reduce emissions from lithium (by 50 percent), nickel (50 percent), and aluminum (70 percent), thereby earning them a “low carbon” classification. If these reductions are achieved, then manganese’s contribution to total remaining emissions could nearly double. The upshot is that targeted abatement strategies, based on a solid understanding of emissions sources and decarbonization levers, will be required across all materials used.
Likewise, the emissions profile varies based on phases of production and production methods, with processing and refining being the most emissive phase for all materials used in batteries (Exhibit 4). For example, for a highly emission-intensive material such as nickel, a substantial amount of energy is needed during the smelting and refining process, particularly when processing laterites using high-pressure acid leach or rotary kiln–electric furnace processes, with emissions typically derived from fossil fuel usage.
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McKinsey_Website_Accessibility@mckinsey.comWhat does a sustainable battery look like?
We see opportunities for best-in-class battery producers to substantially reduce emissions over two horizons by taking actions to decarbonize in each step of the value chain (Exhibit 5). By 2030 (horizon one) they could potentially reduce emissions by more than 70 percent, to less than 24 kilograms of CO2 equivalent per kilowatt-hour (kg CO2e/kWh); by 2040 (horizon two) they could further reduce emissions to less than 12 kg CO2e/kWh. Most ambitious battery makers have set goals to reach ten kg CO2e/kWh as early as 2030.
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Horizon one actions. Battery producers could theoretically limit their emissions from materials mining and refining by up to 80 percent if they source materials from the most sustainable producers, such as those that have already transitioned to lower-emissions fuels and power sources (see sidebar “What constitutes ‘green’ battery materials?”). There are now a number of reduced-carbon primary materials and recycled materials providers on the market, and ongoing innovation is continually increasing those numbers.
Horizon two actions. Horizon two actions extend horizon one actions and add new ones, including recycling battery materials and reducing Scope 3 emissions by using green chemicals to produce raw and active materials and other components. By 2040, emissions from the production of primary battery materials—Scope 2 emissions (power) and Scopes 1 and 3 emissions (process reagents)—will also be substantially reduced. For example, by 2040, ultralow-carbon primary aluminum (based on inert anode or carbochlorination technologies) is likely to be processed at scale, resulting in lower emissions (comparable to the lower emissions of secondary aluminum).
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 percent of total demand by 2040 (Exhibit 6).
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Short- to midterm 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.
