Opinion: Decoupling from China is a lot harder than it sounds

François-Philippe Champagne is clearly not one to be deterred by a challenge. An eternal optimist, the federal Industry Minister has spent the past couple of years trying to position Canada as a player in the high-stakes electric battery and vehicle business, amid fierce global competition and efforts to decouple from China.

His efforts have not gone unnoticed beyond Canada’s borders.

Canada came second in BloombergNEF’s latest global lithium-ion battery supply chain ranking, up from fifth place in 2021, falling behind only China on the firm’s annual scorecard of where individual countries stand in the race for battery primacy.

Lest the recognition go to Mr. Champagne’s head, or lull Canadians into thinking that this country is really kicking butt, the BloombergNEF analysis combines a series of qualitative and quantitative measures. Canada scores well on environmental, social and governance (ESG) factors and the availability of raw materials. But most of the latter remain in the ground. And most of what does get extracted is processed elsewhere. “A lack of significant [battery] cell and component manufacturing capacity means most of the value of these resources is realized outside the country,” BloombegNEF noted.

Mr. Champagne has made it his mission to change that, helping Canada secure commitments from big-name battery-component manufacturers and auto makers to invest billions of dollars here. The latest came last week as Brazilian mining giant Vale SA announced a deal to supply General Motors GM-N with battery-grade nickel sulphate from a proposed plant in Bécancour Que.

The town of 14,000 on the St. Lawrence River is seeking to become a hub for battery-component manufacturing, boosted by government incentives and access to cheap, clean and abundant hydroelectricity. Germany’s BASF and South Korea’s POSCO have also announced plans to build battery-component facilities there.

The hitch is that most of these investments will not come onstream until mid-decade or later. And their overall capacity is likely to amount to a drop in the bucket, with global demand for lithium-ion batteries soaring exponentially as governments seek to end sales of gasoline-powered vehicles by 2040. Incentives for North American-made EVs and batteries included in the recent US Inflation Reduction Act will help attract additional investments to this continent. But not enough to come anywhere near ending global dependence on China for battery components.

Indeed, while global auto giant Stellantis NV STLA-N and South Korea’s LG Energy Solution have announced plans to jointly invest $5.1-billion in an EV battery plant in Windsor, Ont., that is set to open in 2025, its batteries are likely to be assembled from critical minerals and components that are refined or produced in China. It would take the equivalent of a Marshall Plan for an all-North American battery supply chain to become a reality in the next couple of decades.

Benchmark Mineral Intelligence, which tracks critical mineral pricing and capacity, recently estimated that China controls 91 per cent of anode production and 78 per cent of cathode production. Its global share of cathode active material is set to rise to 87 per cent by 2030.

By contrast, Benchmark forecasts North America will only be able to fulfill 3.5 per cent and 3.4 per cent of its domestic cathode and anode demand, respectively, from local suppliers in 2030. “All of this raw material supply is great,” George Miller, an analyst at Benchmark, said of efforts to boost mining of critical minerals. “But ultimately if you don’t have the midstream production steps, those materials will have to be exported elsewhere to be then reimported into the region as cathode and anode. Every step of the supply chain needs to be present to make sense as a localized supply chain.”

Hence the immensity of the challenge facing Mr. Champagne, who recently called for an economic “decoupling” from China and ordered Chinese state-owned companies to divest their stakes three Canadian-based critical minerals companies on national security grounds. Ottawa has so far continued to allow China’s Sinomine Resource Group to own this country’s only operational lithium mine in Manitoba. Production from the mine is shipped to China for processing and use in that country’s EV industry.

Benchmark notes that major non-Chinese lithium producers, including US-based Albermarle and Livent, continue to invest in Chinese plants to produce lithium hydroxide and lithium carbonate, complicating North American efforts to reduce dependence on that county.

“They may not particularly want a decoupling because so much of their downstream demand is in China, where it looks set to remain for at least the next decade,” Benchmark analyst Daisy Jennings-Gray said in report released on Tuesday. “It is easier and more affordable to get operations up and running in China, and it is helpful to have regional hubs to feed the demand in different areas and meet different customers’ needs.”

All of which makes Mr. Champagne’s job a lot harder than he makes it sound.