Author Archives: Stuart Burns

Despite a somewhat chaotic year, with markets buffeted by trade wars and geopolitical risks, the global economy has continued to expand (albeit at a slower pace than previously).

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The market’s reaction to media coverage of trade wars has no doubt been a factor in depressing share price performance and, more importantly, to postponing investments that would otherwise have stimulated more significant growth.

Economic growth in some regions has undoubtedly been hit by the knock-on effects of the trade war.

China has arguably been hit the hardest, but the drop in consumption there has spilled over into major suppliers of luxury goods, autos, and machinery — such as Germany.

But a recent Stratfor report paints a more promising picture for 2020, suggesting a combination of factors should see a gradual recovery.

Source: Stratfor

The recovery would — indeed, could — be much stronger but for politicians’ unwillingness to use fiscal stimulus in some countries.

Again, Germany leads the pack here, as a deep-seated commitment to always balance the budget philosophically prevents them from using fiscal stimulus, even though it would be of considerable benefit — not just to Germany but also its neighbors in the E.U.

By keeping growth sub-optimal in Germany, growth remains anemic across much of the E.U. Stratfor predicts 1% growth for 2020. Only the U.K. may manage better, now that it has settled its political infighting and the re-elected Conservative government budgets for substantial infrastructure investment, said to be £100 billion over the next five years.

Europe is not alone in having limited fiscal firepower to boost growth. As Stratfor observes, emerging markets are also set for a difficult 2020.

Argentina will be mired in an economic crisis, the Stratfor report says. Brazil and India will each struggle to make the structural reforms necessary to resume higher levels of growth. The Turkish economy, driven by unsustainable levels of stimulus, may continue its slow recovery — but no quick acceleration is likely.

Meanwhile, developed markets have no capacity to cut interest rates and limited appetite for quantitative easing along the lines employed following the financial crisis.

It is to be hoped that with the upcoming 2020 elections, President Donald Trump will make resolving trade disputes a key goal.

The United States-Mexico-Canada Agreement (USMCA) is expected to be approved by Congress after the White House and House Democrats recently reached an agreement over revisions.

Meanwhile, the U.S.-China trade war is showing some encouraging signs of a thaw but still has a long way to go. U.S.-E.U. discussions probably have a lot of disappointments in store before a deal is struck.

Broadly, though, progress in these areas should reduce tensions and encourage investment. Stratfor makes the point that the impact of these disputes is waning (see the graph below):

Source: Stratfor via Bloomberg Economics

As time goes by, the status quo becomes the new normal and firms find a way to cope. If this is correct, it means 2020 should be less disrupted than 2018-2019 has been and offers the prospect of continued growth — maybe not strong growth, but certainly positive.

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

After 10 years of a bull market, that’s probably the best one can expect from a late-cycle growth curve.

Iakov Kalinin/Adobe Stock

Well, Boris the Bruiser has done it.

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Boris Johnson’s Conservative party pulled off the strongest showing for the Tories in the British elections since Margaret Thatcher’s 1983 victory and a thumping majority of 79, as the Labour and Liberal Democrat parties vote collapsed.

While some outlets will seek to show this purely in terms of the public’s desire to leave the E.U., the reality is motivations, particularly for traditional Labour and Liberal Democrat voters, were many and varied.

There was considerable tactical voting and very real fear in the closing days of the campaign that a Labour government — or, more accurately, a hung parliament with a strong Labour position — would result in extreme socialist decisions being imposed on the country, such as nationalization of extensive parts of the private sector and sharp tax rises.

The pound rises and falls

There was also a pervading weariness with the whole Brexit process, even for those preferring the option to Remain, as there was a desire to see an end to the trauma (even if that meant leaving).

Although markets had positioned themselves for a conservative win, the pound had eased in the days running up to voting, as the Labour party seemed to be making late gains, according to polls.

As exit polls came out last night, the pound surged to over 1.33 against the dollar and over 1.20 against the Euro. Interestingly, although some analysts are expecting further gains, the pound has since retreated a little, particularly against the dollar, as the realization has set in that while the U.K. is almost guaranteed to now leave by Jan. 31, 2020, the terms of a trade deal with Europe remain to be worked out.

Furthermore, the Boris Johnson government has already nailed its colors to the mast in setting a deadline of Dec. 31, 2020 for that deal (or the UK will revert to a hard exit and revision to WTO rules)

In essence, the hard Brexit option remains.

So, the much-hyped wave of pent-up investment that had been waiting for the certainty a decision would bring may have to wait at least another year to discover whether the U.K. will have tariffs and what kind of barriers will exist between the U.K. and E.U. in the longer term.

SNP’s success and a possible U.K. breakup

An unwelcome development, at least for the union of the United Kingdom, is the success of the Scottish National Party (SNP) in Scotland.

The SNP, while predicted by exit polls to pick up 55 seats, still managed 48 and a dominant position north of the border on their strongly Remain ticket. That opens the door for another independence referendum with a view to an independent Scotland staying in the E.U. – not a move the E.U. has embraced over the last three years of debate, it has to be said.

But the fact remains, fears of a breakup of the U.K. have surfaced as a real possibility.

Future policy

As for policy going forward, a new budget in February is expected to be stimulatory, with an increase in spending both on social services and, to a limited extent, on infrastructure.

As the Financial Times observed today, the Conservatives’ majority will give Johnson breathing space on domestic policy. It will also likely lead in time to a significant increase in infrastructure spending.

The Conservatives’ historical policy position — best described as metropolitan social liberalism — may be about to come to an end. They have won this election by enlisting new (for them) sections of the electorate; many of their gains are poorer seats, more reliant on public services and more socially conservative.

Brexit has allowed the Tories to reconnect with lower-middle class and blue-collar workers; its policies going forward will likely have to reflect that shift.

So, increases in spending and an end to tax cuts may prove more than just a campaign pledge. A move toward a more populist position is almost certain, with controls on immigration, a renewed focus on the use of foreign aid and various other policies likely.

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

But it will be the U.K.’s engagement with Europe over the next 12 months that will shape the kind of country it is to become.

An open, relatively low-barrier trading agreement will allow a reasonably benign outcome and continued prosperity.

However, failure to achieve a workable agreement will raise the specter yet again of isolation and economic hardship – to some extent, on both sides of the English channel — and the possibility of a breakup of the Union down the line.

Platinum has had a decent year from a price perspective.

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Not as strong as palladium, by any means. But despite the travails of the global automotive market, tighter emissions standards have helped demand.

But now price support has come from an unlikely — and unwelcome — source.

South Africa’s monopoly power utility Eskom has been suffering a wave of disruptions due to production failures that have led to blackouts to the country’s mining and refining industry.

According to the Financial Times, after being starved of investment by ex-President Jacob Zuma’s corrupt administration, Eskom’s aging coal-fired power plants are in a dire state. Maintenance of aging coal plants is only part of the problem, as their new replacement power plants have been riddled with flaws, the article reports.

Power cuts earlier this year pushed the country close to recession. The most recent outages have intensified over the last 36 hours, as heavy rains have flooded some power stations.

Multiple failures affecting about a quarter of the country’s power plants have forced the utility to introduce severe rolling “stage 4” cuts of 4,000 megawatts of power on Tuesday of last week, but it was still scrambling to fix breakdowns affecting another 15,000 megawatts — roughly a third of its generating capacity — by the end of the week.

The rolling blackouts were escalated to stage 4 on Friday last week, with a rise to stage 6 (a complete loss of power) bringing many mining companies to a complete halt.

Among them are reported to be Sibanye-Stillwater, Vedanta, Impala Platinum, and Petra Diamonds. Sibanye is the world’s largest platinum producer; the news of Sibanye and Impala’s blackouts caused a 3% spike in the platinum price (see chart from moneymetals.com below):

Source: moneymetals.com

The ongoing disruption is causing some miners, like Vedanta, to question further investment in their South African zinc mines. Meanwhile, others are considering building their own supplementary power production capacity, but on a wider scale.

Eskom has been described as the biggest challenge facing South Africa, a country with many seemingly insurmountable challenges. If the country cannot provide reliable power, it cannot operate an effective economy.

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

These recent power-related problems are unlikely to be the end of the issue.

But it is hoped, as miners and refiners shut down for the Christmas–New Year break, Eskom can get some critical maintenance work completed prior to major consumers coming back online in mid-January.

After much delay and considerable uncertainty, Saudi Aramco finally got its IPO away, albeit only on the domestic Saudi market and not in New York, London or Hong Kong – yet.

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Shares were priced at $8.53, or 32 Saudi riyals. As such, the IPO will raise $25.6 billion for the kingdom’s coffers and value the company at $1.7 trillion. This was the top end of recent estimates of U.S. $1.1 trillion to $1.7 trillion, according to The New York Times but way short of the Crown Prince’s rumored target of $2 trillion.

At $8.53 per share, the offering is expected to raise $25.6 billion — a fraction of the $100 billion that Prince Mohammad bin Salman originally imagined, the article states.

The challenge has been the market did not view Aramco as favorably as the Saudis did. This comes in part because in a weak oil market and with longer-term threats to fossil fuels, not to mention a risky political backdrop in the Middle East, at $2 trillion the valuation appeared too high relative to other major oil companies.

Some bankers were even talking of a valuation in the range of $1.2 trillion to $1.3 trillion, to which the Saudis are said to have reacted angrily and whipped the IPO away from a team of some 75 international bankers to keep the float domestic. There isn’t sufficient investor demand in the region to enable the Kingdom to realize the value of a full float, so at some stage they will revisit London or New York for a listing there.

That may be a factor in Saudi Arabia’s decision announced at a Vienna meeting of OPEC+ this month to increase the output cuts by an additional 500,000 barrels a day.

The move had the desired effect — boosting the oil price — although it raised as many questions as it answered, not least is that 500,000 extra cutbacks could be off the agreed output limits, rather than off the actual output. Both Saudi Arabia and Angola are said to be producing less than their approved limits already, so if this additional 500,000 barrels reduction is off the agreed limit, then it could be largely cosmetic.

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

Nevertheless, a higher oil price would certainly help the Kingdom’s prospects of achieving a higher value in the future as it gradually offloads its shares in what was billed as the world’s most profitable company.

Talk about an own goal.

India, the fourth-largest iron ore producer in the world, could become a net importer next year, Cogencis reported recently.

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In the April-September period this year, India imported 900,000 tons of iron ore and exported 17.18 million tons partly, due to an oversupply in the domestic market. However, even in 2018, India imported 12.8 million tons of the ore and exported 16.19 million tons, according to the article — a net export of over 3 million tons.

This spectacular own goal has come about because the tenure of 329 non-captive mining leases, including 24 working iron ore mines, is set to expire in March, which contributed roughly 30% to last year’s iron ore output of 210 million tons.

Though the mines would be up for auction from April, the article states, industry officials believe it could take at least 3-4 years for these mines to be operational again because of the time required for new environmental and planning consents.

In and of itself, India’s switch from exporter to importer isn’t going to move the global markets much.

But for a country struggling with its balance of payments, it is an unwelcome burden. For Indian steel producers, the need to import more will raise domestic iron ore prices and, as such, steel input costs for domestic steel mills.

The country generally imports higher-grade iron ore above 60% iron content and exports lower grade below 58% iron content to China, so it will be paying top dollar for Australian or Brazilian premium grade iron ore.

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

Estimates put domestic iron ore prices on track for a 15-20% cost increase next year. As a result, this will reduce Indian mills’ competitiveness on export markets at a time when Chinese steel mills are looking for more export sales if domestic demand weakens there as expected.

An important source of precious metals — and in particular, Platinum Group Metals (PGMs) — is in a spiral of diminishing returns and could run out of cash in 2020 with consequences for metal supply and market prices.

Zimbabwe has been here before, it must be said.

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Ever since its corrupt and ineffectual leader Robert Mugabe was thrown out a shade over two years ago, the hope has been his replacement Emmerson Mnangagwa would enact reforms that would reverse the decline and root out corruption. While Mr. Mnangagwa has made some positive changes, unfortunately, his administration hasn’t shown the greatest competency.

Meanwhile, unable to pay for much-needed imports, the economy continues to spiral down. Importing more than it exports, Zimbabwe is facing dwindling foreign exchange reserves that threaten to choke off what remains of industrial activity.

More pressing even than the lack of fuel and spares is the impact it is having on the population, raising the prospect of further unrest — even outright insurrection — as Stratfor suggests in a recent Worldview report.

Fuel and food shortages spurred angry protests that ended in a violent security crackdown in January 2019 and while the government prioritizes what funds it has to pay off, the military’s rank and file, whose support is crucial to the administration staying in power, is suffering along with the rest of the population.

Government workers have begun demanding either pay raises or payment in U.S. dollars, according to the Stratfor report. The country’s junior doctors have been on strike since early September and were recently joined by senior doctors as well. Teachers, meanwhile, have also limited work to just two days a week and the risk of significant widespread unrest grows.

Zimbabwe’s mining sector has been in gradual decline for years, the government has been desperate to encourage more value-add refining at home but every step it takes – like enacting export bans similar to Indonesia – has backfired, creating greater trade imbalances as desperately needed exports have been blocked.

The country’s largest export is actually tobacco, making up nearly half the $1.93 billion of exports in 2017, the last year data was available, but metals make up a sizable portion of what is left.

Precious metals make up $145 million, ferroalloys make up $172 million and chromium ore makes up $122 million. Some ore goes for refinement to South Africa, but Zimbabwe’s largest export market by far is China, accounting for 44% of exports, according to the OEC.

If PGM exports were disrupted due to extended public unrest, the platinum supply market would still function. Zimbabwe’s production at some 11 tons per year is a tenth of South Africa’s 110 tons and only half Russia’s 25 tons, but it remains more than the U.S. and Canada combined, so any serious disruption would create support for higher prices next year.

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The same goes for palladium, which has broadly tracked above platinum this year and rhodium, which has already performed strongly on the back of emissions regulation changes, as this graph courtesy of Johnson Matthey illustrates.

Source: Johnson Matthey

Zimbabwe has increasingly faced a precarious future. Once the stable and prosperous breadbasket of Africa, it has progressively slid into decline under corruption and misrule.

Despite the hopes of 2017 after Mugabe was dethroned, it looks as the next year could be its most testing challenge yet.

President Donald Trump said last week that he would impose import tariffs on steel and aluminum from Brazil and Argentina, accusing them of manipulating their currencies and hurting American farmers.

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“Therefore, effective immediately, I will restore the Tariffs on all steel & aluminium that is shipped into the U.S. from those countries,” Trump tweeted — taking both countries and the markets by surprise.

Both Brazil and Argentina had been exempted from the 25% steel tariff and 10% aluminum tariff imposed in March 2018 following negotiations that settled in May of that year, which resulted in a quota system to limit imports to the previous year’s level.

The gist of the president’s case is both countries have devalued their currencies and, as a result, undercut American farmers looking to export agricultural products like soy beans to China and elsewhere.

It’s true to say both the Brazilian real and the Argentinian peso have fallen relative to the dollar, but Brad Setser, a senior fellow for international economics at the Council on Foreign Relations, is quoted in The New York Times as saying neither Brazil nor Argentina was manipulating its currency. In fact, both countries had been selling foreign exchange reserves to prop up the value of their currencies.

He added Argentina was in a “full-blown” economic crisis and was close to running out of such foreign exchange. The Argentinian peso has lost nearly 60% of its value against the dollar this year, the Financial Times reported, following the failure of populist politics and investor worries in the face of a rising debt burden.

To suggest either Brazil or Argentina have any control over their currencies is laughable.

Argentina faces debt repayments that it will struggle to pay, with more than $60 billion coming due in 2020, an earlier Financial Times article noted. The article reports the markets are rattled over concerns that Mr. Fernández may resort to printing money to cover some of the government’s spending commitments and to stimulate an economic recovery, with the country mired in recession.

The fear is that could fuel what is already one of the highest inflation rates in the world, running at around 50%. While the loss of steel and aluminum sales to the U.S. would be serious, the two products make up some 3% of Argentinian exports, paling in comparison to the agricultural sector, which dominates Argentina’s exports.

Like Brazil, Argentina is caught between a rock and a hard place.

Both economies are struggling. The Brazilian real recently fell to a record low against the dollar as the economy tries to tackle high unemployment and weak growth, while Argentina is in an outright recession.

Both countries need all the export dollars they can earn, but in many ways they need China more than the U.S.

Weaker currencies do help them win export business; it is true they have benefitted from the U.S.-China trade war, but it was not of their making.

As The New York Times states, China is a major purchaser of American pork, soybeans and other agricultural goods. As the U.S. and China have slapped tariffs on each other’s products, China has shifted to purchasing products from Brazil and Argentina instead, annoying Washington in the process.

Quite what they expect the two South American countries to do, though, is unclear. Both countries have been trying to support their currencies all year, to no avail.

Maybe Washington is hoping both countries will voluntarily limit sales to China? Would the U.S. do that if the roles were reversed?

Nor would the imposition of tariffs be a win-win for the U.S. steel industry.

Brazil exports some $2.2 billion of steel products to the U.S., but much of it is as semi-finished material, such as rolling slabs, the U.S. Department of Commerce reported this year. Raising costs for U.S. steel companies that import Brazilian slab and other semis will be the price for supporting American farmers — if this action is followed through as expected.

Nor has a grace period been suggested to allow material on the water to arrive and be cleared, as is normally the case with the imposition of such tariffs. The announcement said the tariff would be applied immediately, potentially imposing massive fines on companies with hundreds of millions of dollars of material on the water or in manufacture.

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No doubt the tariff announcement is intended as a negotiating tactic to force parties to come to the table.

Similar moves elsewhere have met with mixed success — let’s hope this case is resolved sooner rather than later.

We observed last month that the peak had passed in nickel prices and earlier suggestions from some quarters that nickel may hit $20,000 per ton were highly unlikely.

Any stainless consumers taking that on board and living hand to mouth will have seen surcharges come down and should have been able to trim stocks in line with falling input prices. Anyone who committed to bulk buys in Q3 will now be sitting on high-price stock as the nickel price — and with it stainless surcharges — continues to ease.

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

MetalMiner’s Monthly Metal Buying Outlook offers more in-depth advice as to how to react to the nickel price falls and the current market (at least for those who are subscribers).

But the question on many buyers’ minds may be where is it all going from here?

It helps to better understand what has driven the price in recent months.

The LME nickel price has risen 54% since the start of the year, Reuters reported, driven in large part by a perceived supply shock in the form of an accelerated ban on the export of Indonesian nickel ore (a key raw material for Chinese pig iron and stainless-steel makers).

Further support for the nickel price has come in the form of a sustained outflow of refined nickel from LME warehouses, even since September inventory has continued to leave with live warrants down to just 42,000 tons from over 200,000 tons at the start of the year.

The supply-side picture sounds supportive; however, as we wrote last month, the problem is demand.

The market continues to worry about the trade war impacting Chinese manufacturing and, hence, demand, despite the Financial Times reporting this week that Chinese manufacturing expanded at the fastest pace in three years last month. The demand backdrop, though, is one of almost unending doom; reports of high stainless-steel inventory in China are not helping price sentiment.

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The risk remains to the downside, which is not what those holders of high-price stock would want to hear. However, for the time being, the nickel price seems to be following the rest of the metals sector: at best sideways and at worst toward further weakness.

Conventional wisdom has suggested we are headed for a significant oil surplus next year, with some commentators talking about a glut.

Keep up to date on everything going on in the world of trade and tariffs via MetalMiner’s Trade Resource Center.

Even respected industry publications like OilPrice.com headlined “IEA Warns Of A Looming Oil Glut Ahead Of OPEC Meeting” this past week, as global oil demand growth has slowed due to weakening economic growth and the continued trade dispute between the United States and China.

The suggestion is OPEC and its partners, principally Russia, are going to have to do more than just rein in a few transgressors of previous quotas like Nigeria and Iraq if they are to keep supply roughly balanced and avoid significant price falls, CNBC reported.

The International Energy Agency’s (IEA) position is premised on projections that non-OPEC supply will rise faster than recovering demand. The IEA sees non-OPEC countries adding another 2.3 million barrels per day (bpd) to their supply in 2020, while global oil demand growth is expected to be around 1.2 million bpd.

Of that amount, the U.S. is predicted by the IEA to add 1.2 million b/d to current levels in 2020.

But is that realistic?

Rig count is a fair measure of likely production growth, although not all wells need to be instantly brought onstream once they have been completed. Cost constraints, however, mean fracking firms rarely plug and store vast numbers of drilled wells.

There is a correlation between rig numbers as a measure of drilling activity and future production – particularly as shale oil wells have a limited life.

Those rig numbers have been falling — see the below graph from Oilprice.com — as we reported earlier this month:

Source: Oilprice.com

That comes partly as the investment market has been turning its back on the fracking industry. In general, the industry is struggling to access credit as easily as it did last year.

In 2018, the shale industry added about 2 million bpd. This year, it has added just a few hundred thousand in the first eight months of this year.

Finance is not expected to improve. Shale is not the hot topic it was – not least because of dire warnings of an oil glut (as demonstrated by the chart above).

In that respect, the U.S. shale industry is remarkably self-regulating. Activity and output, plus demand and supply, move in yearly cycles, rather than the decades of deep ocean or tar sands.

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Front-priced premiums have already begun to increase, suggesting a tightening market.

However, that doesn’t mean we are facing oil price rises. It may mean the price falls some in the industry fear may not be as likely or as deep as the IEA report suggests.

Europe is sometimes — often, even — chided for its slow decision-making, which is seen by many as a product of being a “Club of 27” and the need to gain consensus for coordinated action.

But a recent FT article describes an impressively fast response to Europe’s realization that it is being left behind in the lithium battery industry and, by extension, the wider Electric Vehicle (EV) market.

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The EU car industry had assumed up to a couple years ago that batteries would become a commodity and were low on the list of priorities in developing a competitive domestic EV industry. But although carmakers have invested billions in developing models and technologies around EV automobiles, the European car market remains almost totally reliant on imports for batteries despite the fact that nearly 40% of the vehicle value is said by the FT to be the batteries.

For an industry that is the backbone of European manufacturing, that is a staggeringly exposed position to be in. Even the 3% that are made in Europe are mostly by Asian-owned companies.

Global production is dominated by Japan’s Panasonic, South Korea’s Samsung and CATL and BYD of China, the FT reports, with China by far the largest, as this chart courtesy of the FT illustrates.

But that is all about to change.

With €1 billion of funding from Volkswagen, Goldman Sachs and Ikea, a company called Northvolt will launch its first factory at Vasteras in Sweden as a dress rehearsal for a much larger Gigafactory in Skelleftea, in northern Sweden, where production should start in 2021.

Supported by cheap loans from the European investment bank and state aid from the EU, the Skelleftea plant is projected to cost up to €4 billion, but will be bigger than Tesla’s Nevada Gigafactory producing some 40 gigawatt hours of capacity by 2024, or some 2 billion individual battery cells, the FT reports. That should be enough for some 500,000 to 600,000 electric vehicles a year with the first phase of capacity already sold out to European carmakers.

Some may question the sense in locating the factory just south of the Arctic Circle, far from car plants, but the rationale is it can access cheap hydropower. As a result, the plant’s energy costs will be a quarter to a third of those available to its competitors in China.

To form a truly integrated supply chain, however, the EU’s European Battery Alliance (EBA) will need to develop mine supply and lithium refining. Although potential mining projects in some 10 EU countries have been identified, the upstream end of this supply chain remains the farthest from self-sufficiency.

Europe’s move to EVs is being driven more by legislation than customer demand. Much as it is in the U.S., the public remains deeply skeptical of the technologies’ ability to deliver a seamless replacement for the internal combustion engine.

Yet a combination of ever more stringent emission standards on manufacturers, tax penalties and incentives on consumers will bolster support of ventures like Northvolt bringing battery making closer to home — and the market will shift to EVs during the next decade, whether Joe Public wants it (or even believes it) today.