Battery makers turn to blockchain as procurement rules tighten – Circular CEO

➤ Requirements for traceability in the supply chain will become more common in purchase agreements between metal producers and end users.

Doug Johnson-Poensgen, founder and CEO of Circulor Ltd. Source: Circular Ltd.

As electric vehicle makers sign sourcing agreements with metal producers to capture the tax benefits of laws such as the Inflation Reduction Act in the US, some are also trying to improve the transparency of metal supply chains.

To do this, the supply chain participants are turning to blockchain technology, which creates a unique digital identifier and tracking system for raw materials, which they say can provide an efficient means of tracking a material from its extraction to its use in an EV battery.

London-based Circular Ltd. develops blockchain track and trace systems for industrial supply chains, including the minerals used in EV batteries. In February, the company said it will work with lithium supplier Sociedad Química y Minera de Chile SA, or SQM, on lithium supply chain traceability. SQM was the second largest global lithium producer in 2021, according to S&P Global Market Intelligence.

S&P Global Commodity Insights spoke with Doug Johnson-Poensgen, founder and CEO of Circulor, about the trends and challenges in tracking metal supply chains. The following conversation has been edited for clarity and length.

S&P Global Commodity Insights: What trends have you seen in metals supply chain traceability, and how would you describe the state of these initiatives today?

Doug Johnson-Poensgen: Traceability has developed over the past five years from a concern about responsible sourcing to one more about sustainable sourcing. The reason for that is that the production of EV batteries is supposed to be better for the planet, not worse for the planet.

It has evolved into creating digital product passports for batteries. Europe, at the end of last year, introduced legislation that will require passports that track, per battery, where the raw materials came from and what the carbon footprint is for each battery.

Under the US Inflation Reduction Act, roughly the same information is required to trigger things like the 30D consumer tax credit, which would mean automakers would have to show who [in the supply chain] touched on what, where and when.

Traceability has moved very far in the last five years or so from traceability of individual raw materials to what is now in practice a product passport covering the 12 most important raw materials in an electric car battery. And it is now beginning to extend beyond batteries… it is increasingly accepted that it is possible to trace raw materials through a complex international supply chain, where they undergo physical and chemical transformation and amalgamation with other materials on their journey from stone to something something like a car.

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How does Circulor track raw materials, and how does the company use blockchain technology as part of its traceability efforts?

The purpose of traceability is essentially to create a digital thread that follows the physical flow of materials. To do that, you must first be able to create a trusted digital twin for a physical item…a trusted digital identity that is attached to a blob of material, including the properties of that material and where it came from.

At each stage of the supply chain, the ingredients are completely different from the manufacturing product. You try to [track] goods in, to the start of production, through an industrial process, to the end of production, to goods out.

Now, where does blockchain come into it? A blockchain is a distributed ledger, or multiple copies of the same information. The key attribute of a distributed ledger relevant to a supply chain is the ability to notarize and timestamp transactions. You don’t want history to be rewritten about what has happened to raw materials and where they come from and who has worked with them. So an immutable record where you can’t change what was recorded at the time is very useful, especially when the time that has passed between a rock, a mining site and a car can be measured as six to nine months.

What are the biggest challenges involved in tracking commodity supply chains using these blockchain-based methods?

Some of them are related to will, and some are related to getting quality data into the platform.

Let’s talk about will. First, transparency in the deeper layers of supply chains is a relatively new concept. The idea that a tier four supplier should declare what they had inherited from their suppliers – where things came from – has always been a concern in most supply chains, because people do not want to be disintermediated, or cut out and someone better found.

As we’ve gone on this journey with automakers in Europe, where they’ve imposed greater transparency commitments, we’ve found supply chain participants very nervous about the idea of ​​submitting to that level of transparency. It is currently not normal in supply chains. But [under] the Inflation Reduction Act and European battery regulations, that is exactly what is going to be required. So it’s obviously a choice whether or not you want to participate and have your materials find their way to, say, Europe or North America. That is the first challenge.

The second challenge then is, how do you get the right quality of the information without a human being involved in the process? I tend to trust data coming directly from machines rather than having the ability for a human to manipulate it. If you think about an industrial process, there is obviously a lot of data collected by production management systems and quality management systems. Then one can take a subset of this data that is able to reliably link input ingredients to the output product. But setting it up in a producer requires some education and some time.

After that, you can begin to stitch together the participants in the supply chain, and you can provide insights about what is happening in those supply chains to all levels of participants. They never had [these insights] for … [and] there is a network effect when others join and benefit from each other’s previous work.

You mentioned battery passports, which create a need for material suppliers to work with end users such as car manufacturers on supply chain traceability. In places where battery passports are not required, but car manufacturers and mineral producers cooperate on supply agreements, such as in the US, cooperation has generally been combined with their own supply chain traceability requirements, and do you expect these requirements to become more common going forward?

Absolutely. For example, if you’re going to do a direct supply deal for more sustainably produced mined nickel, and if you’re going to pay for more sustainably produced nickel, you want to be sure that what you’re actually getting for your batteries is the same thing and that the midstream participants between the mine and the car has not destroyed the relative sustainability advantages of the raw material.

I expect a lot more of this, especially when you look at things like the Battery Regulations, where people want to be confident that they’ve sourced things responsibly, or the Inflation Reduction Act, which has tax credits for manufacturers where e.g. raw materials refined in the United States that find their way into components in the United States allow both the downstream manufacturer and the upstream manufacturer to benefit from a production tax credit.

S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.