The End of the Beginning

Perhaps someone looking at the commentary on Chinese and global EV sales for the past several years could be forgiven for thinking that the EV story would be a one-way growth event.

The world needs to cut down on fossil fuel emission, it needs Electric Vehicles and the Chinese government is going to ensure that that happens. Forever and ever, Amen.

Those of us that look closer at the market knew that that was unlikely to be the case and the Chinese government’s withdrawal of subsidies on some EVs in 2019 and move for a total withdrawal of subsidies by midway through 2020 has guaranteed it.

With Chinese PEV (Plug-in EV) sales now negative in y/y terms for the fifth consecutive month in December, and no signs of the seasonal surge in EV sales at the end of the year that many were hanging on for, many commentators suggest that the situation in EVs looks bleak.

Why would the Chinese government cut back on subsidies in this way and endanger the nascent EV event? Well the reason is because its subsidy regime has been being abused by auto manufacturers. The last five years have seen a supernova of EV developers and manufacturers emerge. China famously has over 100 EV makers, but how many cars are many of them actually making? Some are making a lot and some not very many (or none) at all.

China’s 10 brands with the highest market share control 65% of the PEV market. That leaves quite a lot for small makers. If we look at the top 20 models selling in September 2019, it’s a really long tail. The bottom five models sold less than 500 units during the month, less than a 0.6% market share.

There are dozens of manufacturers out there producing only a few cars a month yet claiming mountains of subsidies. That’s what China wants to control. There’s been free money for EVs for too long and it knows that only with a more consolidated market can Chinese companies compete with the Western World OEMs whom are now starting to enter the space with a vengeance.

Just as in Rare Earths, China wants EV market leaders whose products are competitive in the global market. And it’s not wary of banging a few heads together to make that happen.

So where does that leave investors in the battery story? We’ve talked before about China’s re-weighting from a subsidy carrot approach to a stick approach. We said that we believe that this re-weighting in the Chinese market could take years. But I don’t believe that the Chinese government expected the magnitude of the decline in sales that it’s seen. And if sales continue to decline at this rate it would bring China’s whole Green agenda into doubt. So don’t be surprised to see a roll back of some of the changes in the near-term.* But it may take a good few months for that to happen.

China put the brakes on EV subsidies...then released them again.

Whether China acts to re-catalyse its EV market or not, it seems likely that the era of rapid Chinese growth in EV sales is at an end.

However, I’m not panicking, because there’s a new knight in shining armour that’s likely to charge in to save the EV space. And that’s Europe.

Europe to be the New EV Leader

If you don’t live in Europe it’s difficult to describe the level of fervour that currently exists for the Green agenda here. Every three or four adverts on the TV seems to be for electric vehicles of one sort or another; there is at least one climate change report on every TV or radio news bulletin; websites, newspapers and magazines regularly feature reports on climate change or the measures being developed to combat it.

And the EU is pushing the Green agenda strongly as well. And, what’s more, it’s being pushed forcibly upon the auto industry. A slew of tough new regulations on auto emissions are being implemented this year, enforcing a 15% reduction on CO2 emissions between 2021 and 2025 and 37.5% between 2021 and 2030. This is in addition to a 40% cut between 2007 and 2021.

Auto manufacturers will pay fines if they cannot meet these targets although CO2 emission levels can be relaxed if companies hit certain market shares in zero or low-emission vehicles (ZLEVs; 15% from 2025 and 35% from 2030).

Carmakers need to lower CO2 emissions for their fleet (not individual models) from 120.5g/km in 2018 to 95g/km by the end of 2021. That’s a 21% drop. And if they don’t manage to do that then they pay a fine of €95/g of CO2 over the target for each vehicle they sell in that particular year. Analysis by Westbeck Capital suggests that at current EV sales, automakers will cop €28bn in fines (if no new models come out). That’s a lot of fines and, under those conditions, it’s actually cheaper for automakers to sell EVs at a loss than to pay the fines.

In fact, Electric Vehicles are thought to be one of the primary motivations for the merger between Peugeot and Fiat. Fiat Chrysler does not have a single electric-only vehicle and plans only a handful. It is already struggling under a weight of fines. Peugeot also has no current EVs but plans to launch the e-208 supermini in early-2020 and have a plug-in variant on all models by 2023.

Peugeot is not the only OEM planning EV launches in 2020. So far we’re monitoring 28 EV launches for 2020, and at least 78 different models are expected. Even if there are not a significant number of orders for all of these models, if you consider the supply chain needed to lay down enough models for potential orders, to supply enough batteries, and raw materials for those batteries, we believe that that’s a significant amount of material.

The service plan for the Peugeot e-208 Is a third cheaper than the petrol 208.

Europe had c.384,000 PEV sales in 2018 and is on course for just over 500,000 in 2019. Obviously, that’s nowhere near China with its c.1.1 million sales in 2018 and 2019, but it could be significant. Particularly if EV makers move into the mass-market as we expect.

We’ve discussed the distribution of European EV sales before and highlighted how far EVs are currently from the European mass-market (median EV sales price of £30-35,000 vs mass market at £15-20,000). But we’re starting to see things changing.

The Peugeot e-208 is a start. Peugeot expects it to retail at £25,050. It will have a 185-mile range, a 50kWh battery and take 30 minutes to recharge 80% using a fast-charger.

Renault has announced plans to launch its K-ZE (first offered in China) in Europe. It’s classified as a “small car” in China and is certainly a city-focused product, but with a 26.8kWh battery, 150-mile range and a price tag of under £15,000 it should find fans in the European market.

And finally there’s VW. Their new “Electric People’s Car” is aimed to retail at sub-£18,000 and boast a range of c.124 miles. But it won’t be available until 2023.

The European Federation of Transport & Environment forecasts that there will be over 330 EV models available by 2025. With 60-odd models to launch in 2020 and a further 30-40 over each of the next few years, it’s not a stretch to suggest that Europe could become the biggest EV market in the world. Particularly if it cracks the mass-market price level. Range is not such a concern in Europe as in other markets and if fast charging and charging infrastructure is in place, then there’s no reason that lower-priced, lower-ranged vehicles won’t take off.

Given the very significant Government support and the need for auto producers to start toeing the line on carbon emissions, there is certainly a high likelihood that European EV sales will continue to grow strongly over the next 12-18 months.

Hopefully that will be enough to fill in some of the slowdown in China.

Korean Companies Leading Battery Development

But all of these EVs need batteries to supply them and that’s where the Koreans come in. It’s not really viable to ship EV battery cells over long distances. Even though the cost of doing business in Europe is more expensive than Asia, it works out cheaper to build your battery factory and value chain in the region where the batteries are being used.

And the Koreans have stolen a march on their regional peers. Five years ago, the Japanese dominated the battery manufacturing sector but the focus of the Japanese automakers on non-battery tech (hydrogen, fuel cells) has robbed the Japanese manufacturers of their market leadership. Then it was the Chinese, but most Chinese manufacturers are lower tech and focused primarily on the domestic market. But the Koreans have been outward-looking from the start. Sure, they’ve invested in China, but they’ve also invested in Europe. And that means that over the next 18-24 months Korean battery manufacturers are going to dominate the European industry.

LG Chem, SK Innovation and Samsung SDI already have plants in operation or under construction in Europe and, apart from CATL and Northvolt, they have the only large-scale plants currently in operation or under construction. In November Samsung SDI announced plans to build a second European plant at Göd in Hungary, taking its total investment in European capacity to well-over US$1bn and the others are also champing at the bit.

LG Chem, SK Innovation and Samsung SDI already have plants in operation or under construction.

And the Koreans bring their own value chain. While everyone sources cathode from Umicore, other Korean intermediates makers contribute to the supply chain of these three companies. And they haven’t been as active in tying up raw materials supplies as some of the Chinese peers.

In fact, conversations with Korean intermediates companies shows an extremely blasé attitude about the price and availability of raw materials over the medium-term. Asked direct questions about availability of nickel, for instance, most suggested that they didn’t expect sourcing raw materials to be a major issue going forward.

Which suggests opportunities for raw material producers and developers.

Because under our base case expectations, 2020 has the potential to be a great year for EV sales. And any great year for EV sales is likely to be also become a great year for raw materials demand. And if it starts to soak up the high level of inventories currently in place in some raw material markets, so much the better.

We haven’t talked about the US in terms of EV sales and that’s because I don’t think it’s going to be a core market for EVs (even though it is a key market for stationary storage which is growing off an exceedingly low base). The only way this would change would be if a Democratic candidate won the upcoming US elections. Most Democratic candidates have significant Green policies and that would be a game changer for US battery demand into the 2020s. Unfortunately, it’s not our base case though.

Our base case is that Chinese sale growth starts to record small positive numbers in the latter half of 2020, but Europe is going to come up fast in 2020 and demand could be higher than many commentators expect. And if we get an unexpected policy move from the Chinese, or a swing to the Democrats in the US, then that’s going to be an extremely positive catalyst for the space as well.

* I predicted a few months for a subsidy change above. Just after I filed and moments before we went to press, the ticker on my newsfeed flashed up a statement from a senior official that China is now looking to extend the subsidies originally expiring this year supporting the purchase of electrified vehicles as the country hopes to reverse the recent decline in sales.

"The termination [of the subsidies] will probably be postponed for a little longer," Miao Wei, minister of industry and information technology, told reporters in Beijing. The government is expected to determine the length of the extension later.

The result? The Lithium ETF Index soared 8% in a week. Lithium stocks posted New Year gains in the double digits. The industry really is balanced on a knife edge and, it seems, there’s no turning back. Not just yet, anyway.

And then along came the Coronavirus. The path to a new energy future is not going to be a straight one.