The threshold for electric vehicles (EVs) to receive subsidies in 2019 has been increased again while the value of subsidies has been cut sharply, which was expected by the majority of market participants who are now cautiously checking the resulting impact on the battery supply chain.
The value of the subsidies has been halved to 18,000 yuan ($2,681.52) for EVs with a driving range of 250-400km and 25,000 yuan for those at or over 400km. This is in comparison to 34,000 yuan for EVs with a driving range of 250-300km and 50,000 yuan for those at or over 400km as specified in last year’s subsidy policy.
China’s EV subsidies, which started in 2010, are adjusted annually although recent years’ policies are reflective of the country’s determination to develop EVs with a higher driving range and energy density, and its desire to change the nature of subsidy from "necessary" to "auxiliary."
No immediate acute downward pressure on cobalt sulfate price
Unlike last year, market participants broadly downplayed the acute downward pressure the new subsidy policy would add to the cobalt sulfate price, which has already been at a multi-year low since mid-December 2016.
Cobalt sulfate demand had been under constant pressure following the announcement of last year’s EV subsidy policy in China, which encouraged the adoption of nickel-rich batteries. In other words, less cobalt will be needed as a result of the policy change.
The chemistry shift, together with the slide in global cobalt prices since April, have weighed heavily on the key battery raw material price.
Fastmarkets assessed the cobalt sulfate, Co 20.5% min, China price at 65,000-68,000 yuan per tonne ex-works on December 28, 2018, down over 50% from the historical high of 145,000-150,000 yuan per tonne on April 11, 2018.
After a brief turnaround in January - the traditional pre-Lunar New Year holiday restocking season - the Chinese cobalt sulfate price has been retreating since mid-February.
Fastmarkets' most recent assessment of the Chinese cobalt sulfate price was 45,000-47,000 yuan per tonne on March 29 - its lowest point for two and a half years, market participants acknowledged.
Therefore, the market consensus is that the new China EV subsidy policy is unlikely to bring further large downward pressure to the cobalt sulfate price, while participants also pointed out that the current spot market level is already below certain refineries’ production costs.
Additionally, the international cobalt market appears to be bottoming out, which will help to offset some of the negativity resulting from the new EV subsidy policy.
Fastmarkets assessed the standard-grade cobalt price, which is traditionally used by Chinese refineries to calculate the import costs of cobalt raw materials, at $13.75-14.40 per lb on March 29, a quick rebound from $13.30-14.25 per lb on March 27 when the benchmark price started to display the characteristics of a turnaround.
“The most likely impact of the new China EV subsidy policy would be the hindrance to the cobalt sulfate price’s ability to rebound as immediately as the Chinese cobalt metal price did,” the first battery materials producer said.
The Chinese domestic min 99.8% cobalt metal price rebounded to 255,000-285,000 yuan per tonne on March 29 from 245,000-285,000 yuan per tonne on March 27 tracking the upside in the standard-grade cobalt price in Europe.
Cobalt demand in check in the long run
The increase to the minimum required driving range for EVs to receive subsidies and the sharp contraction in the value of the subsidies are expected to crash the medium and low end of the EV market, market participants told Fastmarkets.
Therefore, small size EV manufacturers who have been relying on the government’s subsidy to operate are likely to drop out of the market. As a result, any demand for cobalt from those plants will be lost.
“Some EV makers who produce only several hundreds of vehicles are likely to close down [as a result of the new EV subsidy policy],” a second battery materials producer said. “Some large EV makers are likely to acquire the smaller ones or expand their operations. [But] in general, cobalt demand will be affected this year.”
Wide adoption of NCM811 lithium-ion battery could falter
Although a higher threshold for EV makers to receive subsidies is, in theory, supposed to encourage the adoption of nickel-rich batteries, such as nickel-cobalt-manganese 811 (nickel:cobalt:manganese: 8:1:1) lithium-ion battery, the lower value of the subsidy could instead hinder such adoption since the subsidies may not be enough to compensate the high production cost of NCM811 batteries.
“The maximum value of the subsidy this year is just 25,000 yuan per vehicle, it is not enough to cover the production cost for the NCM811 lithium-ion battery,” the first battery materials producer said.
The production cost for lithium-ion batteries with higher cobalt content, such as NCM523 and NCM622, is around 20,000 yuan per tonne. The equivalent cost for NCM811 lithium-ion battery materials is currently at least 50,000 yuan per tonne, market participants told Fastmarkets.
“The NCM622 lithium-ion battery is also able to meet the driving range and energy density required by the new subsidy policy,” the first battery materials producer said.
The fall in cobalt prices in the past few months has led some EV makers to prioritize the research and production of the NCM622 lithium-ion battery instead of the NCM811 lithium-ion battery, the same producer added.
“The degradation and anticipated termination of the EV subsidy policy in China will make the NCM622 lithium-ion battery the mainstream ternary battery type in China,” the same producer said.
LFP battery to be the favorite again
Certain battery manufacturers and EV makers have been considering whether to focus on the production and utilization of the lithium-iron phosphate (LFP) battery for EVs because the value of subsidies has been cut so significantly, market participants told Fastmarkets. This is because it is harder to cover the higher production costs for NCM lithium-ion batteries with the lower subsidies.
The cost to produce LFP battery materials is about 10,000 yuan per tonne lower than that for NCM523 battery materials, let alone the more expensive NCM622 and NCM811 battery materials, a second battery materials producer said.
“We expect the consumption of LFP battery materials to increase this year in the lithium-ion batteries sector due to the lower production costs,” Vicky Zhao, Fastmarkets battery materials analyst, said.
Since no cobalt is needed to produce LFP batteries, one long-term scenario is that even with the anticipated growth in EV production in China in the next few years, the market demand for cobalt may not grow at a similar rate as achieved so far.
You can learn more about how China’s policies are influencing the development of battery chemistries at Battery Materials 2019, taking place in Shanghai on April 10-12. Find out more at metalbulletin.com/events/batterymaterials.