China is the world’s leading lithium processor and the largest market for electric vehicles (EVs). While this combination is valuable when conditions are good, the reverse is true when the market sours.
Lithium supply has grown faster than demand, creating a surplus and the build-up of stocks; this is especially the case in China but is evident elsewhere too. To make matters worse, demand for EVs in China and the United States has slowed since July - dramatically so in China’s case.
Chinese EV sales continued lower in November. Sales totalled 95,000 units, down by 43.7% year on year, after they fell by 45.6% in October, 34.2% in September, 15.8% in August and 4.7% in July, according to the China Association of Automobile Manufactures (CAAM).
After a strong first half when sales climbed by 54% from a year earlier, the second-half weakness means sales in the year to date are up by only 2%. In the corresponding period in 2018, sales were up 69% from a year previously.
Such a slowdown in China has unsurprisingly weighed on prices. As well, the uncertainty over sales, combined with falling prices, will no doubt have prompted destocking along the supply chain, making apparent demand look worse than actual demand.
Is the market in China turning a corner? This may be the case - November sales at 95,000 units were stronger than those of October at 75,000 units - but it is too early to say whether the low point has been reached.
Given how much the Chinese government is relying on EVs, we expect the slowdown to be temporary; the signing of a US-China trade deal - a preliminary agreement is expected some time soon - could lead to a rebound in business and household confidence and in turn the purchase of large-ticket items such as vehicles.
The Chinese vehicle market has been under pressure for 17 months so considerable pent-up demand is likely to have built up, which may be a necessary condition for a strong rebound in EV sales.
Since the downturn in China’s EV sales, i.e. since the end of June, the ex-works Chinese lithium price has fallen by 31% to 50,000 yuan per tonne (mid-price) from 72,500 yuan per tonne, according to Fastmarkets’ assessments.
Interestingly, the US market also started to slowdown in July, after a 19.7% year on year rise in the first half of 2019, sales in the third quarter fell 20.9% year on year.
Europe, however is going from strength to strength. Registrations of plug-in EVs (PEV) during the third quarter of 2019 were up around 44% at 132,508 units from 91,811 units in the third quarter of 2018. Year-to-date PEV sales are up 38.2% at 382,836 units.
Overall, we expect the Chinese EV market to rebound after the Chinese Lunar New Year in 2020; we also expect EV production and sales in Europe to accelerate at an even faster pace while car manufacturers start to push EVs in an effort to meet CO2 emission targets.
Since 2009, EU legislation has set mandatory emission reduction targets for new cars. The 2015 target was 130 grams of CO2 per kilometre; the 2021 target will be 95g/km.
Stricter targets will apply from 2021 onwards, with a phase-in from 2020. Manufacturers face high penalty payments for all vehicles sold if their average CO2 emissions exceed the target.
Lithium prices in China continued to fall in the week ending Friday December 13 while prices elsewhere held flat, albeit at recent lows.