China cuts EV subsidy for 2021; market downplays impact on lithium, cobalt prices

China's finance ministry has reduced the subsidies for electric vehicles (EVs) for 2021 by 20%, a move most market participants say they had expected.

The Chinese government body announced the the new EV subsidy policy for 2021 on December 31, 2020, which included a 20% reduction year on year as planned.

Under the new policy for 2021, the subsidy for pure electric vehicles (PEVs) with a driving range of 300-400km will be lowered to 13,000 yuan ($2,013) per vehicle, from 16,200 yuan in 2020, and the subsidy for PEVs with a driving range of 400km or more will drop to 18,000 yuan per vehicle this year, from 22,500 yuan last year.

Additionally, subsidies for plug-in hybrid vehicles will be lowered to 6,800 yuan per vehicle in 2021, from 8,500 yuan in 2020.

The technical standards under the latest policy in regard to the energy density required for NEVs to receive subsidies are unchanged from 2019 to 2021.

This reduction in the EV subsidy follows the government’s plan announced in late March 2020 to extend the EV purchase subsidy by a further two years to 2022 beyond the original expiry date of December 31, 2020, and to slow the rate of reduction to 10% in 2020, 20% in 2021 and 30% in 2022.

The outbreak of Covid-19 early last year put huge pressure on China’s EV industry with output and sales falling by more than 50% year on year in the first three months of 2020. The country’s government took the decision to extend the EV subsidy and slow the reduction of support to offset the adverse effects of the pandemic, boost EV consumption and support healthy and sustainable development of the industry.

China’s Ministry of Finance said the steady recovery of national economic growth and positive polices have helped the country’s EV market bottom out and rebound from the second quarter of 2020 with a total sales of 1.11 million EVs in January-November 2020, up by 3.9% year on year.

Market participants told Fastmarkets that the latest policy announcement is in accordance with previous expectations so it has not had a great impact on the industry. Moreover, increasing consumer appetite for EVs is likely to offset the impact of a reduction in subsidies on decisions to purchase the vehicles.

“The average sales price for different EV models has dropped compared with couple of years ago,” a battery materials producer said. “Therefore, the reduction in subsidies won’t subdue consumers’ interest in EVs.”

Other EV purchase stimulus measures, including free license plates, will continue to encourage the adoption of EVs, market participants noted.

Lithium and cobalt
In the upstream battery raw materials market, the latest subsidy policy has not affected the EV battery supply chain so far and market participants downplayed the impact of the reduction of subsidies on cobalt and lithium, two major upstream raw materials, citing the recent strength in the upstream raw materials prices – unlike in the aftermath of the 2018 EV subsidy reduction when cobalt sulfate prices plunged.

Fastmarkets’ assessment for cobalt sulfate 20.5% Co basis, exw China dropped to 65,000-68,000 yuan per tonne on December 24, 2018, down nearly 54% from 142,000-147,000 yuan per tonne on April 9, 2018, the highest level since Fastmarkets started to track this price in March 2018. The cobalt salt price was 56,000-58,000 yuan per tonne on January 1, 2021.

“The battery raw materials prices are increasingly dictated by upstream, rather than downstream market fundamentals,” the first battery materials producer said.

Fastmarkets’ cobalt hydroxide index 30% Co min, cif China was $13.20 per lb on December 31, recording an upturn of 10.8% since October 9 when the index sat at $11.91 per lb.

The price of lithium has continued an uptrend that started in October 2020 when producers started increasing prices due to improved downstream buying from cathode materials producers and declining lithium inventories in the domestic market.

Fastmarkets’ weekly price assessment for lithium carbonate, 99.5% Li2CO3 min, battery grade, spot price range exw domestic China was 48,000-52,000 yuan per tonne on Thursday December 31, up from 45,000-48,000 yuan per tonne in the previous week. The price has risen by 26.6% from 38,000-41,000 yuan per tonne on October 15 when the current rally began. The price is up from 45,000-51,000 yuan per tonne at the start of 2020.

“I think the latest EV subsidy only has an indirect impact on lithium prices as it just stabilizes market expectations for the EV industry. The rise in the lithium sector is mainly because of tight supply from most producers on increasing downstream demand ahead of the Lunar New Year [on February 12],” a lithium consumer said.