China extends NEV purchase subsidy, purchase tax exemption policy

China will extend the new energy vehicle (NEV) purchase subsidy and purchase tax exemption policy for two years in an effort to support consumption and mitigate the impact of the Covid-19 pandemic on the economy.

Yet the measures may not be sufficient to drive lithium and cobalt market development significantly in the near term, Fastmarkets heard.

Chinese Premier Li Keqiang announced at a State Council meeting on Tuesday March 31 that the NEV purchase subsidy and purchase tax exemption policy will be extended for two more years beyond the original expiry date of December 31, 2020,

The Covid-19 virus, which was first detected in Wuhan, Hubei province, severely dented buying China’s economic development. Measures taken by the country to stem the spread of the virus, such as delaying the resumption of manufacturing after extending the Chinese New Year holiday (January 24-February 2) and restricting passenger transportation in early February further curbed both supply and demand for the NEV industry.

According to the data from the China Association of Automobile Manufacturers (CAAM), Chinese manufacturers sold 59,705 NEVs over January to February 2020, down by 59.5% year on year, and the total production was 53,840 units, down by 63.8% over the same period last year.

The latest policy announcement was designed to reverse these adverse effects but the news failed to incite positive sentiment in the physical NEV battery supply chain market, with gloomy demand prospects outweighing any policy stimulus.

Gloomy view for NEV demand
Operational rates at NEV battery precursor and cathode materials plants in China are at only 30%, according to market sources.

The price of lithium, one of the key raw materials widely used in batteries for NEVs, has continued to soften into 2020 – after an already tepid 2019 – due to weak demand from downstream cathode makers and sufficient supply.

Fastmarkets’ weekly price assessment for lithium carbonate, 99.5% Li2CO3 min, battery grade, spot price range exw domestic China was 43,000-49,000 yuan ($6,066-6,913) per tonne on Thursday March 23, unchanged from the previous week, but down from 45,000-51,000 yuan per tonne at the beginning of 2020.

Cobalt sulfate, another key raw material used to produce lithium-ion nickel-cobalt-manganese (NCM) NEV batteries, has been trending down since mid-February due to the slow recovery of operations at precursor and cathode materials smelters.

Fastmarkets’ assessment for cobalt sulfate 20.5% Co basis, exw China stood at 45,000-47,000 yuan per tonne on March 27, down 20% from 57,000-58,000 yuan per tonne on February 19. The battery raw materials price downturn was capped last week amid feedstock supply disruptions in South Africa when the country started its 21-day lockdown.

“Impacted by the coronavirus, the whole industry has been stagnant. While the latest stimulating consumption policy is expected to bring some confidence to upstream cathode and raw materials sectors of NEVs, I think the support on pushing up raw materials prices is limited,” a cathode producer told Fastmarkets.

Market participants have broadly anticipated the government to extend the stimulus measures since early this year when China’s Ministry of Industry and Information Technology (MIIT) said there would be no significant reduction in China’s NEV subsidies in 2020 due to continuously falling NEV output and sales.

“Any positive impacts [from subsidy talks] were already been digested in January,” a cobalt producer said. “That is also why you see no positive response from the market today.”

Details lacking
Market participants are still seeking clarity on the subsidy policy, the details of which were not mentioned by the premier, although some market sources said they expect the amount of subsidy and the eligibility thresholds would be the same as last year. If this is the case, the long-term price boost would also be limited, especially for cobalt.

The threshold to receive subsidies was increased significantly while the value of subsidies was cut sharply in 2019, driving a few low/medium-end carmakers to turn from NCM lithium-ion batteries to comparatively low-cost lithium iron phosphate (LFP) batteries, a type that does not require cobalt.

“If the requirements of car makers to receive subsidies remain high, then it won’t help to boost cobalt demand to any larger extent,” another cobalt market participant said.