COMMENT: Covid-19 to accelerate EV battery supply chain reshuffle in China

The Covid-19 pandemic has rapidly hit global electric vehicle (EV) production and sales, and so the broadly anticipated reshuffle of China’s EV battery supply chain is likely to speed up in 2020.

Many already believed the EV subsidy policy in China that had been scheduled to end in December 2020 would squeeze out some companies in the EV battery supply chain, including producers of precursors, cathode materials and battery makers.

The EV subsidy policy, which emerged about a decade ago, encouraged automotive makers to focus on the research and development of EV models with high driving range and energy density, which resulted in extensive expansion in the upstream production of nickel-cobalt-manganese (NCM) batteries and related battery materials in the following years.

The initial years of the subsidy was successful in producing huge growth of EV output and sales in China, and so the country’s authorities started to consider terminating the subsidies by gradually reducing the value of the payouts and raising thresholds for EV makers to be eligible.

Some low- and medium-end car makers returned to low-cost lithium iron phosphate batteries after the EV subsidies were reduced and no longer offset the cost of research and procurement costs for high-end NCM batteries. This left their previous suppliers in the upstream chain either adjusting their operation lines and switching their finished products accordingly or competing for a smaller market.

During this process, some companies were inevitably phased out and battery materials prices came under pressure amid an oversupplied market.

The fallout of each annual subsidy cut was significant in terms of the impact on the price of cobalt sulfate, a key raw material in NCM batteries. This was most pronounced in the run-up to the announcement of the new subsidy each June.

Fastmarkets’ assessment for cobalt sulfate 20.5% Co basis, exw China dropped nearly 20% between late April and late June in 2018. The downtrend persisted over the rest of the year, with the battery raw material price dropping to 65,000-68,000 yuan per tonne at year-end, down over 50% from record high of 142,000-147,000 yuan per tonne on April 9, 2018.

The pattern repeated in the second quarter in 2019 when cobalt sulfate prices in China dropped nearly 30% between mid-April and late June, while sentiment was further dampened by the broad anticipation that the government will cancel the EV subsidy policy completely from the end of 2020.

How did Covid-19 speed up the process?
Moving into 2020, the outbreak of coronavirus at the beginning of the year has exacerbated the predicament for Chinese battery upstream materials producers.

The virus, which was first detected in China, caused domestic EV production to falter after travel and work restrictions slashed demand for big-ticket items, such as vehicles. The rapid viral spread in Europe then resulted in massive shutdowns of automotive plants, jeopardizing EV development in the region which was expected to outperform China in 2020 in terms of EV production growth.

The Chinese government subsequently announced in late March that the EV subsidy policy would be extended by two years to rescue the EV industry from the effects of the coronavirus, but the measure is not believed to be sufficient to drive the EV supply chain significantly in the near term.

The average operation rates at precursor and cathode materials plants in China are at around 30% at the moment, market sources have told Fastmarkets, adding that some of them have been operating at extremely low capacity utilization since mid-2019 due to waning demand.

Now precursor and cathode materials producers in China face two challenges: reduction of orders and unfulfilled payments; only those who can counter the hurdles can survive.

Large battery makers who have always pursued the high-end market and high profile customers are turning to low profile customers since their traditional customers are starting to cut orders. With competitive costs and high quality products, it is easy for them to take market share from smaller battery makers who could be forced to exit the market due to a lack of revenue.

The operational strategies of many companies along the EV battery supply chain in China mean they need to maintain enough orders to generate cashflows, especially for those who have conducted aggressive investments either upstream or downstream in the recent years.

To make matters worse, delayed payment is widely adopted in the EV battery supply chain in China, which means if one downstream company is facing severe cashflow issues, it will take a while for its upstream suppliers to realize it or work out a solution in time.

The inevitable reshuffle in the EV battery supply chain will be notable because it has a low degree of industrial concentration. The coronavirus is accelerating the process in which stronger participants are edging out smaller competitors and increasing their market share.

“Those who send us inquiries are large plants with competitive financial strength,” a cobalt sulfate producer said succinctly. “The oligopoly of the EV battery materials supply chain is forming.”