Will China’s push for rural EV usage boost battery material demand?

China, the world’s fastest growing electric vehicle (EV) market, has turned to rural areas to further boost its strategic EV industry, a strong pillar for the economy in recent years. But market sources are skeptical that this strategy will raise battery material demand in the short term

The move was taken after the country registered a surge in EV demand unseen elsewhere in the world in 2022, driven by rapid penetration growth in first and second-tier cities.

The national development and reform commission (NDRC) and the national energy administration (NEA) - China’s top economic and energy planning agencies respectively, released a document on Wednesday May 17, detailing a series of policies, including a rapid rollout charging stations in rural areas of every county suitable for EVs.

“Problems such as insufficient charging facilities… are restricting the potential for EV consumption in rural areas,” the agencies said in the document.

In the document, the NDRC and the NEA urged local governments to provide cash incentives to EV buyers in rural regions. They also called for EV makers to tailor their products for the needs in rural areas, such as by producing small-sized trucks and vans.

The central government’s move is a bid to tackle the bottleneck in increasing China’s EV penetration further in the automotive industry, amid slower EV demand in the months following the subsidies-driven surge in June-December 2022.

China’s EV penetration reached around 27% of vehicles at the end of April, a calculation based on the latest data released by China Association of Automobile Manufacturers (CAAM).

“China has around 13.1 million EV units [as of] the end of 2022, more than half of the global total,” Meng Wei, deputy director of the policy study division of the NDRC, said in a press conference held on May 17. “However, the EV market in rural areas is still in the beginning stages.”

No immediate boost to outlook

The EV and battery material markets have been calling for more stimulus from the government after the conclusion of EV subsidies at the end of last year caused bearishness in both markets.

The end of the subsidies, as well as uncertainty surrounding the economy and personal income, caused a dip in EV sales in April compared with March, although sales were double last year’s figures - at 640,000 units - due to Covid-related factors in 2022.

But market sources believe that these latest policies will take time to improve EV sales and battery material demand significantly – if at all.

“We don’t think EV sales will rise much in May-July. It might be better in the fourth quarter,” an analyst at a battery material trading firm said to Fastmarkets.

“China’s EV market is shifting to demand-driven from policy-driven, and so far the demand recovery is still not healthy enough,” an industry insider said, pinning hopes that the second half of this year could be an inflection point.

In addition to government stimulus, EV producers need to make efforts in designing and producing vehicles suitable for use in rural areas, another market participant said.

“In general, I don’t think the existing EV models fit the needs of people in rural areas, and those policies may have limited effect in supporting China’s EV sales,” a lithium trader said.

And not just the models of EVs, prices of the vehicles have to be lowered significantly to fit the purchasing power in rural areas.

“A EV’s average price is 100,000-200,000 yuan ($14265.70- 28531.40) per unit, and it’s much more expensive than home appliances,” a battery producer source said. “I think the policies will have limited effect in raising NEV’s market share in the countryside, and it will fall short of what the equivalent policies did to the home appliances market.”

The battery producer was doubtful that the policies will work at all, citing the slow growth in EV adoption in rural areas since Beijing started the campaign to sell more EV in rural areas in 2020.

“Similar policies have been rolled out before, and historically speaking they have not been effective in raising EV sales as expected,” the battery producer source added.

LFP batteries more likely to benefit

In the battery raw material space, the government’s push for more EV usage in rural areas looks set to support lithium-ion phosphate (LFP) consumption over nickel cobalt manganese (NCM) due to higher costs for NCM.

This means that the policies could bring up consumption for lithium - the main material for all EV batteries - over time. But market sources in the nickel sulfate and cobalt markets, major materials for NCM, are largely downplaying the policy push. This is especially amid persistent weak demand for NCM materials.

“A rebound has just been observed in LFP demand but, comparatively, NCM consumption is still lackluster, so I don’t see how the effect for nickel would play out,” an industry insider said.

Fastmarkets’ assessment for lithium carbonate 99.5% Li2CO3 min, battery grade, spot price range exw domestic China increased for the fourth week in a row to hit 270,000-321,000 yuan on May 18, compared with 150,000-180,000 yuan per tonne on April 20. The price started to rebound on April 27 for the first time in five months after it started its downturn at the end of November 2022 when it stood at 570,000-590,000 yuan per tonne.

The cobalt market has been affected by the increasing market share for LFP batteries in China, and cobalt sulfate has been sluggish with prices lingering at low level.

“Considering cheaper production costs, EVs makers would like to use cheaper cobalt-free batteries rather than NCM batteries, which curbs demand for cobalt,” a cobalt producer said.

Fastmarkets’ price assessment for cobalt sulfate 20.5% Co basis, exw China was at 36,000-36,500 yuan per tonne on Wednesday May 17, up by 1,500 yuan per tonne from 34,500-35,000 yuan per tonne on May 12. The price was 46,0000-47,000 yuan per tonne at the beginning of 2023.

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