U.S., Europe, and China Policy
World leaders went to COP 26 in Glasgow, and a lot needed to be done. We know the task of decarbonising the world economy is massive, and the world is going through the most significant transition since the industrial revolution. While it is important to remember that these industries will not be able to complete these changes quickly, more can be done from a policy perspective and the industry itself. Government policy is integral to maintaining human development within the Planetary Boundaries outlined by Steffen et al. (2015), evidenced by the change in government policy because of the Montreal Protocol and its amendments that have halted ozone depletion. A prime example of how policy can reduce negative impacts of the industry whilst not impacting human development. There is an increase in pressure on consumers for governments to increase their climate policies; however, while there have been a host of net-zero pledges, governments are struggling to hit near term targets.
Global EV Passenger Stock
The global EV stock is rising above expectations, and growth rates will remain strong.
Following 2020 it is evident that emissions will increase year on year, but governments and organisations continue to focus on reducing emissions while their policy on biodiversity and ecosystems and other planetary boundaries are significantly behind the curve. Transportation continues to be a key battleground for the global economy, and in 2020 global transportation represented 19% of total global emissions, a decline of 14.6% from 2019. According to Climate Transparency, the share of low-carbon fuels in the transport fuel mix globally must increase to 40%-60% by 2040 and between 70%-95% by 2050. This is in line with the IEA's sustainable development scenario, which indicates that the EV sales share reaches 34% in 2030, with plug-in hybrids reaching 27% of EVs in the same year. As per stated policies, the current scenario indicates that EV sales will reach 16% in 2030, and PHEV share in EVs will be 33%. The market share of EVs is at different levels across major consuming areas, e.g., 12% in China,15% in Europe but only 3% in the U.S. for H1 2021. Different governments have different policies, and while the U.S. is behind the curve now, we expect them to catch up quickly during the Biden Presidency.
The Biden administration is pushing to decarbonise the U.S. economy, the President has introduced action plans for all government departments, but these plans offer little in the way of action in the near term and are more a framework. The Biden and Harris administration headed to COP 26 on the backfoot as they have failed to get congressional support for his climate change agenda. A $2.5bn payment to help LEDCs fight climate change has not been approved at the time of writing, and other decarbonisation policies are progressing slowly. President Biden also has to concede that his main piece of legislation, a $3.5bn dollar package for social and environmental initiatives, may have to be trimmed. Biden may see the final version of the legislation range between $1.9trn - $2.3trn. He remains determined to get everything he campaigned for approved, even if it is not passed at the same time. Even though the $1.2trn infrastructure bill has been passed, the administration has failed to hit their targets, and campaign promises, the emission standards set out by Biden lack the audacity needed to undo the ground lost during President Trump's time in office. The proposed measures will see emission reductions hit 10% in 2023 and then 5% annually through 2026. The proposal would only recapture 67% of the emission cuts that would have occurred under Obama-era rules, according to the American Council for an Energy-Efficiency Economy (ACEEE). According to ACEEE, the greenhouse gas rules suggest that the model needs to reach 59MPG equivalent to recover the Obama emission reductions, but the new standards only get to 51MPG by 2026.
U.S. CO2 Emissions by Source
The economy relies too much on oil and gas, but can this change?
According to the EPA, the transportation sector is the largest source of GHG emissions in the U.S., and light-duty vehicles comprise 58% of those emissions. As a result of the new standard suggestions, EVs will only reach a market share of 8% as of 2026, falling significantly short of the 50% new sales target by 2030. However, U.S. EV sales represented a market share of 3%, and sales figures in other areas of the globe are outpacing expectations. We believe that sales will surpass the 8% indicated above but will fall short of 50% in 2030. Incentives bring the cost of EVs down, and there is an instant $7,500 federal tax credit. In some states, these incentives are even more. E.g., in Arizona, there is a $5,000 tax credit for a medium-duty electric truck up to the end of 2022. This will then drop to $4,000 between 2023-2025. Utah has significant benefits with tax credits of $15,000 in 2021 for a heavy-duty alternative fuel vehicle; this credit declined by $1,500 every year out to 2030. However, some of these credits are for alternative fuel vehicles, not EVs, and while this is a positive step, we need to see EV penetration increase in the U.S. to hit the Paris agreement target and the White House's target of 50% EV sales by 2030. Indeed, not all citizens are eligible for the tax credit; for example, if a citizen-owned a Nissan leaf and owed $3,500 in income tax, this would be your credit; if you owed $10,000 in tax, your credit would be $7,500.
The U.S. Department of Transport and the Biden administration wants to create jobs in the EV market. $140bn of the $174bn proposed will be allocated to the Department of Transport. The U.S. EV market is a fraction of the size of China. The more mature markets in China and Europe are due to investment in securing the domestic supply chain. The proposed funds will support automakers and enable producers to secure raw materials and parts. China has secured the whole supply chain, and the key to EV sales will be charging infrastructure, especially in countries with large landmass. $15bn will be invested over 5-years to boost charging infrastructure, specifically 500,000 rapid chargers to support long trips. Other schemes such as Alternative Fuel Corridor, DCFC and L2 charging infrastructure will support charging infrastructure within cities and rural areas. Finally, $25bn will be allocated to zero-emission transit vehicles will prompt the replacement of 136,000 diesel and petrol buses. The $25bn will increase electric busses to 53,000 vehicles, representing 40% of the total fleet. The Clean Buses for Kids Program plan to replace at least 20% of the yellow school bus fleet.
U.S. Investment in Energy Transition
The energy transition is gathering pace in the U.S., and the infrastructure legislation will aid the momentum behind the shift in the U.S. According to IRENA, installed renewable energy capacity reached 420,711 MW in 2020, 388,863 MW in 2019. Onshore Wind Energy comprised 38.9% of the renewable energy technologies installed, hydropower was 37.8%, Solar 12.2%, solid biofuels 5.6%, with others such as liquid biofuels, geothermal, and solar thermal energy making up the remaining percentage. According to the IEA, renewables and waste comprise 10.1% of final energy consumption. We expect to see renewables make up a larger share of the U.S. power sector in 2020 and onwards, with the rate of increase gathering pace assuming Biden passes his infrastructure bill. We continue to see a shift away from coal, helping to reduce emissions. In 2019 the sector produced 1,724MMmt of CO2, 32% less than 2005. This is attributed to the shift to natural gas. As a result, CO2 emissions from power have the floor in the U.S. until more renewable capacity is installed. Gas releases 50-60% fewer emissions and has saved approximately 500m tonnes of CO2 since 2010, according to Alvarez et al. (2018), depending on how much methane is released during the process as methane molecules trap more heat than methane carbon dioxide. The leakage during the process of oil and gas is 60% higher due to existing inventory methods released during operating conditions.
REMap North America Total Primary Energy Supply Planned vs Transforming Scenarios
The difference between the two is significant and we need to see a lot more investment to reach the net-zero goal.
Planned Energy Scenario
Planned Energy Scenario
According to BNEF, investment in renewable projects in the U.S. reached $32bn in H1 2021. U.S. large scale projects investment increased to $6.4bn in Q2 2021, up from $5.3bn in Q1 2021. From a wind perspective, we saw a significant increase in the U.S. in 2020 before subsidies were scaled back. The U.S. invested the second most in 2020 in the renewable transition. However, the commitments declined by 11% to $85.3bn, according to BNEF. Renewable energy investment fell by 20% to $49.3bn, and energy storage in the Americas surged higher to $1.2bn, with 300MW/1,200Mwh batteries in Vistra Moss Landing and 250MW L.S. Power Gateway projects, both of which in California. The tax credit expansion in the U.S. is set to improve onshore wind adoption and raise installations by 25% for 2021, 2022, and beyond, as projects starting in 2021 will be eligible for an 18/Mwh tax credit. Solar costs have declined fast, and the increase in PPAs suggests more solar projects coming online. The extension of the 26% ITC in the U.S. makes projects more attractive; according to the IEA, declining costs and tax credits will mean distributed P.V. will account for 30% of the U.S. growth in P.V. in 2021 and 2022. Investment in renewable energy and a reduction in the use of coal in the energy mix will improve the effectiveness of E-mobility through a greener electricity process.
Previous LCA analysis shows that emissions from PHEVs in the U.S. are 35%-46% lower than petrol cars. Depending on whether the electricity mix uses IEA's STEPS or SDS, the LCA GHG emissions of 136-148 CO2eq/km for passenger cars or 182-203g CO2eq/km for SUVs. The LCA GHG emissions for BEVs are 57%-68% lower than petrol vehicles. The average new BEVs release 83-103g CO2eq/km for passenger vehicles and 105-133 g CO2eq/km for SUVs. For both PHEVs and BEVs, fuel and electricity production equates to over 50g CO2eq/km for passenger vehicles and around 70 g CO2eq/km for SUVs. These results are off the back of number assumptions. There are clear gains to be made for LCA GHG emissions for PHEVs and BEVs as the U.S. increases renewable energy supply. However, questions remain over some of the environmental impacts of some mining processes on the planetary boundaries, such as biodiversity, ecosystems, ocean acidification, global freshwater use, land-use change, and chemical pollution.
U.S. EV Sales
We expect U.S. EV sales to increase significantly in the coming years as more vehicles become available. Investment in auto manufacturers in new models and battery ranges will lead to greater adoption of E.V.s in America. According to Statista, the average daily miles of travel per driver was 25.9 miles a day in 2017, well within the capability of an EV, with average ranges over 200 for the bestselling vehicles, winter ranges are considerably lower than summer ranges but still have a range of over 150 miles. Tesla will use LFP cells in the Model 3 Standard Range Plus for customers who want a faster delivery, significantly reducing the cost of vehicles. Ford, VW and Stellantis have also indicated that they will also LFP cells.
US BEV and PHEV Registrations
U.S. sales are behind the curve but should catch up under Biden.
Cumulative sales in the U.S. indicate 159,000 EVs were sold in Q2 2021; this brought total sales to 310,000 for H1 2021. Total sales for 2021 were 322,000 units, and we could see sales reach 600,000 in 2021 if the current trajectory continues. However, one downside will be the lack of availability for car products such as chips, semiconductors and magnesium. Total sales in the U.S. between 2011 and 2021 have reached 2,084,118 vehicles; this is still behind Europe and China. The EV share in the U.S. has only increased by 1.4% in H1 2021. California remains a key market for the U.S., contributing to 61,948 sales in Q2 2021 and 121,272 in 2021. Total sales in California were 145,099 in 2020. We expect Q3 sales figures to be considerably higher, with Kia reporting that they sold a record number of vehicles in Q3. However, the top 3 producers in the BEV sector are Tesla, Chevrolet, and Ford, who have a 66%, 9.6%, and 5.2% market share, respectively. The three combined have an 80% market share. EV models will come thick and fast. In 2022, Fiat Chrysler is targeting 30 new battery or hybrid vehicles. Ford will have 40 EVs in its global portfolio and will invest $11.5bn on EV models by 2022. G.M. are also on track to meet their target of 20 EV models by 2023. In conjunction with a host of targets for 2025 from V.W. Group, Toyota, BMW, G.M., Volvo, and Hyundai will see an uptake of EVs rise significantly in the U.S., assuming battery advancements continue at their current price.
European EV policy is very progressive and is leading the way for climate change policy and E-mobility. The European Commission released new regulation that strengthens the emission standards for new passenger and light commercial vehicles, which are in line with climate targets. Stepping up Europe's 2030 climate ambition was a comprehensive plan to increase the European Union's binding target for 2030 to at least a 55% net emission reduction. The new targets help the governments, investors, and policymakers align decisions with targets in the coming years. The climate law makes the E.U.'s neutrality targets legally binding, this is a massive step towards carbon neutrality, and the Climate Target Plan is central to that. The auto sector in the E.U. is integral to the economy and represents 7% of GDP, providing 14.6m jobs directly and indirectly. According to the European Commission, investment in R&D in Europe accounts for €60.9bn annually.
The three main objectives for the CO2 standards:
- Contribute to the 2030 and 2050 climate objectives by reducing CO2 emissions from passenger and light commercial vehicles.
- Provide benefits to consumers and citizens by increasing the supply of zero-emission vehicles.
- Stimulate innovation in zero-emission technologies, strengthening technological leadership of the EV value chain the E.U.
To achieve the goals, the Commission has suggested that transport will be covered by emissions trading after 2026, pricing pollution, helping to incentivise E.Vs. A carbon pricing methodology will also be introduced for the aviation sector, with planes encouraged to blend fuels for all departures from E.U. airports. The aviation emission grew at 5% per 2013-2018, reaching 2.5% of global emissions and would be the 7th biggest emitter if it were a country. The aviation sector is lightly taxed compared to the vehicle drivers in the U.K., there is no tax on jet fuel in the U.K. in fact the latest budget reduced tax on flights, but the European Commission has proposed a tax rate of €0.38/litre for intra-EU flights.
Electricity Generation by Source -EU 28
Coal usage has declined sharply as renewables try to plug the gap.
E.U. Taxonomy is the first of its kind; it is the foundation of the Green New Deal (GND) and will support the E.U.'s 2030 climate and energy targets. The taxonomy will alter investors perception and push them towards a low-carbon, a climate-resilient economy without greenwashing. The taxonomy will provide a clear definition of a green company to investors and policymakers while enabling more apparent investment into environmentally sustainable practices across all sectors. One of the key areas is mandatory reporting, but we also see benefits across other regions of the globe as they follow the E.U. The Energy Efficiency Directive (EED) will reduce energy consumption in the E.U. by 32.5%. However, this is a non-binding agreement, but a swift transition to E.V.s will help this target be achieved. The Renewable Energy Directive (RED) is a scheme that would help incentivise member countries to move away from crop-based biofuels such as palm oil, the deadline for RED was the end of June 2021. The majority of countries have taken significant steps to increase EV sales. Sweden sold 400,000 units with BEVs at 13.1% market share and PHEVs at 26.9%; for the E.U. 27, the BEV market share was 6.7%, with PHEVs at 8.3%.
The E.U. approved €2.9bn investment in the EV battery industry; there are also significant incentives, the most generous are in France where you can receive a maximum of €12,000, a bonus of up to €7,000 for vehicles emitting less than 20g CO2/km, there is also a scrappage scheme of up to €5,000 for the purchase of a second hand or new BEVs and PHEVs, the President has set aside €1.3bn for these incentives. Emmanuel Macron announced an €8bn plan for the auto market and set a goal of 100,00 public charging points in the next year and producing 1m E.V.s annually by 2025. Germany and Italy have the next best incentives at a maximum of €9,000 and €10,000. Germany has objectives to reach 10m E.V.s and 1m charging points by 2030. The government invested an additional €2.5bn in e-mobility and battery cell production and doubled the eco-bonus from €3,000 to €6,000 until December 2021, with vehicles up to €40,000. The U.K. have one of the lowest incentives for E.Vs.
European Investment Into Energy Transition
According to the European Commission, the E.U. targets a 20% share of renewable energy by 2020, constituting 19.7% in 2019, which is 0.3% short of the target. 8.9% of renewable energy was used in the transportation sector in 2019. The next target is 32% renewable energy by 2030, we expect this target to be hit as an investment in the sector increases, and the E.U. rolls out more progressive policy. Investment in renewable energy was $35.21bn in H1 2021, wind investment was solid, accounting for 36% of all investment in H1 2021, Finland was substantial doubling investment from 2020. European countries were the driving force behind the energy transition in 2020; investment was 67% higher, reaching $166.2bn. Energy storage investment was marginally lower than last year at $0.6bn, but investment in heat pumps has averaged14% CAGR since 2017. This is mainly due to increased subsidies and regulation of energy standards. Europe's capacity for renewable energy strengthened largely due to policy support and a strong PPA market. PPAs will continue to support P.V. capacity in the coming years. The IEA expect renewable energy capacity in Europe to reach 49GW in 2022, Germany, France, Netherlands, and Spain pushing capacity additions. Governments continue to auction record renewable energy capacity globally; however, in Europe, auctions have marginally slowed due to reduced onshore wind.
CO2 Emissions by Energy
Emissions are declining as E.U. policies favour renewables.
According to IRENA, electricity generation from renewables in Germany need to increase, and this has been evidenced by the power shortages in Europe this year due to supply chain fragilities and high gas prices. As of 2019, onshore wind-generated of 41.7% of renewable electricity, solar was 19.1%, biogas 13.6%, and offshore wind at 10.2%. This needs to increase, and will, in the coming years. The split is slightly different with 50.3% hydro, 30.7% onshore wind, and 10.8% P.V. The increase in capacity will be the supply-chain bottlenecks and higher material prices. Metals have rallied significantly in recent years, and resources such as silicon will mean the cost of P.V.s are considerably higher, while electricity and power costs are also high now; we expect some normalisation of prices next year which will squeeze margins as material and shipping prices remain elevated. Polysilicon prices reached the highest level in a decade, $36.74/kg, with module prices up to 27.6cts/W. Factory shutdowns in China have led to reduced availability of vital solar materials, we expect polysilicon prices to decline in 2022, but there is little product availability before year-end and for prompt delivery.
Comparison of Life-Cycle GHG Emissions
LCA emissions show a clear benefit for EVs across Europe.
An LCA conducted for ICE vehicles compared to PHEVs and BEVs for Europe shows significantly different results than the U.S., and HEVs, with petrol and biofuels, represent 20% fewer emissions than an ICE vehicle. Life-cycle emissions for lower medium and SUVs were 193 g CO2eq/km and 218 g CO2eq/km, respectively. PHEV emissions vary in Europe depending on the energy mix and also how often they are charged. For example, German cars are charged on average 3 out of 4 driving says, while company car PHEVs are charged less, it also significantly depends on what mode the vehicle is being driven in, electric charge-depleting and purely combustion engine charge-sustaining mode. Finally, it is mainly dependent on the model of the car. BEVs have significantly lower life-cycle emissions, 63-69% lower GHG emissions than gasoline cars.
For BEVs registered in 2021, emissions are expected to be 77-84 g CO2eq/km for small vehicles, medium vehicles stand at 76-83 g CO2eq/km, and 82-90g CO2eq/km for SUVs. Lower medium BEVs in Germany have higher life-cycle emissions than the UK, France, Italy, and Spain, at 104 g CO2eq/km compared to 67 g CO2eq/km, 49 g CO2eq/km, 69 g CO2eq/km, and 64 g CO2eq/km. These figures are according to the Joint Research Centre POTEnCIA model. The model highlights the importance of the energy mix and how if BEVs are powered by renewable energy, the emission range is 76-81% lower in a range of 47-51 g CO2eq/km, comparatively fuel cell E.V.s life-cycle emissions are 58 g CO2eq/km and 64 g CO2eq/km for lower medium and SUVs. However, producing hydrogen through electrolysis is more energy-intensive. As a result, energy demand is 272% higher than lower medium BEVs at 201MJ per 100km compared to 74.2MJ per 100 km for BEVs.
E.U. EV Sales
Europe and China account for 47% of all car sales globally, and in H1 2021, sales were 85% of all global sales. This highlights the importance of the two regions, in 2020, plug-in vehicles comprised 10.5% of the market in Europe, with BEVs at 5.4% for passenger vehicles in EU27. PHEVs represented 5.1% of the market. Through the first 3 quarters of 2021, BEVs and PHEVs represented 7.6% and 8.6% of the E.U. market, and German sales reached 478,121 vehicles. The market share of BEV to PHEV was 11.7% and 9.9%, respectively. The cumulative fleet of BEVs and PHEVs has reached 1.49m and 1.425m units in 2021, up from 1.125m and 967,721 units, respectively, in 2020. We expect a significant rise in EV sales in Q3 as August registrations alone were 155,734, up 60% y/y. Outside of better incentives, the key to better EV sales is a stronger charging network; 22kw or under chargers have totalled 240,865 while over 22kW chargers have reached 33,956 in Europe. Petrol and diesel cars sales are falling rapidly down 35% and 50% in Q3.
EU BEV and PHEV Sales
EU sales continue to go from strength to strength.
The road to 2025 will see significant rises in the EV market share in developed economies, but this creates a problem with manufacturers who will have to supply different engine types depending on the region. We expect emerging markets to have low adoption rates due to a lack of investment in charging infrastructure. According to BNEF, medium cars and light van E.V.s will be cheaper than ICE vehicles in 2026, with small vehicles becoming cheaper in 2027. This is due to the increased supply of cars, competition between manufacturers releasing more models, and declining battery costs. In 2021 through to the end of August, the top-selling plug-in vehicles saw Tesla Model 3 the number one selling vehicle, with the V.W. ID.3, Renault Zoe, and V.W. ID.4 next before Ford's Kuga, which is a PHEV. In the closing months of 2021, we expect sales to perform well despite strengthening headwinds to the economy and inflationary pressures; higher energy and fuel prices might convince consumers to switch to E.V.s and utilise the incentives available.
China Electricity Emissions by Source
Less reliance on coal would severely reduce their emissions.
2021 has highlighted the key issues the global economy is facing when tackling climate change. Lessons can be learnt, but whether they will be is yet to be seen. The drought in China has caused significant power issues across the country, as hydropower could not provide electricity in key industrial provinces such as Yunnan, which share a grid with other provinces. The shortage of water-generated electricity was compounded in recent months after power declined by over 4% in July and August, wind power was up 7% Y/Y in August but was below 25.4% in July. In 2020, 60.75% and 17.78% of China's electricity came from coal and hydro, respectively, and both have been severely impacted this year due to weather events. Weather volatility will continue due to climate change, and as a result, there could be a further strain on the global energy system. In such moments as the renewable energy infrastructure is not there, fossil fuels will be the beneficiary, and in China, that means more coal production.
Demand for coal increased by 11% in H1 2021as China needed power; over half of China's provinces are rationing power. A significant issue is that electricity prices are regulated to reduce the pressure on consumers; however, coal prices in China reached a high of RMB1,982/t, up 203.43%. As coal prices rallied, power stations could not affirm new material and drew down inventories, and coal inventories at power plants at the end of August fell to 37% of the same period last year. Coal mines had to shut due to flooding, which is another indication of climate change. Beijing has ordered coal mines to increase production to reduce the pressure on the electricity grid, causing local prices to decline to RMB1,271.8/t.
President Xi Jinping will not attend COP 26, and while China has pledged to be carbon neutral by 2060, the increase in coal output is a setback. However, Beijing has indicated that it will no longer build coal plants overseas. This capital could be invested in green energy, or we could see China invest in domestic fossil fuel capacity. Power production in China increased 13.7% Y/Y to 466.5TWh in Q2 2021; thermal power represents the vast majority of this at 368.6TWh, up 15% Y/Y. We expect thermal power to be significantly stronger in H2 2021. Renewable energy in Q2 2021 has also increased to 59.2TWh for wind, up 26.6% Y/Y, with nuclear at 23.5TWh, up 23.5% Y/Y. The total share of energy consumption by source shows that as of 2019, coal comprises 57.64%, oil 19.69%, with hydroelectric and gas at 7.99% and 7.85%, respectively, fossil fuels represent around 85% of China's primary energy.
CO2 Emissions by Energy Source
China remains heavily reliant on coal despite new promises.
China Investment in Energy Transition
President Xi confirmed that China had started construction on a 100GW of wind and solar power project. This will help create four times as much power as the Three Gorges Dam. Xi Jinping indicated that there will be more investment in wind and solar projects in deserts, and this comes after reports of 400GW of new wind and solar projects in the desert, 200 GW of which should be completed by 2025. He also indicated that there will be an initial investment of $232m for a biodiversity fund. China invested $45.5bn in H1 2021, down 20% Y/Y. This trend continued in the solar power sector with investment at $4.9bn in Q2 2021, significantly down on Q4 2020, which was $8.4bn. Wind investment in China remained strong in H1 2021, reaching $21bn, and this shows an appetite for wind capacity despite the lack of subsidies. According to BNEF, China energy transition investment reached $134.8bn in 2020, down 12% Y/Y. This is in line with expectations that annual growth will suffer due to subsidy phase-outs. China accounted for 50% of global renewable capacity in 2020; we expect new incentives schemes to be announced at the end of this year. Renewable capacity is expected to reach 120GW in 2022, which is 40% of global capacity, but there could be more increases in the coming years. Higher input prices such as silicon, which is up 300% YTD, and energy costs for manufacturers could cap gains of the transition as P.V. module prices increase, undoing the 25% price reduction in 2020.
The IEA forecast that renewable deployment will be strong in 2021 and 2022, following record-breaking auction volumes in 2020. India and China combined auctioned 55GW of wind and P.V. capacity with an average price of $60/MWh for wind with $47/MWh for P.V. We see China adding 55-65GW of production in 2021; however, the dual-controls have meant that silicon production had been heavily impacted. Silicon production in Yunnan declined by 90% between September of December, between January and August, Yunnan's production was 20% of China's total domestic supply. Yunnan will increase electricity tariffs for industrial use by 50% as of January 1st, which will cause prices to rise further or keep production declining. Prices for 60MW solar tender was on average RMB2.10/W, with the highest at RMB2.208/W. We have seen output at 26 modules, and 52 cell production sites have run at an average capacity of 46% and 43%, respectively. There remain concerns over worker rights in various regions of the solar value chain in China. 45% of polysilicon output comes from Xinjiang, and this is where labour concerns arise. Nearly half of all solar panels sold globally contain polysilicon from Xinjiang. The region also relies on coal for electricity which helps to undermine the benefits of solar. The U.S. has restricted imports from China which are linked to labour issues. Solar will become cheaper than coal in the coming years, which we expect will prompt an increase in capacity, but steps need to be taken to increase the industry's transparency.
IEA World E-Bus Stock
China holds 502,235 of the 515,400 Global E-bus stock.
China EV Sales
So far in 2021, EV sales have been high, up 160% from the same period last year, reaching 2.6m units were sold globally, including PHEVs. We expect EV sales in H2 2021 to be just as strong despite the global shortage of semiconductors and the reduction in vehicle manufacturing due to product shortages. Global sales of EVs continue to dominate Europe and China; sales in mainland China have reached 1.1m units in H1 2021 for reference, total EV new passenger plug-in vehicles were 1.27m units. In 2020 E.V.s represented around 6% of vehicles sold; in the first half of 2021, this was 12%. The increase is because of more models being produced and made available, China manufacturers have responded to increase the selection of models available, but most units sold are small inner-city models. EV sales in China have remained strong in the superseding months, August sales June's record of 286,514 plug-in vehicles, up 187% Y/Y, representing 19% of market share. September registrations set a record at 355,000 new plug-in vehicles, up 170% Y/Y and 24% higher than August. As a result, 2m passenger vehicles have been sold in China so far in 2021, and it is not inconceivable that China sales 3m vehicles this year; even with the chip shortages, we expect inventories to be drawn down significantly.
China EV Production vs Sales
EV production and sales have beaten expectations this year.
Year-to-date sales indicate that Wuling's microcar is the best seller with up to 253,704 units sold; the next bestselling models are both Tesla's, Model 3 at 92,755 units and 59,900 units for the Model Y. Both the Wuling HongGuang Mini and the Model 3 use an LFP battery cell. This in conjunction with only Chinese battery manufacturers having a license to produce LFP cells, is why China is leading the way regarding LFP integration. A consortium of Chinese producers holds the patent. The strong sales in China are ahead of the government's targets despite the decline in subsidies. This is primarily due to an increase in new EV releases at a lower cost due to the investment in LFP cells, which now have a more extended range, are cheaper than NCM alternatives, and are longer lasting. China represents 98% of the global market e-bus market, and in 2020 74,000 units were sold; we expect China to be the driving force behind E-bus sales in the coming years.
BEV and PHEV vs Sales Share of New EVs
The EV market has been surprised to the upside in 2021, despite chip shortages.
Nickel prices have been buoyed by robust demand in recent months. However, this was predominately due to higher stainless-steel production. Stainless production in China has been in 2021, up 17.1% Y/Y with a total of 24.78m. The dual control policy on energy consumption has limited capacity more frequently, severely impacting Guangdong and Jiangsu. This caused 200 and 300 series output to decline, with the overall operating rate at 73.7% in September, down from 93% in August. According to SMM, 200 series stainless steel declined by 258,200 to 575,000 tonnes, down 31% on the month. 300 series was also lower down 295,000 tonnes to a low of 1.18m tonnes, the lowest since February 2021. The longer-term trend of declining 300 series output is a threat to nickel demand from stainless, EV batteries traditionally use class 1 nickel; however, the increase in scrap usage and reduction in 300 series stainless, class consumption for stainless has been declining since 2016 and stood at 3.9% of total demand in 2020. This should, in theory, free-up class 1 nickel for the battery market; however, we do not expect this to necessarily be the case. There is a significant investment in converting class 2 laterite ores into class 1 nickel in Europe, Indonesia, and China. We also saw Tsingshan outline that they would convert NPI into matte if the market price allowed it, this price is expected to be above $20,0000/t as the margin would be $3,000/t, assuming matte is 85% of the LME price and $6,000/t with sulphate.
Nickel Sulphate Prices
Demand for nickel sulphate surprises to the upside, repeatedly.
Nickel sulphate production in China was down month-on-month in September to 127,000 tonnes or at 27,900 tonnes of metal content, up 101.2% Y/Y. Battery grade nickel sulphate was 26,200 tonnes in nickel content, with electroplating-grade nickel sulphate was 1,700 tonnes. 50% of the nickel sulphate was the self-dissolved briquettes and powder, virgin materials such as high-grade matte, MHP and MSP was about 27%, and scrap was 18%. Power rationing continues to threaten nickel sulphate in the near term, Hunan and Guangdong, in particular, will suffer, but new price caps for coal in China will mean that more power can be produced, reducing the likelihood hood of more significant outages. We could also see a reduction in the emission standards in the near term to boost output and economic growth. However, nickel sulphate does not consume much energy and therefore would not be hugely impacted. Nickel output has increased 6.87% M/M to 29,800 tonnes, up from 75.32%. Nickel sulphate prices remain high in China, ni sulphate 22% Co 0.4% Exw is at RMB36,250/t with ni sulphate 22% 0.05% Exw at RMB40,250/t. Demand remains robust for nickel sulphate as EV production and sales are strong despite the chip shortage. The trend for nickel sulphate has been robust in recent months, as the 3-month LME nickel has also rallied.
LME Nickel Inventory vs Ni Ore Inventory at 7 Major Ports
The decline in ore inventories this year are unlikely to be replenished due to the export ban.
The market is expected to be firm as there is limited material availability due to the nickel ore ban from Indonesia and season supply from the Philippines. Ni sulphate to Changjiang has remained constant in recent months at RMB34,000//t, and sulphate 21.8% Jinchuan spot contract has rallied considerably in the last year due to robust demand and stands at RMB41,250/t. We have seen higher material prices this year, with some record prices. Therefore, battery prices will be impacted. This is without factoring in the energy prices associated with cathode and anode output, as well as the cell manufacturing itself. Nickel demand in batteries is expected to reach 270,000 tonnes in 2021, expanding to 680,000 tonnes in 2025. The majority of this will come from passenger vehicles; this trend is in conjunction with high nickel batteries. The increase in LFP cells in China, and to some extent the U.S., has softened the pressure on the nickel market marginally for small low range vehicles. However, primary nickel demand for battery technology reached 242,000 tonnes, increasing to 605,000 tonnes in 2025. There will be limited secondary nickel available from batteries in the near term due to the infancy of the market, poor EV battery cell dismantling technology, weak collection logistics, and limited processing capacity. The main ways to process materials from old batteries are pyro-metallurgy and hydrometallurgy and mechanical and hydrometallurgy. The End-of-Life Vehicle Directive means that 95% of the vehicle is expected to be re-used and recovered. The average lithium-ion battery will last for 8-10 years, and as a result, there will be little secondary material available until the end of the decade. We will start to see more material come to market from 2025, but it is limited to 74,000 tonnes.
China NCM 622 and NCMO 523 Battery Production
Even with a mild shift to LFP cells, 523 and 622 output remains strong.
Investment into Indonesia is very strong as companies look to secure nickel ore and produce NPI; according to U.N. Comtrade, Indonesia exported 3.8m tonnes of nickel ore in 2020, which has now declined to 0 in 2021. The government could cap the high-grade ore reserves due to the depleting of high-quality resources. We expect E.V.s to overtake stainless in the coming years as companies such as Indonesia Battery Corporation incorporate mining to battery cell manufacturing for EV ecosystems. Approximately $15bn needs to be invested into the battery value chain in Indonesia; this includes mining, refinery and smelting, battery precursor, battery cell, recycling and power supply. The Indonesian market is expected to produce batteries from 2025 onwards, significantly improving the value chain for EVs. The benefits for companies consist of lower production costs, with mining costs half of the selling. Investment in Indonesia would boost the local supply chain and reduce transport emissions, helping to reduce the environmental impact of the battery supply chain. However, most batteries are produced in China, so we still expect materials to be shipped to China for battery creation. However, we are seeing significant investment in gigafactories in Europe, with around 30 being built as of April 21st, 2021, but refinery capacity is still low, and we need to see more refineries to secure the value chain.
Nickel Forward Curve
Forward selling and a backwardated curve suggest tight fundamentals.
The tightness in the nickel market is expected to continue despite the downtrend in Class 1 consumption and 300 series production. The dominance of high nickel batteries continues; despite more LFP cells used for smaller city vehicles, we expect high nickel battery rations such as 8.1.1, 220.127.116.11.5., 6.2.2 and 5.2.3. Nickel sulphate prices will continue to remain supported as the supply of high-grade ores are capped, and recycling is limited. In 2022, we expect my supply to increase due to restarts and ramp-ups. The EV story is near tipping point with monthly market sales data showing E.V.s market share increasing, and nickel demand will continue to increase. We expect to be surprised by the upside. Direct emissions are high from the supply side, especially for class 2 nickel with laterite smelters dependent on fossil fuels. Approximately 60% of nickel is produced with self-generated power, and usually, fossil fuels, laterite smelting in Indonesia uses captive coal. We need to see more producers commit to low emission nickel and invest in renewable energy capacity. As things stand, the nickel value chain is vulnerable to carbon prices. The different geographies across the value chain indicated that carbon prices would differ. Indonesia has introduced a carbon tax of $2.1/t of CO2 once emissions break a certain point compared to the E.U. price of $60/t CO2.
Cobalt 3-month Price vs Open Interest vs Previous Day Volumes
Open interest is very low compared to 2018 but prices continue to rally.
Similarly, to other battery materials, cobalt prices have continued to be well supported in 2021. However, the cash to 3-month spread is in contango at the time of writing at $303. The forward curve shows some moderate tightening as we move into Q1 2021, but then the 3-month prompts start to widen, the 3-month to December 2022 at $1,575 contango. The flat price has rallied this year, gaining 75.6%, with the 3-month contract now standing at $56,545/t. The tight fundamentals will aid costs in the near term, especially given the supply chain shocks we are witnessing; we expect freight rates and bottlenecks to plague the market for the next 12 months. This suggests that we will see prices rise further in the coming months and in 2022. Despite the fundamental tightness there, we saw limited buying from the battery supply chain despite robust EV production and sales. In our opinion, this is attributed to refiners and producers drawing down on inventory, and this is expected to change in the coming months we China re-stocks material ahead of 2022. China's cobalt sulphate production reached 5,335 tonnes in September; according to SMM, this increased 37% Y/Y. There were some power outages for cobalt sulphate producers; however, to process is not very energy-intensive. Prices outside China have considerably risen, and smelters have had higher costs for intermediates; output is expected to be flat in October.
China Cobalt Oxide vs China Cobalt Oxide 72% Spot vs Cobalt Oxide 72% Rotterdam
Cobalt Oxide prices go from strength to strength, increasing cell prices.
Cobalt oxide warehouse premiums have rallied once again in Q4, suggesting more robust physical demand across all major regions. The 72% Rotterdam warehouse premium reached $41.5/lb, increasing from $33.5/lb in June. We expect the European warehouse premium to continue to firm in the near term as consumption of E.V.s gathers pace and the supply-chain bottlenecks prevent a constant flow of material from China. Lithium cobalt oxide remains a dominant cathode material, and while we have mentioned previously that some producers are looking to reduce the cobalt in batteries. 99.9% cobalt warehouse premiums have also risen significantly, with premiums in Rotterdam and Baltimore reaching $27/lb for both regions. This is below the record high in 2018 of $43/lb. Stocks in LME warehouses have remained relatively constant this year, with the inventory at 271 tonnes. In our opinion, the product has been going straight to the industry as producers struggle with just in time supply-chains. This is in line with reports that refiners and manufacturers have been using local inventory. At this time, cobalt oxide is still heavily consumed, and prices in China are rising back towards RMB35,000/t. The 72% cobalt oxide spot price strengthens, outlining the tight fundamental, Q4 EV sales traditionally outperform, and we expect the trend to remain intact. We expect warehouse premiums and lithium cobalt oxide prices to remain elevated in the immediate term, adding to price pressure for battery cells. Lithium cobalt oxide prices in China have broken above the highs of 2020, with lithium cobalt oxide 60% DEL at $390.5/t, and lithium cobalt oxide 60% 4.35V at $392,500/t.
Cobalt LME Forward Curve vs Open Interest
The forward curve indicates tightness in the longer term, amid robust demand.
China cobalt powder 20-30% Congo CIF continues to rally, towards the 2018 highs, the price is $23.55/t, the cobalt concentrates 6-8% CIF is also rising and stands at $20.75/t. Investment in mine supply needs to increase as demand increases. Supply of cobalt is expected to rise in the coming years, towards 200,000 tonnes, but the deficit this year may be less than expected. However, the CIF prices lock in the freight risk for the buyer, which is significant; higher freight is expected to remain a common theme for the next 12 months. The higher payload may keep the cobalt powder 20-30% and concentrate prices high; however, forecasts indicate that next year there will be a cobalt surplus. As mentioned, we expect EV demand to surprise to the upside, which will prompt robust demand for cobalt. We do not see battery chemistries deviating too far from the NMC in the near term, especially with most gigafactories in Europe planning on producing NMC batteries. This will cement cobalt consumption from the bloc in the close to medium term, but the region needs to increase refinery production to improve the supply chain and reduce the environmental footprint of transporting material across the globe.
The $2.5bn expansion by China Molybdenum's Tenke Fungurume mine in the DRC is positive for the market, but we need to see more investment. This investment will see cobalt output increase by 17,000 tonnes, up from 15,436 tonnes in 2020. Glencore is ramping up production at their Mutanda mine, and we expect this capacity to be brought on slowly, in line with the consumption of cobalt. Supply of cobalt will improve in the next 5-years to around 220,000 tonnes, increasing around 40%. We expect Glencore production to increase significantly in the coming years after they produced 27,400 tonnes of cobalt in 2020. Even though the quantity of cobalt in batteries has declined in recent years, the majority of leading EV vehicles and battery producers use cobalt, and, in our opinion, this will remain the case at least in the medium term. EV sales will likely surprise the upside, making cobalt consumption robust. CATL has vertically integrated within the supply chain by taking a stake in China Moly Cobalt for $137.5m and Jinchuan Group International Resources and securing 3,000 tonnes of cobalt per year. Jinchuan International mined 4,158 cobalt at its Ruashi mine; this capacity is expected to increase to 13,000 by 2023.
China Cobalt Grade 1 99.8% vs Electrolytic Cobalt vs China Cobalt Sulphate 20.5% DEL vs Cobalt Sulphate Spot 20.5% Spot
Grade 1 Cobalt is approaching the high recorded at the beginning of the year.
CATL, Panasonic, and L.G. Energy Solution are the leading battery producers and represent around 70% of the battery manufacturing market. The top 10 battery producers are all based in China and Asia, and as the E.U. starts to increase production, this will change. However, Chinese companies are investing in Europe, which will remain the most prominent producers but geographically diversified. CATL's net income increased Q3 significantly; however, what may be good for CATL might not be such bullish cobalt. CATL has received orders from Tesla for more LFP cells, and this will focus on shorter-range vehicles and inner-city cars; sales of LFP cathodes have had an average market share of 51.1% in 2021, up from 42.6% in 2020. Another critical area the CATL are focusing on is the recycling of materials. They invested $5bn in a facility to increase recycling and reduce the pressure on the industry to extract the raw material, increasing the life-cycle of the material.
China Lithium-ion Battery Production
Battery output of Lithium-ion output is down Y/Y.
The tightness in the lithium market has been evident in 2021; following the supply glut in prices, capacity was swiftly reduced. Lithium hydroxide, used for high nickel batteries, declined to $5,000/t in 2020 but since then has recovered sharply as EV demand surprises to the upside. The 1st generic lithium hydroxide price has reached $29,000/t as of November 8th, futures traded at $15,450/t on July 28th. Tightness in the lithium market is expected to remain in the near term, which will provide another tailwind to battery prices. We expect this deficit to stay in place in 2022, as consumption continues to firm and supply struggles to improve. We expect deficits to be 23,000 tonnes in 2022, 61,000 tonnes in 2023 before breaking 100,000 in 2024. The spodumene market, which is approximately 55% of the lithium market, is particularly tight. Seaborne lithium prices have continued to rise due to the tight market. Offers for the battery-grade material remain high with the lithium hydroxide monohydrate 56.5% spot CIF China, Japan and Korea was $28-30/kg in the week to November 8th. Lithium hydroxide monohydrate 56.5% EXW domestic China price has increased by 12% in the last month, lithium hydroxide monohydrate 56.5% DEL at RMB182,500/t.
Lithium Carbonate Swaps vs Lithium Carbonate 99.5% DEL
We expect lithium carbonate prices to remain elevated in the near term.
Lithium carbonate production reached 19,557 in September, a decline of 5% M/M and 22%Y/Y. The power rationing impacted the production of lithium salt. As a result, carbonate extracted from spodumene declined. The power rationing will keep the market tight in the near term even though Hebei increased production. Lithium carbonate production is expected to be 20,625 tonnes in October, up 5% M/M. Lithium carbonate prices across major regions have increased, the E.U. lithium carbonate CIF swap has broken above $16,000/t, the South American lithium carbonate FOB swap is marginally lower at $14,000/t. The prices are lower than the 2018 highs, but with demand still robust and supply struggling to keep up, we expect prices to reach a new high. The power rationing in China is focused on other more energy-intensive metals such as aluminium. China battery-grade lithium carbonate EXW has surged higher in recent months to $30,000/t, lithium carbonate from North America and Asia CIF has firmed but not to the same extent with prices at $15,000/t and $19,000/t, respectively. The increase in LFP cells, which traditionally use lithium carbonate, will provide upside pressure to prices. We expect this trend to continue in the years to come. Shipments continue to be impacted by the bottlenecks, and China's lithium carbonate 99.5% DEL reached RMB194,500/t as of November 9th. The recent rally has been sharp, with the spot up 123.5% since the beginning of July, when prices were at RMB87,000/t. The price rise is another indication of why battery cell prices will rise; offers for spot carbonate have been limited in recent weeks, and according to Fastmarkets are hearing buyers are struggling to digest the higher prices. Supply was strong last year, and inventory levels were high, the dislocated shipping market would have caused inventory levels to decline, the market is expected to remain tight into next year, and low stock levels will only support the tightness, although we have seen the shipping market ease, slightly, in the last few weeks.
Lithium Carbonate and Lithium Hydroxide
Lithium carbonate demand has strengthened due to increased LFP production.
Western Australia remains the key producer of mined lithium and in 2020 accounted for 49% of lithium production. The ore is mined in Australia and with China, the main receiver of global lithium at this time, the political tensions between the countries could present some obstacles to the market in the situation worsens. China accounted for 52% of Western Australia's battery minerals exports in 2020, but due to poor price performance, the value of exports declined by 35% to $2.6bn. Exports to other key regions were predominately down, with shipments to Japan, S.Korea, Europe, and India down 32%, 2%, 19% and 99%, respectively. The U.S. was the only region that increased by 8% to $251m. The higher prices this year should lead to more CAPEX from miners into lithium; even so, the EV market continued to become more advanced, which should lead to more investment in the value chain. In Western Australia, there are significant lithium mines under construction. A total of 1,431k tonnes are under construction for lithium in Western Australia, with the largest 608kt due to start in 2025. This is a lithium concentrate facility and is part of the Greenbushes mine expansion by Talison Lithium.
There has been a significant increase in mergers and acquisitions from Chinese-based companies as they look to secure their material supply chain in Chile and Australia, Canada, and Argentina. So far in 2021, there has been $1.575bn worth of deals, only two deals are completed, and the others are pending only at the bidding stage. Securing the supply of resources makes sense, and we expect more deals to be completed in the coming months. Between 2018 and H1 2021, China invested $4.3255bn; according to S&P Global Market Intelligence, the U.S. were second at $1.38bn. According to Chile's Mining Ministry, the increase in deals and the projections that lithium demand will reach 1.8m tonnes.
China Lithium Prices
Lithium prices have continued to surge in recent months as supply tightness continues.
Chile's lithium carbonate production is expected to reach 250,000 tonnes by 2025. Chile will auction five new lithium developments with a quota of 80,000 tonnes of lithium annually. Even though these projects may not be online for ten years, Chile's capacity will rise significantly as a result. Chile is in a unique place as they have 44% of global lithium reserves. The significance of the auction is that the government will allow increased exploration of lithium reserves, the royalties would increase significantly, and this would likely pay for social policies and the pandemic stimulus. In Europe, there remains a significant miss-match in demand and lithium production. Nearly 30 Giga factories are producing high nickel lithium-ion batteries, which needs lithium hydroxide. At the time of writing, Vulcan resources are positioning themselves to be a key supplier of lithium hydroxide in Europe and plan to produce zero carbon lithium using geothermal and lithium brine resources in the Upper Rhine Valley in Germany. The plant aims to produce 40,000 tonnes of lithium hydroxide per year.