In the first instalment of our new Electric Vehicle and Battery Materials report, Sucden Financial's research team outline key policy changes in the US, China, Europe and Japan, in the last 12-months. We also provide a brief update on global EV sales and developments in battery technologies, in particular cathodes. Finally, our analysts provide a detailed outlook for the battery materials in the coming months.
Government Regulations
US Reforms
In 2020, the Trump administration had eased fuel economy and greenhouse gas emissions (GHG) standards for light-duty vehicles (LDVs), from a reduction of 5% per year to 1.5%, and overturned California's zero-emission vehicle (ZEV) mandate, which helped drive electric vehicle (EV) sales in many states that follow vehicle emissions rules. While this has set the targets back, the new administration under Biden confirmed that it is moving to withdraw the rule, with the Environmental Protection Agency (EPA) and Transportation Department given a July 2021 deadline to decide whether to suspend, amend or revoke a Trump administration regulation.
Federal incentives help support developing and deploying electric vehicles. As a result, Congress is now under pressure to take steps to boost federal incentives to stimulate demand, in particular, by expanding the $7,500 federal tax credit by raising a cap that currently prevents purchases from the two largest US producers, Tesla and General Motors, that have already sold the required 200,000 EVs, from qualifying for the credit. The Trump administration opposed any such changes and managed to block past efforts to expand the availability of the EV tax credit. However, once stepping into the office, Biden made the pledge to extend the current federal tax credit; he could also drop the ceiling as well as enhance incentives for EV buyers in low-income communities.
Additionally, property owners and businesses can take a tax credit for 30% of the cost of purchasing and installing EV infrastructure, up to $1,000 for individuals or $30,000 for businesses. This helps move the costs from home-charging to business owners who may wish to deploy charging infrastructure. However, no such scheme is available to renters, who face their own challenges and costs for charging EVs at home. Therefore, existing federal incentives have provided important support to the market but moving to mainstream adoption will require targeting those that do not own their own place, which accounts for 33% of all-American homes in 2020.
Within President Joe Biden's $2.25 trillion infrastructure plan, the American Jobs Plan, the White House is proposing a $174bn investment to aid the growing electric vehicle market. If it passes Congress, we could see Americans' use of plug-in vehicles (PHEV) jump considerably, with the total number of EV forecast to grow by more than 40%. Additionally, Biden has been calling for a goal of 500,000 chargers built out across the country by 2030. His infrastructure plan states that the federal government could help achieve the goal by creating grant and incentive programmes for local and state governments as well as the private sector to deploy EV chargers. The plan also calls for electrifying the federal fleet vehicles. However, his plan will likely see additional alterations before it goes through Congress. As of now, there are no stringent GHG emissions standards for vehicles.
Regionally, California is the national leader in enabling the use of EVs. The state has a strong set of individual and fleet owner incentives and encourages charging infrastructure installations. Given its action against fossil fuel relaxations set by the Trump administration, California sets the standard for other state governments to take action and encourage both consumer and manufacturer demand. In particular, the state announced that it would adopt policies to ensure that all in-state sales of new passenger vehicles would be zero-emission by 2035. These include regulations to mandate that 100% of new sales are zero-emissions, as well as the partnership between state agencies and the private sector to accelerate the provision of charging infrastructure. To facilitate this target, California issues rebates to consumers for buying EVs and is now considering alternative incentives like feebates, a self-financing system of fees and rebates that are used to shift the costs of externalities onto the market actors, to drive zero-emission vehicles (ZEVs) sales. Any new ZEV programme enacted by California, or an extension of the current programme, would require a new waiver from the EPA, which it is more likely to receive from the current administration.
Number of EV Incentives on State-by-state Basis
California remains the clear leader in the number of policies to support the uptake of electric vehicles, with Massachusetts, Maryland, and Wisconsin following closely behind.
Elsewhere, although regulations among state policymakers vary, many states are working to diversify the transportation sector and drive down emissions by promoting the use of both cleaner energy and vehicles that use a cleaner type of fuel. Indeed, many states have implemented incentives to encourage the adoption of EVs, including PHEVs and BEVs. As of 2020, the heavy majority of states offer incentives to support EVs and other fuel-efficient vehicles as well as supporting infrastructure, either through state legislation or private utility incentives. One of the most common incentives comes from cost reduction through off-peak hour charging.
In comparison to the European market, the US consumer behaviour depends mostly on price disparity between the electric and the combustion engine models, rather than availability of emission targets and electric vehicle (EV) mandates. Indeed, despite the dropping costs of batteries and EVs, consumers still need incentives to buy more expensive electric cars. The report by ACEEE identified that policies like ZEV mandates and electric vehicle deployment targets, financial incentives for vehicle purchases, and incentives for installing vehicle chargers have the greatest impact on the adoption of EVs in the US.
European Reforms
Since the beginning of the century, the EU has been at the forefront of global action to combat climate change. It has developed ambitious energy and climate goals, including the target of reducing GHG emissions by 55% by 2030 (vs 1990) and achieving climate neutrality by 2050. Given the current outlook, Europe will remain the clear leader in the race for the low-carbon future. Since the EU Commission President Ursula von der Leyen took office in late 2019, the centrepiece of the new initiative towards energy efficiency, the Green Deal (GD), was introduced, aiming to prepare the country for climate neutrality. The transport sector is a critical component to reducing the bloc's emissions, and today, transport emissions still represent around 25% of the EU's total GHG emissions. Therefore, in our opinion, to achieve climate neutrality, EU policy efforts need to focus on transport, industry and construction, alongside policies that support energy system integration.
As part of GD, the European Commission has proposed strengthening the current GHG reduction target from 40% to at least 55% by 2030 compared to 1990 levels. The EU is yet to debate this target but had previously called for an even more ambitious target of at least 60%. In particular, Europe has pledged to reduce transport emissions by 90% by 2050 vs 1990. Indeed, to become a net-zero economy in 2050, the bloc would have to have negative emissions to offset the transport emissions. The transport sector is presently responsible for about a third of total CO2 emissions and 25% of total GHG emissions in the EU. Finally, the EU is considering banning internal combustion vehicles as soon as 2025, as part of its Euro 7 emissions rules, but this has not yet been confirmed. However, even under these ambitious targets, transport sector emissions are likely to account for an increasing share of total GHG emissions, and therefore remain a key challenge in achieving the EU's proposed climate goals.
CO2 Emissions by Sector
Transportation, as a percentage of the bloc’s emissions, continues to grow, and this will likely continue in the long term.
Within the transport sector, light- and heavy-duty vehicles (LDV, HDV) account for around 70% of the transport sector CO2 emissions. The new targets are defined as a percentage reduction with 2021 as a starting point, and the standards are expected to get tougher over time. If a manufacturer exceeds its average emissions target, they have to pay the penalty. The standards also apply for ZLEVs, defined as vehicles with CO2 emissions up to 50 g/km. Moreover, by 2025, manufacturers are required to ensure that ZLEVs make up at least 2% of the new vehicles sales to counteract steadily increasing road traffic emissions.
Over the last year, many EU member states introduced ambitious policies with the aim to accelerate the deployment of EVs. In 2019, several EU member countries advanced their ambitions to further deploy EVs. Germany and Italy announced new deployment targets. The Netherlands announced new commitments that will increase their existing EV objectives. According to the revised Integrated National Plan for Energy and Climate plan, Italy is targeting 6m electrically powered vehicles by 2030, including 4m BEVs. Italy recorded a huge increase in EV sales in 2019 relative to 2018. This reflects the 2019 introduction of a subsidy of up to $6,800 for cars with rated emissions of less than 20gCO2/km if the buyer scraps an old car rated Euro 1-4, otherwise, the incentive is capped at $4,500. Moreover, BEVs are exempt from the annual vehicle tax during the first five years and benefit from reduced tax level afterwards.
Market dynamics are strongly driven by CO2 emissions limits since they encourage manufacturers to produce more efficient vehicles. Likewise, strict government incentives, such as purchase subsidies and tax exemptions, have a major impact on consumer demand. The COVID-19 crisis has already urged some changes in both the emission regulations and incentives, as many local governments have increased consumer incentives for EV purchases, often as part of stimulus programmes designed to soften the economic impact of the pandemic. The incentives, combined with the increase in EV models, has led to soaring consumer demand, despite the continued COVID-19 pandemic. We expect this continue in the long term, thanks to continued government support.
China Reforms
From 2016 to 2020, EVs benefitted from the continued yet falling benefit of the electric vehicle subsidies, lowering the total cost of ownership of each to that of an average ICE vehicle. Consumer subsidies are common practice globally to assist governments in cultivating growing industries with initial high subsidies to assist the pickup of new technology, then a gradual reduction in the amount, as the economies of scales are achieved. In 2009, the government began to grant subsidies for EV purchases; however, the considerable price differential prevailed, and so paying for the subsidies became extremely costly for the government.
As a result, policymakers phased out the subsidies and instead now rely on a mandate imposed on manufacturers, requiring that a certain per cent of all vehicles sold each year must be battery powered. Under the rule, automakers that produced or imported more than 30,000 conventional cars annually were required to generate new energy vehicle (NEV) credits by producing electric vehicles in addition to meeting corporate fleet average fuel efficiency standards. To avoid financial penalties, manufacturers must earn a specified number of points, which are awarded for each electric vehicle produced based on a formula that considers range, energy efficiency, and performance. The requirements get more demanding over time, with a goal of having EVs make up 40% of all car sales by 2030. In 2019, the NEV credit requirements were set at 10% of total car production and 12% in 2020.
The policy underscored a significant shift in China's national new energy vehicle policy. The Ministry of Industry and Information Technology (MIIT) proposed an updated and tightened NEV credit scheme by both setting new NEVs credit targets for 2021-23 and by establishing a new calculation method for NEV credits beyond 2021. Automakers are obliged to reach NEV credit targets of 14%, 16% and 18% over the period 2021-23. Compared to the previous calculations, the revised approach implies a reduction in the number of credits allocated to BEVs and PHEVs and an increase in credits for FCEVs.
National subsidies for EV purchases between European countries and China
Despite China’s sheer EV market size, European countries government support exceeds that of China.
In 2020, as the COVID-19 pandemic took its toll, subsidies were extended for another two years until 2022 to stimulate the auto market. The subsidy size, however, was phased down by 10% in 2020, indicating confidence in the industry's ability to sustain itself as NEV regulations pushed companies to higher production. For 2021 and 2022, China's finance ministry has reduced the subsidies for electric vehicles by 20% and 30%, respectively, as sales of NEVs regained momentum after plunging during the pandemic last year. These actions are in step with China's planned gradual transition from direct to more indirect forms of subsidies and incentives, including increasing support for charging infrastructure and other support services. Among other measures, the central government encouraged cities to relax car permit quotas, at least temporarily, complemented by strengthening targeted NEV measures. As a result of these regulations, the government expect NEV sales 25% by 2025, from 15-20% by 2025 previously (vs 2019).
For the first time, however, price and sales limits were introduced, and subsidies for FCVs are replaced by dedicated promotion packages. Indeed, the Chinese central government stopped providing purchase subsidies for FCVs in 2020. In place of the subsidies, a new four-year pilot programme will be initiated, and suitable cities will be selected to carry out research and development and application demonstrations of FCVs. This pilot programme aims to encourage innovation and to stimulate the development of hydrogen and the FCV industry in China. The Chinese central government will reward successful pilot cities. The base subsidy for fuel cell electric passenger cars is a linear function of the rated power of the fuel cell system and capped at $25,000 per car. For light-duty fuel cell electric commercial vehicles, the base subsidy is $40,000 per vehicle. For medium to heavy-duty commercial vehicles, the base subsidy is $62,000 per vehicle.
Another way the Chinese government encourages the use of EVs is through the NEV license plate. Many big cities in China cap the number of new vehicle license plates issued each year, with a significant proportion of these license plates annually reserved for NEVs. Additionally, NEVs are exempt from traffic restrictions that are sometimes implemented to control urban congestion. Some cities even allocate dedicated parking space for NEVs. These schemes have been supported regionally, as now more than 29 provinces and cities in China have announced non-subsidy EV promotion policies. However, in light of the pandemic, in February 2020, China underpinned the need to stabilise automobile sales and encourage relaxation of car permit quotas in cities, therefore, many provincial-level policies have been temporarily relaxed or suspended. This was followed by a government announcement requesting that local governments support auto markets through a variety of measures, as it indirectly promotes the purchase of both the electric and the combustion engine counterpart options.
While the outlook in other countries that are beginning to introduce higher EV subsidies, such as Japan, is likely to remain bright, China is navigating the environment in which a gradual phase-out of its NEV subsidy programme along with tightening credit attribution is likely to reduce long term growth rates in the long-term. We still envisage China to lead the market as the absolute number of EVs dominates that of the rest of the world, however, the speed at which this growth will continue is likely to diminish. In the meantime, an important factor will be how China manages to balance the tightening in the subsidies along with other supportive policies such as license plate quotas, which have been temporarily relaxed to stimulate demand.
Japan Reforms
Japan has limited domestic fossil fuel energy resources, and the country meets less than 15% of its own total primary energy use from domestic sources, according to EIA, therefore making it vulnerable to exogenous shocks as it depends heavily on imports. It causes Japan to have an energy structure that is heavily dependent on trade relations with other countries. To support the country's energy transition away from an import-dependent economy, the government has worked together with the industrial sector to promote a transition away from nuclear towards other 'clean' sources of energy.
In 2019, the country adopted a long-term low-carbon strategy to reach carbon neutrality by 2050, with most of the improvement coming from car manufacturers' support and clean vehicle development. Indeed, with new fuel economy standards, the government expects 50-70% of new vehicle sales to come from next-generation vehicles by 2030, including HEVs, BEVs, PHEVs, fuel cell electric vehicles, and "clean" diesel vehicles. Similar policies apply to internal combustion vehicles. In 2019, the Ministry of Economy, Trade and Industry (METI) set new fuel-efficiency standards for LDVs for 2030 and HDVs for 2025. For light-duty vehicles, the standards require an average fuel efficiency of 25.4km/L, representing an improvement of 25% compared to the 2020 standard. The new standards are welcome because the 2020 standards for light-duty vehicles had already been reached in 2013, and the average fuel economy of new passenger cars vehicles has hardly improved since. The new standard is less stringent than the 2030 standards in the European Union, but it is ahead of other major vehicle markets such as China and the US.
The Japanese government decarbonisation strategy is not all about incentives but also regulation. Earlier this month, speculation arose suggesting that the government is aiming to ban the sale of combustion engines by the mid-2030s. The government still views hybrids as an important technology and has no intention of following the lead of places that plan to ban them. Japan’s is targeting 100% electrification over the next couple of decades, a move that would gradually phase out ICE vehicles out of the car market.
Hydrogen is expected to play a central role in Japan's clean energy transition. The country was among the first to launch a national hydrogen strategy, aiming at making hydrogen cost-competitive with other energy sources. Japan places a strong emphasis on pushing the market for hydrogen-powered vehicles. It set the ambitious goal to have 800,000 fuel cell electric vehicles and 1,200 fuel cell buses. The government released its Strategic Roadmap for Hydrogen and Fuel Cells, including targets to reduce the average price difference between FCEVs and HEVs from $27,700 to $6,500 by 2025. The goal regarding refuelling infrastructure is to install 320 hydrogen filling stations by 2025 and to make hydrogen stations commercially independent in the second half of the 2020s. Government subsidies support between half to two-thirds of station and equipment costs, depending on the size of the hydrogen station and style.
Global breakdown of current policy support for hydrogen deployment, 2018
Most of the support for hydrogen deployment is allocated to passenger cars, with infrastructure following closely behind.
Tokyo has set its own goal for all new cars sold in the city to be hybrids or electric vehicles by 2030, committing to reducing greenhouse gas emissions to virtually zero by 2050, in line with the rest of the country. This is a massive jump from a previous goal of only 50% of new cars sold by 2030. Tokyo's goal puts it years ahead of the national targets as the city aims to promote efforts to reduce greenhouse gas emissions.
In 2018, METI launched the Strategic Commission for the New Era of Automobiles and tasked it to develop a long-term goal and strategy for the Japanese automotive industry to tackle climate change. The report recommended a target to reduce GHG emissions from domestic automakers by 80% by 2050, compared to 2010. For passenger cars, a more ambitious target of 90% was suggested, along with the goal to reach a 100% market share of electrified vehicles. The goal is to realise "well-to-wheel zero emissions", thereby linking the 2050 vision to global efforts for realising zero-emission of the energy supply. However, direct support to charging infrastructure has been decreasing in recent years. While Japan allocated about $1bn to charging infrastructure in the first half of the 2010s, budget allocation fell to $13m between 2016 and 2019. Accordingly, the installation of new charging stations somewhat stagnated in 2017. This decline is directly related to the lack of funding during the period and underpins the importance of public and private investment into the infrastructure. The strategy includes plans to harmonise future charging standards, which provides support to various research, development and demonstration projects for 2018-23 that assess the feasibility of wireless charging and vehicle-to-grid applications.
Daily Trip Mileage
Japan’s daily trips account for smaller driving mileage compared to the US, given its geographical size.
Japan, in line with other economies, has provided tax breaks to favour more environmentally friendly vehicles since 2009. This mostly included exemptions or reductions for "new generation vehicles" and fuel-efficient vehicles but also increased tax rates for older vehicles. In 2019, Japan extended tax reductions for new generation vehicles past the April 2021 deadline, as well as introduced a purchase tax based on vehicle's fuel efficiency and exhaust emissions. Tax breaks to incentivise the purchase of EVs are generally less efficient than directly taxing the polluting counterparts, therefore the introduction of the automotive fuel efficiency tax is, therefore, a welcome step. Overall, Japan has a comprehensive approach to reducing emissions in the transport sector, with measures targeting improved fuel efficiency of cars; the promotion of low-emission vehicles, as well as the use of public transport; however, it is the lack of funding as well as comparatively-low general public interest in the use of EVs that is most likely to keep the country’s growth on the back foot, at least in the medium term.
Global EV Market
The global stock of EVs reached a milestone in 2020 of 10m cars, an increase of 43% y/y and now represents a modest 1% of the global stock share. Battery EVs has reached 4.5m units, using a figure of 83kg per BEV this represents 373,500 tonnes of copper consumption. China has been leading the way in terms of e-mobility for some time now, however, last year, Europe’s EV stock increased the most to 3.2m BEVs and PHEVs, up from 1.8m vehicles in 2020. The electric car (BEVs and PHEVs) market share reached 5.7% in China, up from 4.8% in 2019. The US is considerably behind the curve of 231,000 BEVs sold in 2020 and 64,000 PHEVs 2%. New stimulus measures will see the market share rate increase in the coming years, but we expect them to remain behind the curve for a while longer. The EU showed robust sales despite COVID-19, as the transition to e-mobility gathers pace in the bloc due to significant investment from auto and battery makers, as well as governments. The market share of 10%, was significantly higher than the 3.2% recorded in 2019. Regulation in Europe is likely to keep sales in Europe robust, the emissions standards, for example, continue to limit the average carbon dioxide per km.
China NEV Production vs Cumulative Production
NEV production in China is robust despite the softer incentives from the government.
The global conversation on the green economy has accelerated sales of e-mobility, however in a year when government stimulus and spending rules were re-written. Of the $14.9trn on stimulus since the beginning of the pandemic, $2trn has been directed at mitigating climate change through pollution and the energy transition. Global governments spent $14bn on incentives and tax reductions in 2020, up 25%y/y. However, the percentage of total spending on EVs has been declining in recent years, from 22% in 2015 to 10% in 2020. Improved subsidies, the greater desire by consumers to be more environmentally friendly, saw consumers spend $120bn on electric car purchases in 2020, up 50% from 2019. The need for subsidies is evident, with the average cost of a BEV at $40,000 and $50,000 for PHEV. The introduction of price caps in Europe and China have helped to reduce prices. As governments make targets to ban the sale of ICE engines, in the next 10 to 15 years, they must be wary of the up-front cost. While on the road costs are lower due to tax and no fuel, the upfront expense and limited secondary market are against citizens in the lower-income brackets. This is somewhat self-fulfilling with little supply for secondary EVs but strong demand, this keeps prices for secondhand vehicles high.
Major Battery Minerals Production in 2020
Western Australia produced the majority of the world's lithium in 2020.
Source: Western Australian Government
Demand for raw materials because of the transition towards e-mobility is still low, most sales targets come into effect in 2025. This is when we foresee demand for raw materials to remain consistently high, in the lead up to 2025, stakeholders will secure the materials for their supply chain, but 2025 is when the EVs as a percentage of the global market share will make ground. The IEA’s sustainable development scenario suggests sales of light-duty vehicles (LDVs) need to reach 22m in 2021, this is significantly above the OEMs declaration and stated policies scenarios which indicate sales of 16m. The gap starts to close in 2024, but once again, despite all the sentiment and positivity surrounding the green economy, the consumption of materials is still low. Our base case is for the global stock of EVs to reach 18m in 2021, however, 20 of the world’s largest car manufacturers are increasing their range of vehicles, and specifically LDVs.
Battery Market
Nickel cobalt aluminium oxide (NCA), nickel manganese cobalt oxide (NMC), lithium manganese oxide-nickel manganese cobalt oxide, and lithium iron phosphate (LFP) are the main cathodes being used in today’s market. The adoption of LFP does reduce the threat of procurement on critical minerals such as cobalt and manganese. The issue with LFP cathodes is that the energy density is worse than NMC cathodes, the energy density for NMC is 65-70% better than LFPs. There was a breakthrough last year which improved the energy density by 25% by using manganese in the cathode. The LFP cathode does reduce the cost of the cell significantly, the CATL LFP cell is 43% cheaper per kWh than the NMC811. From a cost perspective, the LFP material makes sense, however, they are unable to deliver on the energy density and range side of the equation, ceteris paribus, we expect NMC cells to dominate the market. Technology developments in the battery space are certain this will improve the energy density and ranges of vehicles. There is also the debate between solid-state and liquid batteries. Solid Power has developed a silicon anode cell with a higher energy density that is more cost-effective and charges quicker, this is expected to be commercialised in 2026. Lithium-based solid-state batteries will increase the lithium demand of products not widely used today, the lithium intensity in a solid-state battery is 14 times higher than liquid batteries. For the two examples provided, as new technologies are developed, this will significantly impact demand for raw materials, according to BNEF, lithium demand from solid-state batteries will reach 500,000 tons in 2035 compared to approximately 225,000 tons for lithium-ion batteries.
High nickel batteries are particularly prevalent in Europe, but the issue they have is the lack of raw materials. Investment in Europe into battery cells and EVs is strong, but there is little to no refinery capacity in the bloc for materials in batteries, this leaves them vulnerable to capacity constraints in China. This also reduces the efficiency of the supply chain and increases costs and carbon emissions. We need to see greater investment in the refining of the battery materials in Europe to cement their place in the global battery supply chain.
Battery Materials
Nickel
Nickel prices sold off sharply following the news from Tsingshan that they will produce nickel matte when the market forces allow for it; this is largely dependent on margins. The ability to use class II nickel drastically changes the balance of the battery nickel market, but the key remains prices. Near term demand for nickel, sulphate has been strong, and sulphate prices have performed better than the 3-month price. Inventories are predominately nickel briquettes priced at RMB134,200/t as of May 10th, but new nickel capacity continues to come online in Indonesia to benefit the battery materials markets. Nickel sulphate (electroplating grade) is at a premium to the battery-grade material; profit margins for nickel sulphate have declined in recent months and stood at 10% at the end of April 2021. The battery market continues to change fast as new cathode chemistries are being developed; the current standards favour high nickel chemistries as producers increase energy density.
LME 3-month Price vs Cash to 3-month Spread
Nickel has remained in a steady contango despite the rally in prices. Batteries are still a small percentage of nickel demand.
Nickel prices have been firmer in recent weeks, following the sharp correction due to the news from Tsingshan that they would create nickel matte from NPI. Tsingshan outlined that this would only be the case when market conditions allowed. This technology has been in development for some time. Still, now we know Tsingshan is commercialising it, the market balance for battery-grade nickel has changed, and that is the reason behind prices falling so sharply. According to Wood Mackenzie, the margins are the most crucial factor; converting NPI to matte costs $2,000-4,000/t, refining matte to sulphate is an additional $2,000/t, bringing the total cost of ore to sulphate at $11,500-13,500/t. So, assuming the matte price equates to 85% of the LME price, the sales margin could reach $3,000/t; if sulphate is included, this would add approximately $6,000/t, according to Wood Mackenzie. The production of nickel matte for the battery stream will improve the availability of battery-grade nickel material, but only when market conditions allow, Tsingshan has announced a matte venture with CNGR called PT ZhingTsing New Energy. The project will have a capacity of 30,000 tonnes. Tsingshan has also signed a two-year deal to buy nickel from Silkroad Nickel; this follows Silkroad signing a 10-year agreement within January to supply laterite nickel ore to Jiangxi Ganfeng.
Nickel sulphate production in China continued to expand in April, up 5.37% m/m to 22,800 tonnes nickel content, up 133.19% y/y. The output of battery-grade products was up 8.6% m/m as consumption strengthens from EVs and new energy, electroplating materials production was down 35.84% m/m due to maintenance. According to SMM, the output will be flat in May, around 22,000 tonnes, with an increasing number of plants using briquettes to produce nickel sulphate. Sulphate prices have edged higher recently, as demand remains solid and battery-grade prices trade at an average of 32,750RMB/t compared to sulphate, which trades at 34,500RB/t, nickel sulphate (electroplating grade) remains at a premium at 36,000RMB/t, as of May 14th. Towards the end of April, we saw profit margins increase for liquid nickel sulphate produced with self-solution nickel briquette was 11%, according to SMM. Nickel sulphate profit margin has declined in 2021, from 30% in February to 10% as of April 28th. Nickel briquettes comprise much of the LME inventory at 197,094 tonnes, inventory levels have remained constant for a year, but we have started to see some drawdowns in recent weeks.
Nickel, Sulphate Premiums and Prices
EXW Nickel sulphate corrected to the downside in recent months with the Ni S 22% 0.05% premium falling from 2021 high.
The battery sector only represents 5% of total nickel demand, considerably low compared to stainless which equates to 70%. HPAL (High-Pressure Acid Leaching) is the favoured technique to create battery-grade nickel; this is primarily due to converting low-grade nickel laterite ore. Nickel laterite ore comprises 70% of the total known nickel reserves. This material is typically close to the surface; unlike sulphide reserves, laterite production is more widely used. Like many low-grade materials, the cost of converting is higher and a lot more energy-intensive. SX-EW or solvent extraction is a hydrometallurgical technique relying on leaching, extractants, and electrowinning to produce nickel from ore. However, HPAL is the preferred option but is very wasteful and energy-intensive, increasing costs to the producer and environment. Typically, 1 tonne of nickel from HPAL produces 1.4 to 1.6 tonnes of waste. Generally, deep-sea disposal was suggested once acid is extracted; however, following pressure from downstream and society, most of these plans have been scrapped, and tailings dams will be used.
China Lithium-ion Battery Output
Lithium-ion output has been a bit softer in recent months which can in part be attributed to the shortage in chips.
Nickel content in batteries continues to change in line with cathode chemistries; lithium nickel manganese cobalt oxide is the preferred cathode (NMC), with lithium nickel cobalt aluminium also gaining traction (NCA). These cathodes use 33% nickel and 80% nickel; respectively; however, the ratios continue to change; it is increasingly common that NMC cathodes have a higher nickel content, with cells of 811 NMC now commercialised. This is due to producers wanting to reduce cobalt content and increasing nickel content to improve the energy density and storage capacity of the cells at a lower cost. High nickel battery cells comprised 60% of the global battery capacity market in 2020. According to Adamas Intelligence, Europe saw the most significant increase with NCM 6 (622 ratios) and 8 series (811 ratios). More deployment of high nickel batteries will see consumption of nickel grow significantly in years to come. However, China is looking for different cathode chemistries and looking to reduce the nickel content in batteries. Lithium-iron-phosphate, lithium-manganese oxide, and lithium titanate continue to be deployed; LFP captured <10 of EV sales in 2020, but and we expect this to increase in 2021 to 2021. Tesla has started to pivot towards LFP batteries and talks with EVE Energy Co; LFP batteries are cheaper to produce due to iron instead of nickel and cobalt.
In our opinion, the nickel industry needs to reduce its carbon intensity, which was 18 tons of C02e in 2019, to remain at the top of the pecking order for materials used in the battery cathodes. The ESG factors for battery materials are imperative, and nickel isn't the greenest. However, Tsingshan has proposed building 2GW of solar and wind in the next 3 to 5 years in addition to 5GW of hydro. This will reduce Tsingshan's scope 1 and 2 emissions by 23%, and if this energy is fully utilised and used for matte nickel production, emissions could decline by 60%. The working conditions and social aspect of ESG for nickel productions leave a lot to be desired, which may start to be the focus of the investors.
China EV Production vs Sales
We expect sales for EVs to be strong in the coming months, as the transition to e-mobility gathers pace.
Investment in Europe is has increased rapidly in recent years, reaching 60bn euros in 2019, 3.5 times more than in China. The European Union approved state aid to 42 countries, including Tesla and BMW, as the bloc attempts to become self-sufficient by 2025; currently, China holds 80% of lithium-ion battery output. The European market favours high nickel cathode chemistries. However, Europe will have to rely heavily on imported primary material initially, leaving producers vulnerable to large swings in prices and higher costs. There is insufficient availability of batteries in their end of life stage to provide material for Europe in the near term. Increasing the supply of secondary material is imperative for Europe to reduce reliance on imports and reduce the deficit; the EU battery directive will help, but there needs to be significant investment in infrastructure. Recovery rates need to improve, for lead-acid batteries collection rates are approximately 99% according to Eurobeat, but only 16% of nickel used within the EU is recycled. The new directive indicates obligations for battery recycling, the recycling of 65% by the average weight of lead-acid batteries; 75% by the average weight of nickel-cadmium; 50% by the average weight of other batteries. According to Birmingham University, based on the 1 million EVs sold in 2017, approximately 250,000 tonnes or half a million m3 of unprocessed waste will be accumulated when these cells reach their end of life.
Cobalt
Cobalt prices rallied strongly in January, with the LME spot reaching $52,784/t and the 3-month contract reaching $52,610/t. Prices have since fallen back to $42,535/t as of June 7th; flows of material out of LME warehouses have been consistent in 2021 but have halted in recent weeks. Sentiment surrounding the green economy, EVs, and energy storage gather pace. We have seen the cobalt content of batteries decline in recent years, and more cathode chemistries are targeting as little cobalt as possible or even no cobalt at all. Premiums of cobalt in European and American warehouses have softened in line with the flat prices in recent months, with the European cobalt oxide 72% in warehouse Rotterdam standing at €34.5/kg, down from €39.5/kg in March.
According to the United States Geological Survey (USGS) mine, production declined marginally in 2020 to 140,000 tons, down 144,000 tons. This was predominately due to the decline in output from Congo to 95,000 tons; according to USGS, total known reserves in Congo are 3,600,000 tons with the global reserves at 7,100,000 tons, but production in 2020 equated to 67.8%. Australia has 1,400,000 tons, but production for 2020 was 5,700 tons, Australian reserves equate to 19.7%, but output for 2020 was only 4% of global production. Most deposits in Congo and Zambia are in copper mines, with Australia essentially comprising of nickel-bearing laterite; this is in line with statistics that suggest 98% of cobalt material (ASM) is mined as a by-product of nickel and copper mining. Artisanal and small-scale mining is a critical component of cobalt mining in Congo. According to Benchmark Mineral Intelligence suggests that ASM produces approximately 7% of the worlds cobalt supply. The majority of ASM is not illegal, and ASM mining provides employment (directly and indirectly) to around 60,000 to 80,000 people and is responsible for developing towns and cities, boosting the economy. The employment from this sector is a crucial reason why the LME allow ASM cobalt to be traded on the exchange. Supply-chain management tools using blockchain are being introduced to showcase transparency, this is a massive step in the right direction, but there remain issues surrounding the 'First Mile. This is where illegally mined material, which is sold on the side of the road to traders, is mixed with material certified by blockchain before the chain starts. This presents the issue we have seen with the lawsuit over child mining.
China Cobalt Oxide vs Cobalt Oxide Rotterdam
Cobalt oxide prices in Europe have held their value compared to Chinese prices.
While nickel makes up approximately 80% of battery cathode, NMC cathodes have seen cobalt and manganese content decline from 33.3% in 2016 to 10% in 2020. Carmakers and technology firms are increasingly moving away from using cobalt in their batteries due to the volatile supply, comparatively high prices, and the struggles relating to child labour and illegal mining. The reduced cobalt content in batteries and new cathode chemistries which use no cobalt at all are a threat to the Congolese economy in the long run; however, with copper prices high, we expect these mines to remain open. Indeed, Glencore is restarting operations at the Mutanda mine. We could see vertical integration of automakers and technology firms to secure the battery supply chain. This would enable them to know there is no illegal material or child labour throughout the production of the battery. In early 2021, China cancelled approximately $30m of loans to the Congo, in addition to $17m of other financial support. Congo is now up to be a partner on the Belt and Road Initiative. This will facilitate further investment in the Congo from China, especially in the battery materials and mining; we expect to see greater ownership of cobalt mines; accordingly, 40% of cobalt capacity in Congo was owned by Chinese companies. CATL has purchased a $137.5m stake in China Moly Cobalt to ensure their supply chain. 80% of global cobalt sulphate and oxide production is in China, but this capacity is often coal-powered. According to Roskill, CO2 emissions from cobalt production in 2021 are expected to be 1.6m tonnes; this is primarily due to refining capacity and the supply chain and transportation. Material is mined, shipped to China for refining and then exported back to consumer countries.
Cobalt Powder 20-30% Congo CIF vs Cobalt Concentrate 6-8% CIF
Concentrate and Powder prices have struggled to maintain their strength in recent weeks.
Cobalt concentrate 6-8% CIF prices have softened recent months to $15.95/lb, following the rally at the beginning of the year when prices hit $18.45/lb when we saw some heavy restocking. We saw a decline in cobalt raw materials in China at the beginning of the year; a decline in inventories of cobalt sulphate during these months. We continue to see strong demand for cobalt sulphate despite prices having fallen from RMB101,000/t to RMB72,500/t. Grade 1 cobalt 99.8% trades at a premium to the China electrolytic cobalt metal; the market trades at RMB353,500/t compared to RMB346,500/t for electrolytic cobalt. The prospect of Glencore's Mutanda mine coming onto the market will suppress bullish momentum and has done to some extent; however, in our opinion, demand will be stronger than supply after 2024. New mining laws in L'Entreprise Générale du Cobalt (EGC) will be a key component to our price forecasts; it is yet to be seen how stringent they militant these regulations will be ASM cobalt.
China Cobalt Grade 1 99.8% vs Cobalt Sulphate 20.5% vs China Electrolytic Cobalt
Despite the robust downstream demand from the battery industry, battery-grade cobalt prices have struggled.
CATL battery production reached 51.71Gwh in 2020, up 9.4%, sales increased by 14.4% to 46.84Gwh. CATL unveiled plans for three new battery facilities in China, and this, in conjunction with the stake in China Moly in congo and their investment in a battery factory in Europe, outlines their intent. Reports indicate that CATL produced 13.3Gwh of battery capacity in Q1 of new sold passenger EVs. LG produced 11.9Gwh, with Panasonic next in line at 9.1Gwh. We anticipate CATL to maintain their spot at the top of the leader board in the near term; however, sales were robust in China in January. The transition to e-mobility accelerated in 2020 as global sales reached 3.24m units, the global share of EVs reached 4.2% in 2020. We expect to see sales of EVs strengthen in the US this year with Biden's green agenda; there is little prospect of Europe matching the 137% growth rate seen in 2020. EV sales are likely to beat the target set in 2020
Downstream demand for cobalt is still robust even with the changing cathode chemistry backdrop; while we anticipate an increase in LFP batteries, to amend supply chains takes time, and their NMC batteries will maintain their market share in the near term. In our opinion, battery production for EVs and consumer electronics will grow at a robust pace, primary EVs, in 2021. CATL has invested in a battery plant in Europe, and Britishvolt is due to start construction on their Gigafactory this summer, indicating improved downstream demand. One headwind to EV output remains the global shortage of chips, EVs have more chips than ICE engines, but the margins for these products are considerably below consumer electronic chip margins. Therefore, chip producers continue to prioritise these products over EVs.
Lithium
Lithium carbonate EXW China has been well supported in recent months, reaching $13,700/t as of April 30th. The global shift towards a greener economy and e-mobility has underpinned a rally in lithium spodumene, hydroxide, and carbonate prices, in conjunction with declining inventory levels. Downstream demand is robust, and this caused stocks of lithium carbonate to draw down in Q1 as smelter output was weaker due to the Lunar New Year prompting tightness in the market. Lithium hydroxide trading continues to be robust, high-nickel producers restocked as lithium salt factories restocked exports, external demand is strong and aids the bullish rhetoric. As smelter capacity improved in March and April, this helped to alleviate some of this tightness in the market, but prices of lithium and lithium products have continued to rally as downstream demand is robust.
Lithium Carbonate Global Prices
Battery grade lithium carbonate prices in China have outperformed other regions.
According to Western Australian government data, lithium supply is predominately split between Western Australia 49%, Chile 22% and 17% from China for 2020. Western Australia is behind Chile in global lithium reserves with 4.7m tons to Chile's 9.2m; Chile lithium output was down y/y in 2020 according to the USGS with production at 18,000 tons, down from 19,000 tons in 2019. Australia produced 40,000 tons of lithium, down from 45,000 tons the previous year. Global reserves are increasing as technology advances, and new deposits are unearthed; according to the USGS, global reserves improved from 17m tons in 2020 to 21m in 2021, with world resources reaching 86m tons in 2021 from 80m tons in 2020. According to Western Australia Government data, Australia has a low cost of production for seaborn lithium versus other exporters at $2,002/LCE compared to $5,769/LCE in Chile and $7,292/LCE in the US. There is hard rock and brine; both have different cost curves, traditionally hard rock is concentrated are a lower value than higher value brine products, Australia and China, and Canada have considerable reserves of lithium materials primarily from spodumene (Li2O.Al2O3.4SiO2). Lithium brines the dominant feedstock for lithium carbonate. Australian mineral deposits, on average, have a 1-3% Li2O, and in December 2020, we IGO purchase a 24.99% stake in Greenbushes hard-rock lithium mine and a 49% share of Kwinana lithium hydroxide plant. Greenbushes are one of the world's largest hard-rock mines; spodumene is mined from fresh, unweathered zones in a pegmatite in open pits. The high grade makes a strong case for the mine from an economics perspective. The Kwinana plant will provide 48,000 tonnes of battery-grade lithium hydroxide a year.
Total Cash Cost of Global Seaborne Lithium Exports 2020
Western Australian lithium is low compared to other major producers.
Source: Western Australian Government
Brine production, which is predominantly in Chile, is a lot more cash-intensive. High wages in Australia contribute to approximately 30% of hard rock production cost compared to 9% for brine; for brine, the highest costs are reagents for downstream processing, accounting for up to 40% of the total cash costs. Another significant cost is transportation and royalty costs, making up a large proportion of costs for lithium production in Chile. New laws are being discussed that would increase royalties for miners in Chile; the lower house backed the bill in March, which would impose a flat royalty of 3% on the output of lithium and copper; this royalty would finance environmental and social programs near mining communities. Royalties to the Chilean government have been increasing in recent years; thus, this increases the global average cost of brine production.
South America vs Europe vs China Lithium Carbonate
In line with market expectations, lithium carbonate prices have rallied in 2021.
The supply chain for battery materials is something that could be addressed. Shipping material from origin to China for processing and then back to consuming nations is not sustainable in the long run from an ESG and Task Force on Climate-related Financial Disclosures (TCFD). China has invested in the EV supply chain over the last 10 years; due to domestic demand is the largest in the world, capacity stands at, according to BNEF was 72Gwh in 2020. China boasts 80% of the global raw material refining and 77% of battery cell capacity. CATL and BYD have led the way, and investment in China was head of the curve, but we are seeing increasing evidence that other regions are catching up; Transport and Environment confirmed this when they highlighted that investment in EVs and batteries in Europe was €60bn in 2019, 3.5 times investment in China which €17.1bn. Brussel has also approved €2.9bn of investment into the battery industry; Europe is looking to be self-sufficient in the battery market by 2025. Investment from Europe is increasing, and CATL invested €1.8bn into Germany, but most of the €60bn number in 2019 was from VW, which invested €40bn in Germany and Czech Republic. However, when you look at refinery capacity for battery materials in Europe is low, lithium hydroxide refinery capacity which is a key product that goes into high nickel battery cells favoured in Europe, there is no refinery capacity in Europe. We need to see more investment in refinery capacity and not just battery factories to compete on the world stage. Failure to invest in refinery capacity will leave Europe vulnerable to price increases and reduce the sustainability of supply chains due to transportation costs.
China Lithium Carbonate 99.5% DEL vs Spodumene vs Lithium Hydroxide 56.5% DEL
Lithium products in China have rallied with, spodumene has reached levels not seen since 2019.
Despite the ever-changing backdrop of battery cathodes, lithium-ion batteries will continue to be the dominant force; consumption of lithium will therefore be robust even if cathodes switch from NMC622 to NMC 811, or NCA90. However, Solid Power's, a leading producer of solid-state batteries, the sulphide solid electrolyte powers the flexible all-solid-state platform to enable high silicon and lithium in the anode. The new platform uses low cost and high energy-specific conversion type cathodes that are not suitable in lithium-ion or liquid cells. According to company data, the lithium anode could remove cobalt and nickel from the cathode entirely and reduce costs by 90%. The silicon anode could reduce pressure on the lithium market, the high silicon anode improves fast charging, removes flammable liquids and gels, provides a longer calendar life, and could provide up to 400wh/kg compared to liquid lithium-ion cells, which range between 200-300wh/kg. The solid-state battery is more stable, safer, and according to Solid Power, can provide a 50-100% increase in energy density compared to the best available rechargeable batteries. The silicon anode product could be commercialised by 2026; they will also commercialise the lithium NMC cell in due course.
The UK will soon have its first Gigafactory, and as the battery production moves away from China to consuming countries, it will reduce carbon emissions from the supply chain and transportation costs. Tesla is building a Gigafactory in Germany, and speculation has stated that they are looking to create a new factory in the UK, which indicates that companies are looking to localise their supply chains. This shift will prompt more material to be shipped to Europe, prompting premiums to rally. However, these factories are still developing, and the supply chain will not change in the coming months. We expect the consumption of hard-rock material for lithium hydroxide in Australia to support these prices in the coming months. The key will be the royalties suggested by the Chilean government will increase the cost of brine by 3%, reducing profit margins when you factor in transportation and shipping.
