Is the honeymoon over?
Cracks have subsequently appeared in the market as tighter monetary policy and high inflation impact consumer demand.
Growth in China, the world’s biggest EV market, has been steadily falling – from more than 100 per cent in 2022 to around 25 per cent in recent months.
This comes on the back of a shift in government policy measures. Beijing removed direct subsidies last year and replaced them with tax incentives. An aggressive price war among EV companies has also led to consumers holding off for better deals. The weak economic backdrop has also played its part.
The honeymoon period for the EV market appears to be over, with many companies along the supply chain re-focusing on margins, profitability and efficiency gains.
Most of the weakness has emerged in the North American market. High inflation and a weaker economy has weighed on consumer demand. This has led US EV makers to adjust production schedules.
This has been compounded by concerns over whether the US’s 2022 Inflation Reduction Act (IRA) will remove the influence of Chinese automakers in the US market, resulting in strikes by US auto union.
This is impacting major projects such as Ford Motors’ partnership with Chinese battery manufacturer CATL, with Ford forced to delay construction of its battery plant in Michigan citing profitability concerns.
At the same time, high interest rates are derailing the ambitions of automakers in Europe to accelerate the shift to EVs.
EV sales are still growing strongly, but demand is not keeping up with carmakers’ expectations. So they are altering their plans.
Bottlenecks and new plans
The growth in sales has created supply chain bottlenecks in many materials used in EVs. A period of readjustment could have important implications for the battery metals sector.
After record growth last year, expectations were high for the EV market 2023 and China experienced a huge build-out in battery capacity.
However, in a rush to make the most of the EV boom, supply ultimately outweighed demand by two to one. While still strong, EV sales growth has subsequently been in decline, leading battery makers to cut output and reduce their battery metal inventories.
Metals such as lithium, cobalt and nickel – crucial for EV batteries – will remain oversupplied in the short term, keeping prices depressed.
Nevertheless, there is still a strong long-term outlook. Supply still needs to increase by 1.5 to 3.5 times over the next five years, a goal not easily achieved.
A period of sustained weakness in battery metal prices could ultimately make the decarbonisation of the transport sector even harder.
With little appetite (or expertise) to dig the materials from the ground and process them, EV makers will face supply questions until the market stabilises.
It’s unlikely to impact the supply of EVs in the short term. However, it remains an open question over the longer term.
The excitement around decarbonisation of the transport sector is quickly giving way to the realities of the task at hand.
The uneven growth of the supply chain, combined with consumers becoming more cost conscious, has seen demand for battery metals suffer. While the longer-term outlook is positive, the market must navigate these short-term headwinds.
The risk is any of these hurdles may put the industry back years, and ultimately delay the journey to a completely carbon-free transport sector.
Daniel Hynes is senior commodity strategist with ANZ