China’s mandate for 30% electric cars and hybridising with lithium
It’s easy to get fatigue with the “China demand” story which has been trotted out for just about every mineral category in the last decade. Some however have run their course (e.g. iron ore) with linkages between certain products and large scale construction and infrastructure projects, while others may have been promoted too soon while still not having begun to see their potential come into play.
The prime candidate in the latter group is lithium (though we might also say something similar about uranium in the Chinese context). In the case of lithium it is NOT cellphones and laptop batteries that excite us most about the Chinese market but the lithium batteries in hybrid and electric autos. The other collateral beneficiaries of greater penetration of hybrid cars in China are the Rare Earth and Graphite spaces. In both of those cases China is the dominant producer but the logic goes that greater Chinese use of these minerals leaves less for export. However Lithium is different in that China has some production of its own but does not dominate the global sourcing of lithium minerals. One of the major Chinese groups paid $838mn last year to snap up the Australian lithium producer, Talison Salares.
A Heady Brew of Problems
We started thinking a while back about which way China would jump on the evolution of its national automobile fleet. It is in both a good position AND a bad position. The good position is that it has low per capita car ownership, so low that it is almost a tabula rasa and that means it can make big strategic decisions on the future without having to consider too much the legacy fleet of automobiles. The bad position is the pressures it faces:
- A very poor supply situation when it comes to oil (in some ways it is even more vulnerable than the US used to be)
- A horrific and growing urban air pollution dilemma
- A rapidly empowered middle class with aspirations to own automobiles
Thus far things have developed rather traditionally along the lines of most developing markets with the middle class appearing as buyers of autos as they rise in the social scheme of things. This solves nothing for the broader economy.
Considering these issues the most natural course to take would be for China to totally leapfrog over the conventional combustion engine model and head straight for the better option of having a national car fleet entirely made up of hybrid and electric cars. The effect on air pollution and imported oil consumption would be dramatic. With hybrid cars (in contrast to electric cars) available now on a mass scale there is no reason for China to even dally with the polluting and outdated technology of the combustion engine and instead it should skip the various phases by which the middle class tastes morph into environmental consciousness. This is not California and that attitude change could be a long time in the waiting.
A sign though has appeared that the mindset in Beijing is starting to change. A story on Bloomberg that China was going to mandate that electric cars make up at least 30% of government vehicle purchases by 2016 set heads a-spinning in the lithium space with regards to a potentially great looking market looking even better. This latest measure is designed to fight pollution and cut energy use.
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According to the reports the Central government ministries and agencies will take the lead on purchases of new-energy vehicles, a term that China uses to refer to electric vehicles, plug-in hybrids and fuel-cell autos. It is felt that the ratio will be raised even higher beyond 2016, when local provinces are also required to meet the target.
This interesting chart shows how things looked PRIOR to the latest announcement. We would posit that the latest moves will significantly boost the outlook for both vehicle categories from 2016-17 onwards.
Bloomberg also reported that the government had directed agencies to give preference to all-electric vehicles in purchases, while cold-weather jurisdictions may consider plug-in hybrids. Government pronouncements are all well and good but electric vehicles, in particular, require pro-active creation of the conditions for users to conveniently operate within the constraints of needing to recharge the batteries. Therefore government organizations and public institutions will be required to add parking spaces reserved for new-energy vehicles and ensure the ratio of charging facilities to the vehicles is equal, according to the plan.
Electric sedans should cost no more than 180,000 yuan (US$29,000) after subsidies. This however is still not cheap by any means and therefore the best way the government can lower costs is mass production turning what has been hitherto somewhat of a luxury product into the most attractive option pricewise.
It is estimated that government purchases made up less than 10% of total new vehicle sales in China, so 30% of 10% is a mere 3% but it is the ideological significance of the new diktat that is crucial here because it shows a shift towards a new thinking.
To stimulate the man in the street to think hybrid over combustion engine the government announced, in recent weeks, the waiver of a 10% purchase tax for new-energy vehicles, excluding them from the levy beginning Sept. 1 until the end of 2017. In the long-run more forceful encouragement might need to be applied to build up a momentum.
The Grab for the Leadership
If we look at the two other Asian economies with the most rollicking growth since WW2, both reached a point in their evolution where their auto export industries made up a significant part of exports and were drivers for a next level of economic expansion. South Korea and Japan have been well served by having a strong automobile industry. Even India, at the moment is ahead of China in this respect with a reputation for cheap rather than high-tech.
China’s support for electric vehicles is timely as demand has apparently lagged behind its targets because of consumer concerns over price, reliability and convenience. The government has identified EVs as a strategic industry to help it gain global leadership. China’s USP (given its grip on Rare Earths) would be to become the go-to country for manufacture of hybrid and electric vehicles. To achieve this though economy of scale is required to pull ahead of the likes of Toyota. It will also need to get a better grip on the supply-side of Lithium. Talison was but the first shot in this accumulation of dominance strategy (though we might also note Galaxy’s production plant).
Much of the focus on electric car development has been on the US so it is good to see that China is finally joining the bandwagon on hybrid and electric vehicles. This could significantly increase demand for Lithium and other products (Rare Earths) that are used in electric vehicles.
Names to conjure with in Lithium include the most advanced examples, Orocobre and RB Energy but also Nemaska Lithium, Stria Lithium, Western Lithium, Reed Resources and Texas Rare Earths.
China these days is a great big stew of environmental problems, challenges and opportunities. Some problems are more intractable than others. Air and water pollution are becoming critical issues. How to tackle these? Then there is the energy challenge. Building a substantial new wave of nuclear power plants is the smart thing to do but does NOT solve the country’s energy dependence when it comes to oil in particular. These issues are the feet of clay of the Chinese economic colossus.
The first signs are there that China wants a quantum leap in the hybrid/electronic vehicle space. This makes eminent sense on a variety of fronts. Prime beneficiaries of this will be the Lithium, Rare Earth and Graphite spaces. The race is ready to start… Gentlemen, start your engines!
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