Development of New Energy Vehicles and Analysis of Its Impact on Upstream Resour

Development of New Energy Vehicles and Analysis of Its Impact on Upstream Resources

1. The overall development of new energy vehicles was good in 2017.

In early 2017, the new energy vehicle market was greatly affected by major policy adjustments such as drastic decline in new energy vehicle subsidies and re-examination of the model catalogue. But China's determination to vigorously promote the healthy development of the new energy vehicle industry has not changed. In March and April, China successively introduced the Action Plan for Promoting the Development of the Automotive Power Battery Industry and the Medium- and Long-Term Development Plan of the Automotive Industry, which has injected confidence into the market. Since May, China's new energy vehicle market has shown a strong growth momentum. In September, the "dual-credit" policy was issued, officially forming a long-term and market-based healthy development mechanism. China's new energy vehicle market has soon regained rapid growth. According to the data released by the China Association of Automobile Manufacturers (CAAM), 794,000 new energy vehicles were produced in China in 2017, up by 53.8% year-on-year, 777,000 were sold, up by 53.3% year-on-year, and month-on-month growth was achieved throughout the year.

In the meantime, other countries and regions outside China also delivered remarkable performance. According to the data at the China EV100 Forum, in 2017, the global sales of new energy vehicles are expected to hit 1.42 million, up by 53.1% year-on-year and the growth of new energy vehicle sales in markets outside China will exceed 55.9%, where 260,000 new energy vehicles are expected to be sold in Europe, up by 27.1% year-on-year, 200,000 in the United States, up by 23.4%, 130,000 in Japan, up by 490%, and 55,000 in other emerging markets, up by more than 110%.

In addition to the trend of strong market growth, there have been positive changes in the medium- and long-term development of new energy vehicles. On the one hand, different countries are vigorously promoting electric vehicles. In particular, Britain and France have successively proposed a timetable for banning the sales of fossil fuel vehicles (although most of them have not entered the legislative procedure).On the other hand, major automakers have successively set an agenda for comprehensive electrification of cars. Arguably, the trend of global automotive electrification has become clearer.

In September 2017, Xin Guobin, Vice Minister of Industry and Information Technology disclosed that China is also working on a timetable to ban the sales of fossil fuel vehicles. Domestic enterprises have also released electrification development plans. In October, Chang'an Automobile released the "Shangri-La plan", stating that the company would comprehensively stop the sales of traditional fuel cars starting from 2025. In December, the Party Committee Secretary of BAIC Group revealed for the first time that the company would take the lead in comprehensively stopping the sales of traditional fuel passenger cars in Beijing by 2020 and would comprehensively stop the production and sales of traditional fuel passenger cars across China by 2025.

2. The installed capacity of ternary batteries soars due to a switch of engine of market growth.

In 2017, the new energy vehicle market in China saw a switch of growth engine. According to the CAAM data, 593,000 new energy passenger vehicles were sold in China in 2017, up by 71.9% year-on-year, which included 202,000 commercial vehicles, up by 17.4% year-on-year. The new energy passenger vehicles have become the primary engine of market growth. Among them, 478,000 pure electric passenger vehicles were sold, up by 81.7% year-on-year, making them the core of engine, and 114,000 plug-in hybrid passenger vehicles were sold, up by 40.3% year-on-year.This change is directly manifested in the installed capacity of power batteries. In 2016, the pure electric bus market was the largest market in terms of the installed capacity of power batteries, followed by the pure electric passenger vehicle market. The situation was reversed in 2017, when the pure electric passenger vehicle market became the largest segment with the installed capacity of power batteries surging by 60.8% year-on-year, accounting for 38.0% of the total market. The pure electric bus market ranked second with the installed capacity of power batteries declining by 18.8% year-on-year, accounting for 36.8% of the total market.

Due to the switch of engine for new energy vehicle growth in 2017, the sales of pure electric buses with greater demand for battery installation were slightly less than expected, while the sales of passenger vehicles with less demand for battery installation especially Class A00 passenger vehicles were dramatically increased (300,000 units sold, accounting for 67% of new energy passenger vehicle sales), leading to limited growth in the total installed capacity of power batteries. According to RealLi Research, the total installed capacity of power batteries in new energy vehicles in China was 33.55 GWh in 2017, up by only 21.4% year-on-year. That is a wide gap from the growth rate of the new energy vehicle market and far lower than the production growth of power batteries last year, about 80%.Meanwhile, as passenger vehicles have replaced buses as the main force of the new energy vehicle market and they mainly use ternary batteries with higher energy density (their share rose from 54% in 2016 to 76% in 2017), the demand for ternary batteries has increased significantly, while the demand for lithium iron batteries has declined. According to RealLi Research, the installed capacity of ternary power batteries was 15.28 GWh in 2017, up by 143.7% year-on-year, while the installed capacity of lithium iron phosphate batteries was 16.33 GWh, down by 19.2% year-on-year.

In the future, after the switch of growth engine is completed, the sales of new energy passenger vehicles will grow rapidly and the installed capacity of power batteries will soon regain rapid growth. In the time, national policy will set out increasingly high requirements for battery energy density, which will be implemented through subsidy and new energy vehicle credit policies. This will further raise the share of the installed capacity of ternary batteries.

3. Analysis of future development trends and their impact on resources

In 2018, the dual-credit policy (Measures for the Parallel Administration of Average Fuel Consumption and New Energy Vehicle Credits of Passenger Vehicle Enterprises) will take effect as of April 1. China's new energy vehicle industry will officially shift from subsidy-driven to market-driven development, and embark on the path to long-term healthy development. Although the new energy vehicle credit assessment won't be formally carried out until 2020, automakers need to vigorously develop new energy vehicles in advance in order to meet the assessment requirement - "new energy vehicle credit ratio of 10% and 12% by 2019 and 2020 respectively". Meanwhile, as the negative credits generated by fuel consumption can be offset by the positive credits generated by new energy vehicles, traditional automakers are encouraged to develop new energy vehicles. Therefore, the dual-credit policy will put substantial pressure on automakers from the beginning of its implementation, and provide substantial incentives for the development of new energy vehicles.

Table 1 Dual-credit management system

Corporate Average Fuel Consumption (CAFC) credit managementNew Energy Vehicle (NEV) credit management Administrative departmentMinistry of Industry and Information Technology (MIIT) Management methodsDual requirements, dual-credit management CAFC positive credit: Can be carried over and transferred between affiliated enterprises.NEV positive credit: Can be traded freely, but cannot be carried over to the next year or transferred between affiliated enterprises.Dual purposes: Can offset CAFC negative credits. Subjects under managementAll enterprises that sell passenger vehicles in China (including imported automakers)Passenger vehicle enterprises with an annual output or import volume of more than 30,000 vehicles in China Separate accounting of domestic and imported passenger vehicles Management requirementsCAFC target: 5L/100km by 2020NEV credit ratio target:10% by 2019, 12% by 2020 Punishment measuresEstablishing a credit evaluation system Suspending the acceptance of applications for the announcement of models meeting the criteriaSuspending the production of some high oil-consuming modelsSuspending the production of some fuel models

Source: MIIT, Orient Securities

On the other hand, the state is also promoting a decline in new energy vehicle subsidies. The industry generally predicts that the new subsidy policy will also start from April 1. According to the discussion draft of the new subsidy plan, the state subsidies for low-grade passenger vehicles such as Class A00 will be greatly reduced, the state subsidies for passenger vehicles with a mileage of less than 150 kilometers and an energy density of less than 105 kw/kg will be completely cancelled, and the state subsidies for passenger vehicles with a high mileage (more than 300 kilometers) and high energy efficiency will be increased. At the same time, many cities such as Beijing are also mulling a plan to cancel local subsidies. In addition, the subsidies for new energy buses and special cars are generally reduced by 40-50%, and the minimum energy density requirement is increased from 90 to 110 kw/kg.Based on the above national policy changes, China's new energy vehicle and power battery industries are expected to reflect the following trends:

First, China's new energy vehicle market will continue to maintain rapid growth, and enter the new stage of healthy and sustainable development with the passenger vehicle market at its core. After initial development, domestic new energy vehicle enterprises will directly confront joint ventures and multinational enterprises.

Second, the structure of new energy passenger vehicles will be optimized. The share of Class A and above models will be continuously improved, and the power battery consumption per vehicle will be further increased (the installed battery capacity per new energy passenger vehicle was only about 20.6 kWh in 2017).

Third, the penetration of ternary power batteries will further increase. In particular, the penetration of high-nickel ternary batteries with high specific energy will increase rapidly. The share of 622 ternary power batteries is expected to increase dramatically in 2018 and the share of 811 ternary power batteries (use of silicon as a negative electrode material) is expected to increase dramatically by 2020. At present, the R&D of all-solid-state lithium-ion power batteries is prevalent. They are expected to become the mainstream power batteries by around 2025.

Although the sales of new energy vehicles in China exceeded market expectations in 2017, the domination of Class A00 vehicles led to a less-than-expected installed battery capacity per vehicle and less-than-expected applications of high-nickel ternary batteries. From a global view, the growth rate of new energy vehicles in Europe and America was basically in line with expectations (The failure to mass produce Tesla Model 3 dragged the market down, otherwise the growth rate will exceed expectations), while the growth rate of new energy vehicles in Japan and other regions was significantly higher than expected.

In light of the active responses of the countries and major automakers around the world, we predict that the global new energy vehicle market will maintain high growth of more than 40% and see sales of about 2 million units in 2018. Besides, the installed battery capacity per vehicle and the penetration of ternary batteries in China are expected to grow significantly. Ternary batteries will still be dominated by model 523 and model 622. All these factors will substantially boost the demand for lithium carbonate, cobalt and rare earth permanent magnetic materials such as neodymium and nickel sulfate.

The global lithium carbonate resource construction and expansion projects will be gradually put into operation from the second half of 2018. In 2018, the increment of lithium resources is mainly contributed by Australian mines, Albemarle's Atacama expansion and domestic brine lakes. The annual lithium salt (lithium carbonate equivalent) output is expected to exceed 280,000 tons, despite uncertainty in the specific capacity release rate. In general, the industry forecasts that the overall supply and demand of lithium resources in 2018 will still be in a tight balance, and the price of lithium salt will fluctuate at a high level and weaken in the second half of the year. The expansion of global cobalt resources will be very limited in 2018. As the market is small, the resources are concentrated, and new energy vehicle sales are expected to grow, market speculation will continue, suggesting higher prices ahead.

A slew of measures such as environmental supervision, anti-speculation, industry integration and national purchase have been taken to address oversupply in the rare earth industry, which will substantially affect rare earth prices. Considering national planning and industrial governance efforts, we estimate that the rare earth industry has entered the stage of medium- and long-term healthy development.Reproducing nickel sulfide ores into nickel sulfate will affect the production of platinum-group metals, thus increasing costs. It's difficult to reproduce most lateritic nickel ores into nickel sulfate due to their low grade and high iron content. As "nickel bread" often has excessively high iron content, nickel sulfate produced from it doesn't meet the requirements for battery materials. Therefore, the overall supply of nickel sulfate will still be tight, and the price will remain relatively high.