Global battery giant CATL intends to offer discount of lithium to EV OEMs to attract more commitment of orders, thereby fulfilling its ambition to vastly expand globally.
This is taking place at a time when lithium prices are expected to drop from last year’s historical high.
Based on yet to be confirmed proposal, OEMs will be able to procedure 50% of batteries within their contracts with CATL at a price where lithium carbonate (battery grade) cost is 200,000 yuan/tonne ($29/kg), and the remaining 50% of batteries will be priced at spot market prices.
This new pricing mechanism is set under a condition that OEMs will purchase at least 80% of its cell demand from CATL in the first 3 years.
Rystad Energy understands this proposed discount on lithium in the pricing mechanism reflects the over-supplied battery markets in China with domestic cell production hits a 60% surplus in 2022.
In fact, China has already started to fulfil the demand of other regions where supply is yet to be met by local suppliers.
This new pricing mechanism is proposed as the battery supply chain aims to destock both lithium materials and battery supply aspects this year.
The domestic Chinese battery-grade lithium carbonate price was 486,000 yuan per tonne in January this year, down by 18% from the record high at 593,000 yuan per tonne in November 2022.
However, the current price is still 40% higher compared to the same period last year.
It is estimated that the lithium carbonate price in China will drop by 40% in 4Q from the current spot level.
Rystad Energy’s battery cell cost model shows that if the condition for prices of other materials remains unchanged, and battery-grade lithium carbonate price drops to 200,000 yuan per tonne, then battery cell cost will decline 22.6% and 24.1% for LFP and NMC523 cells respectively.
By mixing the proposed lithium carbonate price and market price with a 50-50% ratio, battery cell costs will decline 11.3% and 12.2% for LFP and NMC523 cells respectively.
CATL obviously is attempting to acquire more market shares among EV OEMs while it is expanding quickly in both China and abroad.
Despite potential cost reductions, EV OEMs might not be necessarily interested in this proposal.
The commitment of high volumes of procurement of cells in the future might conflict with existing supply contracts that EV OEMs have with other cell manufacturers.
In addition, EV OEMs need to evaluate both the benefits and risks of high dependence on one cell manufacturer.
It is probable that CATL’s proposal could cause other cell manufacturers in China to take similar actions in order to secure existing clients.
EV markets slowdown in January: a hitch or a cause for concern?
From the highs of December 2022, which propelled total 2022 EV sales beyond the 10 million mark, January 2023 has been the mirror opposite with major EV markets reporting significant slowdowns.
While the month-on-month decrease is in line with market trends, the significant year-on-year decrease poses a significant risk to the bullish expectations of the market.
There are 2 possible reasons for this dip:
- Countries that have seen a dip (China, Germany, Norway) have all in some form or another reduced EV purchase incentives, either by removing upfront incentive for EV purchase, or restoring taxes that EVs were earlier exempt from. Due to this, a variety of deliveries got pushed from the early months of 2023 to December 2022 and in some countries, the vehicles have been registered on paper in December 2022, but automakers are yet to deliver the actual vehicle. This would imply that Q1 2023 will be a relatively weak quarter, but sales will pick-up starting from Q2 and H2 onwards
- The reduction in incentives has dissuaded some customers from purchasing EVs. While TCO savings still favor EVs, the sudden increase in upfront cost would be the main reason for this dissuasion. This, however, does not mean demand is completely dwindling. Tesla Motors for example saw a massive spike in orders when they announced discounts in various markets. Ever since, they have been slowly hiking prices in an attempt to establish the right price point
Within the automotive industry however, there is some consensus that the rapid growth observed in 2021 and 2022 may not be seen this year.
There is also the possibility that governments would consider putting back certain subsidies in place.
As such, automakers are now responding through price cuts, but we expect Q1 sales to remain weak in many key markets as the appetite for EVs reduces.
In particular, the US was the only market to register a year-on-year growth in January EV sales, and this is to be expected given the market share is still only at around 7%, on the lower end compared to other developed markets.
In addition, the EV tax credits are a “new subsidy” of sorts given that it now includes models that were earlier phased out from receiving credits. The market growth is expected to continue at a steady pace as there is now no rush to avail these tax credits.
The partnership between Ford and CATL for a new battery plant, despite only qualifying for half of the $7,500 tax credits is enough for the company to invest in this partnership, signaling that the full rebate may not be necessary to increase demand in the American market.
