High raw material costs, COVID-19 measures challenge China's NEV industry

Facing a fresh wave of COVID-19 outbreaks, China's strict lockdown measures are dealing a huge blow to the NEV industry, just two weeks after the industry was left reeling over record-high nickel prices on the London Metal Exchange.

High raw material prices and logistical problems have led to a pessimistic outlook for the NEV industry, and market sources are not expecting any significant improvements at least in the next two weeks or so, as China continues to monitor domestic infection rates and adjust its lockdown measures.

Decline in copper imports likely

Domestic demand for copper, used as wiring in electric vehicles, was expected to increase on the back of strong EV sales in China, but the outlook for cathode imports has been dim as the import arbitrage remained largely closed through March, in addition to increased trade financing pressure.

Demand plummeted further since strict lockdown measures were implemented in Shanghai as sellers faced additional transport hurdles in withdrawing or moving stocks across cities.

"The increased time and effort required for testing is causing truck drivers to avoid Shanghai for now," a Chinese trader said.

Market sources added that it was unlikely for demand to pick up until Shanghai emerges from its lockdown as it is home to many key warehouses due to its role as a financial hub.

From a macroeconomic perspective, the ongoing COVID lockdowns would also have a significant impact on China's economy, which generally leads to weaker copper consumption.

All this makes a slowdown in April copper imports highly likely, with lockdown measures and the Russia-Ukraine conflict as key factors to keep an eye on.

S&P Global Commodity Insights assessed Chinese copper import premiums at $20/mt plus LME cash, CIF China, April 1, unchanged since March 23.

Slow battery metals market in short term

Market sentiment was strongly affected for battery metals as well, though trading had already been slowing through March due to high salt prices.

Chinese lithium chemistries ended a half-year long rally to stabilize at around Yuan 500,000/mt in the last two weeks of March, as precursor and cathode makers began resisting high offers in the hopes that prices would eventually adjust, though producers maintain that supply would not outpace demand anytime soon.

Production cuts have been heard for midstream and downstream players in the industry, with battery makers in the computer, communications, and consumer electronics (also known as 3C industry in China) sector reported to have trimmed run rates significantly due to low profit margins.

Many ports were heard to be congested due to restrictions, which could impact the inflow of spodumene- the key raw material for lithium salts - which usually comes into China via ports in the south, said a trader.

"This would lend further support to lithium salt prices if refiners can't secure material for salt production," the trader added.

S&P Global assessed battery-grade lithium carbonate at Yuan 500,000/mt, and battery-grade lithium hydroxide at Yuan 496,000/mt April 1, both on a DDP China basis.

While nickel and cobalt salts were less impacted by port congestion, demand remained weak as nickel prices on the LME "have yet to fall to normal tradable levels," said a Chinese trader.

For nickel sulfate, logistics was less of a concern, with high metal prices taking the spotlight.

Uncertainties in nickel price directions have kept buyers off the market, despite three-month prices on the LME having fallen by 30% to $33,223/mt April 1, compared to March 7's closing price of $48,078/mt.

"I think the market expects nickel prices to fall back to $25,000/mt, and the current situation is only temporary," said a trader.

Market sources said it was difficult to say when sulfate prices would fall, and that logistical issues arising from COVID-19 restrictions could stifle demand recovery.

S&P Global assessed battery-grade nickel sulfate at Yuan 48,000/mt April 1 on a DDP China basis, unchanged since March 29.

Cobalt sulfate was the most affected of the three, as restrictions had resulted in tight raw material supply and manpower shortages.

China's Huayou Cobalt had earlier announced that it was trimming smelting operations at its Quzhou plant from March 17, with other producers also heard to be in similar straits.

"Cobalt hydroxide imports usually come in from the Ningbo port, which is not badly impacted," said a Chinese refiner. "However, shipments coming out of Durban are still being delayed, which is a huge problem."

While hydroxide remained tight, demand was also sluggish on account of weak sulfate consumption, as nickel-cobalt-manganese (NCM) battery makers struggle with surging raw material costs.

S&P Global assessed battery-grade cobalt sulfate at Yuan 118,500/mt April on a DDP China basis, down Yuan 1,500/mt on the week.

Even if restrictions are lifted, market sources said the key challenge of high salt prices would continue to hamper the NEV industry, and it remains to be seen how well end-users would respond to higher EV prices come April, though the economic strain from the current lockdown measures could dampen demand in the short term.