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The noticeable drop in EV sales in China and Europe in January of this year was seen as a signal to many that 2023 would be a sluggish year for EV adoption. However, Fastmarkets believes that this is not the entire story. In this piece, we examine what we have seen so far in the EV and ESS markets in the first quarter of this year and discuss how that informs our demand forecasts for 2023 and beyond.
For more in-depth insights into the short- and long-term forecasts for the key battery materials, find out more about our NewGen forecasts here.
January was a slow month for EV sales, contracting 5.5% year on year. This was a result of the removal of OEM manufacturing subsidies, low consumer spending as a result of the downbeat macroeconomic outlook and a spike in Covid-19 cases. While January has always been a slow month for EV sales in China, this contraction in January is notable, as it is the first that the market has seen in the past three years. Sales in February and March have also been more sluggish (57.3% and 34.8% year on year) compared to the levels of uptake that we saw in 2022 where monthly sales growth averaged 106.9%.
Fastmarkets has noticed that OEMs and dealerships have higher levels of inventory because of this dampened demand; as seen in the graph below, 2023 sales are not keeping pace with production as demand is not reaching the levels that OEMs have seen previously.
As a result of these factors, the battery raw materials team at Fastmarkets is re-assessing its 2023 EV sales forecast for China. They now expect EV sales to reach 8.04 million units in 2023, down from 8.55 million previously. That said, Fastmarkets remain bullish on sales picking up in the latter half of the year due to the new emissions standards being implemented on July 1, 2023.
The standards enforce new limitations on the level of emissions that internal combustion engine (ICE) cars can emit, reducing levels by around a third. This has created a glut of ICE vehicles for OEMs to sell before the regulations come into place in July, with OEMs lowering model prices to clear this backlog. However, once these emissions standards are introduced, it is thought that the policy will encourage consumers to go electric by making ICE vehicles less attractive as an investment. We also expect that the ongoing EV price war, falling battery material prices and greater EV inventories, will cause an acceleration of the downward trajectory in EV prices in China, aiding EV affordability.
Elsewhere, the ESS market in China has experienced exponential growth in 2023. Market participants have said that provincial governments are investing extensively into the development of battery energy storage systems (BESS), particularly those co-located with renewable energy sources. This is a result of the government’s policy requiring BESS to be constructed alongside new renewable energy projects, in addition to a goal to attain 100 GW storage capacity by 2030. These policies have propelled investments into ESS and the ESS market could reach 30GWh this year. This means that the ESS market in China will grow more quickly year on year than EV sales, with 50% growth in 2023 (see graph below), compared to 25% for the EV market, highlighting just how rapid growth will be in this industry in the near term.
Fastmarkets believes that EV sales have reached a turning point in the US and have entered the mass adoption phase. This was initiated last year, with the EV penetration rate reaching 6.6%, surpassing the 5% point typically seen as an indicator for the beginning of mass adoption. Data from quarters one to three shows that mass adoption is on track.
Figures from Argonne Library state that of the 1.13 million new light vehicles registered in February, over 105,241 were electric. That represents a 77.1% growth year on year and a new high of a 9.3% EV penetration rate. We also note that the new US EPA (Environmental Protection Agency) emission standards, requiring that 60% of OEM vehicle production is for electric vehicles, provide a major boost to EV demand over the longer term by increasing the pool of available vehicles for consumers and future investments into EV model designs. Consequently, Fastmarkets are bullish on sales for 2023 and beyond, with a forecast of 1.55 million EVs to be sold this year, rising to 10 million in 2033.
One sticking point for sales growth will be the announcement on April 18 by the US Treasury Department that only 10 electric and plug-in hybrid cars from four automakers (Tesla, General Motors, Ford, Volkswagen) qualify for the $7,500 US tax credit within the IRA. With the 2023 battery component and critical material requirements kicking in on April 18, we now see brands such as Hyundai, Nissan, BMW, Audi, Volvo and Rivian not qualifying for the credits. Of the top 10 EV models from last year, only three qualify, namely Tesla’s Model 3 and Y, and the Chevy Bolt (Ford’s highly popular Mustang Mach-E only qualifies for the partial, not full, credit).
While we expect that more vehicles will qualify once manufacturers have altered their supply chains in order to meet the requirements, for this year, we expect to see a shift in consumer preferences towards the models where credits are available. This is because the tax credit is hugely helpful in making EVs more affordable for consumers.
EV prices remain high in the market, sitting at $58,940 in March according to Kelley Blue Book, $11,000 above a new ICE vehicle, meaning that the loss of this credit will particularly hurt low-to-middle income consumers who rely on the credits to afford an EV.
In the ESS market, there has been explosive growth in the US, with 111% growth of battery storage capacity expected this year alone (see graph below). We are also expecting this figure could be surpassed given the introduction of ESS subsidies by the IRA this year, making standalone storage systems eligible for a 30% investment tax credit, alongside other incentives, that will remain until 2032. This level of demand highlights the need for the US to build out its domestic ESS battery manufacturing capacity, as many large-scale ESS operators currently rely on China for battery supplies.
While EV adoption at the outset of this year in Europe has been sluggish, there are signs that the market remains resilient, despite a first-quarter dip. Sales from this first quarter in some of Europe’s leading markets were poor; sales contracted in January (as shown in graphs below) in Norway and Germany as a result of the former ending VAT exemptions for EVs and the latter ending subsidies for plug-in hybrids.
Another good example is the UK – the market seems to have lost the exponential growth in sales that it built up in 2019 and 2020, with sales across the three months just surpassing or matching sales figures from last year (see graph below).
The rebound in sales across these locations in March is an indication that the EV market remains resilient, all posting above 20% growth year on year. Data from the ACEA also highlights that EV demand across the broader European region remains upbeat, with sales of BEVs increasing by 22.9% in January. In particular, European sales are expected to be bolstered throughout the year by the entrance of more affordable Chinese EV models this year, from the likes of BYD, Nio, Xpeng and Great Wall.
Fastmarkets predicts that Australia will reach the tipping point for mass adoption (5% EV penetration rate) this coming year, as price cuts to Tesla models will cause a surge in sales in the market. Elsewhere, excluding Korea, Canada, New Zealand, Israel and Singapore, growth will remain nascent. EV affordability will need to increase before major uptake in this region in the near term. One notable laggard is Japan, which is expected to only reach a 3% EV penetration rate this year (up from a low 1.4% last year). The EV industry has been slow to develop in Japan, largely as a result of automakers focusing on hydrogen and other fuel-cell vehicles. One segment in Japan that is predicted to do well is mini-EVs, which experienced a 48-fold increase in 2022 due to their affordability, costing a third of the price of a passenger EV and utility in urban areas.
One bright spot to note is Costa Rica, which achieved the highest EV penetration rate in the Americas region last year of 7.3%, with a rate of 10.6% in December 2022. Growth has continued this first quarter, with sales expanding by 187% in February. Although the volume levels are low, with 2,674 EVs sold in 2022, this market could act as a role model for other emerging markets and countries in the region. Costa Rica’s growth has been achieved by ambitious government policy, which offers an attractive breadth of financial and non-financial incentives, available until 2035. This level of policy commitment is rare to see outside of the major countries with EV sales and we need much more of these durable policies within emerging markets to ensure that EVs become more accessible and affordable to a wider array of consumers.
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