China is by far the biggest market for EVs. Sales of new energy vehicles in the country should top 6.7 million units in 2022, roughly more than double the tally from 2021, the China Association of Automobile Manufacturers said. NEV sales comprised 33.8% of the total vehicle sales in the country during November 2022, staying above 20% for the ninth straight month, calculations showed.

Some of those sales later in the year may have come in anticipation of the expiration of China’s subsidies on EVs, market participants said. By the end of 2022, China's subsidy for pure battery EV had its largest decline since 2019, down to nothing from Yuan 12,600/unit. This is over double the Yuan 5,400/unit reduction in 2022 and the Yuan 4,500/unit reduction in 2021.

Again, China has subsidized EV sales since 2009 and by now laid the roots for the industry. China controls every step of the battery supply chain, aside from battery metals mining that relies on where the minerals naturally occur. This domination led, to quote the article "Chinese OEMs to reduce EV costs more aggressively than in the West, which may allow for an organic increase in the future regardless of the irregularity of subsidies."

With demand in the coming months not looking great, sources said battery makers had been slashing output substantially since early December.

“There has been considerable pull forward of EV demand (when bricks-and-mortar stores were closed), so I think the first half of 2023 will not look great,” said a source from a lithium converter based in China.

Even so the situation isn't all doom and gloom, said an Australia-based lithium producer, noting the Chinese EV market would need time to adapt to the new subsidy-free landscape.

“Demand may slow down with the end of Chinese subsidies for EVs, but it will certainly not fall. deceleration and decrease are two different things,” the producer said.

The lull in battery and EV making has hardly impacted Chinese lithium prices. Lithium carbonate DDP China plummeted to Yuan 457,000/mt Jan. 30 from a record Yuan 590,000/mt reached on Nov. 11, 2022. This was the lowest price since May 17, 2022, but 18% higher than the price on Jan. 31, 2022.

Lithium carbonate prices will not fall through 2023 in China despite a rise in supply, as demand will remain robust at least in the first half of this year, according to a China-based analyst. China’s sales of NEVs will total 9 million units for the full year, a 35% increase over 2022, CAAM said.

Economic strains in the West

The other two major markets for EVs, Europe and the US, are also likely to face significant challenges this year due to macroeconomic factors and market outlook.

“Economic momentum has slowed with a recession next year [2023] increasingly likely [in the US],” according to a Nov. 28, 2022, report from Ratings. With very high prices hitting purchasing power and very aggressive Federal Reserve policy raising the cost of borrowing, we still expect a shallow recession for the U.S. economy in the first half of 2023. Our U.S. GDP growth forecast is 1.8% in 2022 and -0.1% in 2023, a touch weaker than our economic update in September [1.6% and 0.2%, respectively].

The Inflation Reduction Act was designed to further increase EV sales in the US. But many of the positive effects are not anticipated to kick in until 2024, according to some market participants. Starting in 2024, buyers will be able to directly use the value of the EV tax credit to reduce the vehicle’s price, rather than receiving tax credits.

Instead, the IRA actually would pose some hurdles around the sourcing minimums for the battery metals and battery components that must be met to qualify for the $7,500 EV tax credits. For a vehicle to qualify for full tax credits, the percentages for 2023 are 50% of battery components, and 40% of battery metals, sourced within the US or a country which has a free-trade agreement with the US. These thresholds climb eventually to 100% for battery components in 2029 and 80% for battery metals in 2027.

“Increasing sourcing thresholds are likely to hinder the sales of EVs as the supply chain likely will not be able to shift in the short run to qualify for the tax credits,” Metals and Mining Research noted in a recent report.

In Europe, stubbornly high inflation and soaring energy prices are threatened with price, by the continuing war in Ukraine, also remain high. “The good momentum of the European economy will almost fade away in early 2023. Sticky inflation, stunted hiring, and higher interest rates will be obvious bad news. We still expect the European economy to shrink about 1 percentage point of GDP over the next two quarters [Q4 2022 and Q1 2023]," Ratings, Nov. 28, 2022, confirming nil GDP growth in the Eurozone this year.

Like China, state subsidies in Germany for plug-in hybrids ended at the close of 2022, and those for purely battery-electric passenger cars were scaled back. New electric car registrations in Germany rose 114% in December 2022 versus December 2021, totaling a new monthly record of 174,200 units, according to the German Association of the Automotive Industry, known as the VDA. Future EV purchases were moved forward, the VDA said.

Also, the availability of charging points is a big problem. While charging infrastructure has seen large investments, the vast majority, with more than 1.4 million EV charging points as of September 2022, are in China, vs fewer than 400,000 in Europe and around 140,000 mt in the US, according to data from Insights.

“The automotive market is still adrift from its pre-pandemic performance, but could beat wider economic trends by achieving substantial growth in 2023. To sustain that growth, which is increasingly zero emission growth, the government must support the transition of all car drivers to electric and press others to deliver much faster the national infrastructure for charging,” said Mike Hawes, the chief executive of the U.K.’s Society of Motor Manufacturers and Traders.

The SMMT confirmed that back in July 2020, the government's EV Infrastructure Strategy had predicted that the UK's charging point network would need to grow to between 300,000 and 720,000 charging points by 2030. Even meeting only the lower number would require the installation of more than 100 new chargers every single day. Now it is about 23 every day.

Downtrend may follow for lithium prices

There has already been a direct impact on the lithium market from the bearish sentiment around EV sales in 2023. Spot prices are falling, especially in China, and even short-term expectations are not rosy. The latest Battery Metals Outlook Survey showed that over half of the firms surveyed expect Chinese lithium prices to average below Yuan 500,000/mt in 2023, and north Asian lithium prices to average below $70,000/mt.

Although the recent decline in Chinese spot prices was caught up with a real take of demand, one of the aspects to be taken into account is the behavior of traders to deplete stock material they had bought previously at lower prices and to avoid the risk of selling at a loss. This may have strengthened the recent price drop since December, and therefore should only be temporary, if so.

At heart, the lithium market is still tight. Metals and Mining Research's supply estimate for lithium chemicals was 858,000 mt of lithium carbonate equivalent (LCE) in 2023, up from 668,000 mt in 2022; demand for LCE was forecast at 856,000 mt, up from 684,000 mt in 2022. This would leave the market in a slight surplus of 2,000 mt in 2023, a recovery from a deficit of 15,000 mt in 2022.

If any of this year’s scheduled capacity expansions slip, or quality requirements turn out to be too hard to work off quickly (which they have been historically among lithium