China's extension of EV subsidies lifts sentiment for lithium producers: Morgan Stanley

New York — Lithium producers got a modest boost overnight after China's government said it would extend electric vehicle subsidy programs to help prop up the ailing auto sector, with Morgan Stanley suggesting the move could drive positive sentiment and mask gloomy fundamentals.

Output and sales of New Energy Vehicles in China last year fell to 1.242 million and 1.206 million units, respectively, down 2.3% and 4.0%. Chinese NEV sales are forecast to remain flat year on year in 2020, according to China Association of Automobile Manufacturers.

The coronavirus pandemic has rattled the world to its core, with stock markets in turmoil and a global recession on the cards as lockdowns spread across the globe.

Larger listed lithium producers such as Australia's Albermale, Chile's SQM and China's Tianqi all saw a positive start to 2020.

Tianqi, China's largest lithium producer, started 2020 around $4.4/share before hitting a year-to-date high of around $5.4/share late February, only to then be sold down, in line with wider markets and the impact of COVID-19. The stock hit a 2020 low of roughly $2.6/share Tuesday, and then made some gains on the back of the two-year subsidy extension news Wednesday. The stock is currently trading around $2.8/share.

"Although the subsidy extension had been expected, we believe the official announcement amid a gloomy market will still trigger a positive stock reaction in the EV value chain, OEMs [original equipment manufacturers] in particular. But, the real impact on EV sales stays fluid, depending on more interacting forces beyond subsidies," Morgan Stanley said in a research note Wednesday.

Analysts at the bank added that, although they don't expect the subsidy extension to immediately revive China EV sales, "stocks of the local EV value chain, OEMs in particular like BYD and NIO, may react positively to the announcement that corroborates the Chinese government's strong commitment to EV development."

"The two-year subsidy extension would facilitate a smoother transition for EVs to get one step closer to cost parity with internal combustion engines and also give local brands a little bit more time to further gear up for serious foreign competition; however, the schedule still looks tight," said Morgan Stanley.

Since the inception of subsidies in 2010, China has been gradually tweaking and tapering, with a view to phasing out subsidies completely in 2020. To qualify for any tax break these days a vehicle must be able to travel at least 250 km on one charge.

At the start of this year the government signaled it would keep things going for at least the remainder of 2020, in the face of falling EV sales. That was once again extended late Tuesday.

"The news that subsidies will remain stable is an indicator that the central government is still in active support of cultivating a globally competitive electrified auto industry in China," said Zane McDonald, an EV analyst at S&P Global Platts Analytics.

The coronavirus pandemic and its impact on the global lithium supply chain emphasizes the US' damaging overreliance on lithium from China, American Battery Metals CEO Doug Cole said Monday.

"If coronavirus has shown us anything, it's that we are far too reliant on China and other countries for key minerals like lithium, cobalt and nickel," Cole said in a statement. "The United States is rich in these key metals, and we must quickly increase domestic investment to bring these resources into the supply chain."

The US is only mining and producing about 1% of the world's lithium despite having access to large domestic lithium resources, Cole added.