Elemental pursuits

The California gold rush was sometimes likened to Nature’s lottery, where the chances of success were one in a million at best. Perhaps the same will be said of the crowded marketplace for new energy vehicles in China, which has attracted nearly 500 entrants. At least 80% of them are expected to go under, notwithstanding the fact that China’s electric vehicle (EV) market is projected to grow strongly.

China Youngman Automobile Group could be one of the firms at risk. It was put under the spotlight last month after it unveiled its first hydrogen-powered car, which, it claims, can travel up to 500 kilometres on 300-400 litres of water. Media attendees were sceptical when management was unable to show the technology at work. Adding to the mood of cynicism were Youngman’s eight failed partnerships with various local governments and a debt load of Rmb500 million. Undaunted it has received fresh backing from the Nanyang government in the Henan province, which has ploughed Rmb4 billion ($577.66 million) into the initiative in addition to providing land, tax rebates, financing for building manufacturing facilities as well as procurement contracts.

Nanyang is among the many Chinese cities excited by hydrogen.

Cars running on hydrogen fuel cells get their energy from a chemical reaction, converting hydrogen stored in the vehicle into electricity, and emitting water vapour. (EVs with lithium-ion batteries are powered by a store of electrical energy produced away from the car).

Companies like Youngman are betting that cars with hydrogen fuel cells will eventually prove just as popular as electric vehicles because they refuel faster and can typically be driven for longer distances between recharges. Hydrogen fuel cell batteries are also said to perform well in cold climates, where lithium batteries can sometimes fail.

Investment of at least Rmb85 billion was announced in hydrogen fuel businesses last year, according to China’s Society of Automotive Engineers. Wuhan in Hubei province is building a hydrogen energy park in a bid to attract more than 100 fuel-cell automakers, for instance, and SAIC Auto has unveiled the world’s largest hydrogen station in Shanghai as part of the city’s plan for a fleet of 3,000 fuel cell buses on its streets by 2020.

Also at corporate level, at least 41 automakers are building cars with hydrogen mobility. Geely has just launched its first fuel-cell bus, the F12, which is capable of running over 500km from a 10-minute refuel. Grove Hydrogen Automotive, a Wuhan-based start-up, debuted the prototypes of three fuel-cell passenger cars – a coupe and two SUVs – at the Shanghai auto show in April. And Changchun’s FAW, China’s oldest carmaker, has announced it will mass-produce a fuel-cell version of its flagship marque Hongqi this year too.

Other non-traditional auto industry players have been sucked into the fuel-cell craze. China’s largest chiller maker Fujian Snowman is spending Rmb4.55 billion on building a fuel-cell engine plant in Chongqing, hoping to tap into its experience of producing air compressors for new energy vehicles. Chengdu Huaqi Houpu, which has largely focused on making equipment for the natural gas sector, is also offering solutions for hydrogen storage and refuelling.

The gold rush has ignited the share prices of companies thought to be connected to the new energy segment. After signing a strategic partnership with Canada’s Ballard Power Systems, a leading hydrogen fuel-cell maker, Weichai Power has seen its Hong Kong-listed stock surge 51% year-to-date. Shares in Shenzhen Center Power, the mastermind behind Wuhan’s hydrogen park, have rocketed 94% in the same period.

Some of the excitement was prompted by Premier Li Keqiang’s annual policy address in March, which made mention of hydrogen energy development for the first time. The plan is to build 100 hydrogen stations across the country and put 5,000 fuel-cell vehicles on the roads by 2020, China Daily reports (about four times as many as today). Over the next decade sales of fuel-cell cars are expected to reach 1 million units.

Wan Gang, a former government minister who drove China’s EV battery boom, is another keen supporter, calling for the creation of a “hydrogen society”, given China’s need to combat air pollution.

As China’s car industry is shifting towards a zero-emission model, Wan’s vision is to have EV prevail for inner city travel while buses and trucks – powered by hydrogen fuel cells – will be used for long distance travel.

To advance in fuel-cell cars, China is repeating its strategy for solid-battery electric vehicles – mainly by providing generous subsidies and preferential policies.

In 2018 about 1.26 million new energy vehicles were sold, up 62% on the year, bucking the downtrend in the wider auto sector.

But popularising hydrogen vehicles could be a daunting task.

“The resolve of the government is obvious, but this is not the kind of trade that allows one to make a quick buck as it involves a lot of outlays for infrastructure and technology,” Zhang Junyi, NIO Capital’s managing partner, told tech media site Lieyunwang. Zhang added that the current economic climate, as well as falling sales in the wider car market, might weaken automakers’ commitment towards hydrogen technology.

One major challenge is the higher costs of ownership for hydrogen vehicles. Costs to drive a battery-powered EV work out at about Rmb0.3 per kilometre, while fuel-cell cars can cost between Rmb4.5-5.25 for the same distance, says Beijing News. Setting up a hydrogen refuelling network is also much more expensive, with each station costing Rmb12-18 million, versus a few thousand yuan for the smaller types of electric vehicle charging points.

China has already made a massive commitment to the battery-powered EV segment and done much to conquer that supply chain – which suggests to some that hydrogen will always play a more junior role. For instance, the country has invested aggressively in the production of lithium, an alkali metal vital to the high-quality battery cells needed to power electric vehicles.

By securing upstream resources and investing in refining capacity, Chinese firms now control over 60% of the world’s lithium cell production capacity, according to Wood Mackenzie, a UK commodity consultancy. Ganfeng Lithium is one of the leaders, seeking out mining rights in lithium-rich countries such as Australia, Chile and Argentina as early as 2011. With its revenues more than tripling between 2015 and 2018 to Rmb4.9 billion, China’s largest lithium producer has increased its stake in Cauchari-Olaroz, a lithium project in Argentina with Canada’s Lithium Americas Corp. The Jiangxi-based company also offered to buy 30% of London-based Bacanora Lithium last month, giving it access to one of the world’s largest lithium resource projects in northern Mexico.

These deals are expected to turn Ganfeng into the world’s largest lithium supplier: it already counts LG Chem, Tesla, BMW and Volkswagen among its long-term clients.

Chengdu-based Tianqi Lithium is another major player, boosting its stake in Chilean lithium giant SQM to 24% last year in a $4.1 billion transaction.

What gives both of these companies an edge is technological advances in refining raw materials such as brines or hard rock deposits into battery chemicals – usually in the form of lithium hydroxide and lithium carbonate.

A report from the Chinese government recently claimed the country’s lithium extraction costs are now just $2,400 per tonne, versus $13,000- $22,000 internationally, according to the South China Morning Post. Such advantages are allowing the Chinese players to entrench their positions and entice foreign suppliers of raw materials to use lithium processors in China.

By 2025 the market for battery cells – which account for over a third of the costs of assembling an electric car – will be worth $424 billion, according to a base-case scenario from the Australia-based Association of Mining and Exploration Companies. And as a result lithium producers are trying to move up the value chain into battery making (the same report estimates sales of refined lithium in 2025 to be $43 billion).

At the top-end of EV battery production is Fujian’s CATL, short for Contemporary Amperex Technology. The eight-year-old firm overtook Japan’s Panasonic as the world’s largest EV battery maker in 2017, thanks to a domestic policy that prioritised locally-made batteries in sales subsidy schemes that were made available to Chinese carmakers (see WiC404).

As of April CATL accounted for a fourth of the EV battery market worldwide, followed by Panasonic (22%) and Shenzhen’s BYD (16%), according to South Korea’s SNE Research.

Toyota has just signed a landmark deal to source batteries from both CATL and BYD as it tries to increase the proportion of its EV sales to 50% by 2025, a target brought forward from 2030, the Financial Times reports. Much of the increase is likely to come China, which is expected to continue to account for more than half of the world’s EV sales until at least 2025.

A recent report by the Centre for Solar Energy and Hydrogen Research put the number of registered EV cars on China’s roads at 2.6 million (the US has 1.1 million and the UK has 186,000).

However, Chinese regulators are clearly worried that many of its 500 electric vehicle brands don’t have a viable future. The authorities put out a draft of new rules this month that will make it harder for newcomers to tap other EV companies’ production capacity, in a move designed to weed out some of the more marginal players .

In the short term at least, this is also a market that is showing signs of flagging. Much of the recent surge in sales has been dependent on subsidies averaging Rmb70,000 ($10,100) per vehicle. These are being heavily reduced in the next two weeks, which may force the car firms to push up their prices. That is likely to mean less demand in the second half of the year compared to earlier in 2019, when consumers were rushing to buy before the end of the subsidies.

In fact, the market is already slowing: sales of new energy vehicles were up just 1.8% in May – or 104,000 units – compared with a 126% increase in May last year, according to data released by the China Association of Automobile Manufacturers this week.

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