• Fastmarkets’ view is that EV sales will largely be insulated from recession
  • There is a clear bifurcation in fortunes playing out between electric and ICE vehicles, with EV sales worldwide continuing to grow significantly
  • The greater concern right now is that limited raw material supply may constrain demand in the near term

 

A global recession is coming in 2023, the experts say.

The consequences will be higher unemployment, lower wages and incomes, and reduced spending – especially on discretionary items like new cars.

Central banks around the world have been raising interest rates to cool inflation this year with a degree of synchronicity not seen over the past five decades — a trend that is likely to continue well into next year, according to a World Bank Report.

One of the hardest-hit sectors during the most recession in 2007-2009 was the car manufacturing sector.

“New vehicle sales fell nearly 40%,”says economist Bill Dupor.

“Motor vehicle industry employment fell over 45%.

“Faced with bankruptcy, Chrysler and General Motors were bailed out by the US government using TARP funds.

“At one point, the federal government owned 61% of General Motors.”

Yesterday, Tesla (which makes up almost 20% of all global EV sales) fell ~5% after the bell as the company revealed a drop in revenue over the quarter, despite a record 343,000 car deliveries.

“This was still short of analysts’ expectations, with supply chain issues reported as the main culprit,” Stake market analyst Eliot Hastie says.

“That said, some analysts believe that softening demand is the primary concern, with sales in China — Tesla’s biggest market — having slowed due to rising competition and a poor macroeconomic landscape.”

In June, Fastmarkets senior price development manager, Peter Hannah, tweeted this.

So, we asked Hannah:

Could a 2023 recession kneecap the nascent EV sector?

Fastmarkets’ view is that EV sales will largely be insulated from this macroeconomic weakness, Hannah replied.

The brunt will instead be borne by the internal combustion engine (ICE) segment.

“This is because waitlists for most EV models are still broadly on the order of months to years, so there is significant buffer of demand,” he told Stockhead.

“Furthermore, the consumption of EVs is still largely being driven by the more affluent in society.

“If we were a few years down the line, during the mass-market adoption phase, then this downturn would likely be of greater concern to the EV sector.”

Is there any evidence of a drop in new car sales yet?

In some markets, yes.

And yet we are seeing a clear bifurcation in fortunes playing out between electric and ICE vehicles, with EV sales worldwide continuing to grow significantly, Hannah says.

Pics: Via Fastmarkets.

“EU EV sales flattened out at a high level in Q2, but we do not see that as an issue in demand, but rather a production constraint due to parts shortages (semiconductors + war in Ukraine),” he says.

“Meanwhile Chinese plug-in EV sales continue to rise.”

In a worst-case scenario, a deep and prolonged period of macroeconomic weakness could eat into top-line demand for EVs, especially if interest rates continue to rise, adding further cost to financing car ownership.

Another key uncertainty is China’s zero-Covid policy, Hannah says.

“A continuation of rolling on-off lockdowns in response to sporadic Covid cases could see China demand undershoot expectations,” he says.

But the bigger issue is still lack of raw materials supply

Hannah says the greater concern right now is still on the supply side — that limited raw material supply may constrain demand in the near term.

“At the moment it’s still full speed ahead for the EV revolution,” he says.

“The different battery metals prices have their own physical stories, and some are performing more strongly than others for a variety of reasons.

“Overall though the demand from the EV sector remains strong.”

Among the battery metals suite, lithium prices remain the highest relative to their historic norms, and there is little sign of the tightness easing meaningfully in the months ahead, Hannah says.

“Further out though, there is new supply on the way and a huge price incentive to accelerate its path to market, and we will undoubtedly eventually see this impact on price,” he says.

“That won’t be the end of the story though by any means.

“Fastmarkets’ forecast is for the market to move between periods of small surpluses and deficits throughout the decade, driving continued price volatility.

“The price floor of the market is also likely to move considerably higher than historical norms as the production costs of the marginal operations inevitably increase – especially as producers have to take on board more ESG considerations.”