Overcapacity and 'alarming' price trends present speed bumps for Canada's battery industry as EV enthusiasm slows
Canada’s ambitious ventures into the electric vehicle battery space face challenges in the months and years ahead amid signs of EV demand coming down from record highs, striking overcapacity issues and “alarming” price trends.
The slowdown is not a story of the world giving up on EVs, says Yayoi Sekine, head of battery storage at BloombergNEF, in an interview with Yahoo Finance Canada. Rather, she says, demand is now growing at a rate below that which many in the broader industry had forecast.
“The industry from the supply side was hoping that the records were going to be even bigger than they have been,” Sekine said, “especially over the course of the last two years and in anticipation of next year.”
A consequence of those misjudged hopes is a global overcapacity stunning in scope, which, in tandem with jaw-dropping price declines in the Chinese market, has threatened margins and led the industry to reconsider plans. Sekine says that although automakers prioritize local supply chains, major Canadian gigafactories — Northvolt’s $7 billion project in Quebec and another $7 billion project by VW’s Powerco in Ontario in particular — are not immune.
“We've been looking at Northvolt in particular because we're also following what's happening with their European operations,” Sekine said, referring to BMW’s cancellation of a $2 billion contract. “So, they are in a particularly challenging position.”
'A rosy picture'
In a note published last week, S&P Global Mobility analyst Srikant Jayanthan wrote that “the ambitious zero-emission (ZEV) sales targets by both governments and automakers painted a rosy picture about the EV industry and how quickly it was expected to evolve.”
But many EV manufacturers have adjusted their sales projections lower this year. With EV sales in Europe and the U.S. missing estimates so far in 2024, energy research firm Wood Mackenzie says carmakers and governments are shifting their focus to hybrids, putting “five million battery electric vehicle (BEV) sales at risk” and reducing “installed battery capacity in the U.S. by 23 per cent and in Europe by 20 per cent.” In Canada, BMO economist Erik Johnson recently said he expects to see EV market share to continue to grow, but below the rapid pace of recent years.
Industry enthusiasm inspired by that erstwhile rapid pace produced “a massive investment from many stakeholders in the EV ecosystem, right from material sourcing to setting up significant manufacturing capacity for batteries,” Jayanthan wrote, but “the industry is now looking at a case of oversupply, underutilization of the capacity and lower return on investments.”
The oversupply situation is “most apparent in battery-cell manufacturing,” the BloombergNEF 2024 Electric Vehicle Outlook notes. “Planned lithium-ion cell manufacturing capacity by the end of 2025 is over five times the 1.5TWh global battery demand expected that year.”
Against this backdrop, Bloomberg’s Sekine notes that tracked prices for lithium iron phosphate batteries in China plunged from around $95 to $53 per kilowatt hour in the first few months of 2024, a trend she calls "alarming."
“Margins are really squeezing,” Sekine said. “And again, that comes back to the factor of overcapacity. A lot of companies are just trying to ramp up their production in order to run their factories at some rate so as to recoup the costs they've invested into those facilities.”
Canadian context unclear
The Canadian industry is insulated against some global pressures, Sekine says, because “the overall sentiment around building localized and secure supply chains has been pretty consistent,” and because of government tariffs and incentives. Without those, she says, the plunging prices in China are “a threat for local manufacturers because achieving those costs, you just don't have the same dynamics in North America and within Europe.”
But there are signs of a bumpy road ahead. Although Northvolt has said its Quebec facility will proceed as planned, S&P’s Jayanthan notes reports suggesting it could be delayed. Sekine suspects the Canadian project may take a back seat, with the company “taking that step back and assessing what actually makes sense in order to focus the next couple of years — and probably that's just delivery on the ramp-up of some of the European plans that they have.”
Last week, Umicore delayed plans for a $2.8 billion battery materials plant in Ontario that had been scheduled to open by 2026.
Sekine says Powerco’s St. Thomas, Ont., plant is surely also the subject of internal conversations as VW executives watch the market. VW recently signalled it would delay a decision on a fourth European battery factory, Jayanthan writes.
“I think companies tend to be very rational especially when they have pretty global operations,” Sekine said. “When things kind of slow down a little bit, they're not going to just jump in without some additional considerations around timing. That's generally what's happening right now.”
The current slowdown has not affected BloombergNEF’s overall outlook for EVs, which remains upbeat. “Improving economics of electric vehicles underpin the continued long-term growth in EV adoption,” their 2024 outlook notes. And although overcapacity issues are causing turmoil in the battery supply chain, Sekine notes that it's a good thing for the demand side, where discounted prices could ultimately translate to cheaper EVs.
Present-day headwinds for the battery industry are unlikely to change the overall trajectory of the industry, the report says.
"There is already fierce competition among governments to ensure the development of local supply chains. EVs and batteries will remain a central part of many countries’ industrial policy over the coming decades."
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jmacf.
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