China clean energy: electric cars still need coal

Global demand for clean energy vehicles should intensify the world’s reliance on Chinese suppliers. Clean tech’s latest growth spurt will cost over $10bn — for which Chinese electric vehicle battery and material companies have turned to local investors. Yet some may have ignored the long term, underlying risks these groups carry.

Contemporary Amperex Technology (CATL), the world’s largest battery maker, kicked off its Rmb45bn ($7bn) private placement last week to expand its production of lithium-ion batteries. At the same time, Tianqi Lithium, one of the world’s top producers of battery materials, will raise as much as $2bn in a secondary listing in Hong Kong. Local peer Huayou Cobalt will raise up to $2.6bn via a private share placement.

The market share of Chinese EV battery producers such as CATL has expanded. Sales have more than doubled in the first four months of this year, accounting for more than half of the world’s supply. Added capital would secure China’s dominance in global clean tech supply chains.

Chinese companies have an edge, low raw materials processing and battery production costs. Profitability is impressive, with Tianqi Lithium’s operating margins at 55 per cent last year, far above its US peer Albemarle. Shares of Tianqi Lithium have nearly doubled in the past year, as demand and prices for electric car batteries soared in the past year.

But many of their cost advantages depend upon cheap energy, mostly from coal. Coal-fuelled electricity accounted for more than half of China’s electricity last year. Electric cars thus rely heavily on this dirty source.

This poses risks. The EU and the US are considering implementing carbon border adjustment taxes. These put a price on imported carbon, forcing producers to pay for any carbon they emit from the point of manufacturing. That could hit Chinese coal-dependent manufacturers hard.

Demand for China’s EV battery and materials makers will not dry up soon. But investors must recognise that not all clean energy companies are carbon-free.