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Chinese EV manufacturers produced strong sales results in 2021. That success extended into the first quarter of 2022 as well, with major names in the sector producing double and triple-digit growth. However, climbing raw material costs have more recently forced EV makers to raise prices, potentially threatening those companies’ prospects going forward.

While there are few options to deal with skyrocketing lithium prices in the short-term, a renewal of stimulus measures and coming tax cuts in China could counter those EV price hikes. Additionally, high lithium prices will improve the already robust profitability of Chinese lithium carbonate equivalent (LCE) producers, generating more stability in EV input costs over the long-term.

Related Stocks: NIO Inc. (NIO), XPeng Inc. (XPEV), BYD Company Limited (BYDDY), Li Auto Inc. (LI)

Chinese EV Market Expands, Raw Materials Drive Price Hikes

Sales of electric passenger cars in China surpassed 3.3 million throughout 2022. Experts, cited by China Daily, said the country is expected to sell 4.5 million to 5 million electric vehicles (EVs) in 2022, which could see it overtake Japan for the third ranking. Additionally, Nikkei Assian Review reports China exported nearly 500,000 EVs in 2021 — more than any other country in the world. China accounts for almost 60% of global EV production.

A rapid acceleration of growth in the production and sale electric vehicles is nothing new for China. Per Wang Yunshi, director of the China Center for Energy and Transportation at the University of California-Davis, the penetration rate, or percentage of Chinese car users who have purchased an EV was 6.2% in 2020. By 2021, that rate had climbed to 15.5%.

Despite lofty projections for this year, Chinese EV stocks have gotten off to a rough start. Asia Financial’s China Electric Vehicles index has slumped about 26% this year, and the gauge of 14 leading China EV makers was down about 13% in March.

Part of that sell-off can be chalked up to broader volatility in Chinese equity markets following an overdone crackdown on the technology sector and other elements of the economy. China reversed that position in March after a particularly violent rout on the country’s stocks and threats of de-listing at US exchanges. As MRP highlighted last month, China has now pledged stimulus, tax cuts, and other measures to get the economy and financial markets back on track.

Another roadblock for EV stocks has been the recent rise of battery materials prices; specifically nickel and lithium.

China’s EV industry and Asian battery manufacturers have been largely insulated from the ongoing tumult in nickel markets, where the spot price for the metal has more than doubled over the last year, due to long-term contracts and a diversified supply chain. That could change, depending on how long nickel prices remain elevated, but EV and battery manufacturers’ focus is largely on lithium for now.

Bloomberg notes that the price of lithium carbonate in China has jumped about 472% from a low last June to a record high on March 15. While there are few solutions for this issue in the short-term, the ongoing surge in lithium prices will…

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