Project Blue’s Critical Materials Basket Price Index tracks prices for 30 different critical materials as well as looking at baskets of critical material prices for key energy transition sectors. All critical material price indices hit recent highs at the beginning of 2023 before falling back largely due to a stifled demand outlook for key end-use sectors. Chinese demand, in particular, was difficult to track and forecast through the first part of 2023 with uncertainty over how the economy would emerge from COVID-lockdowns, while tackling the considerable issues facing its property and construction sectors. This uncertainty, along with anti-inflationary monetary policy in western markets, resulted in weak sentiment across most key demand sectors.
In H2 2023, critical materials prices have stabilised and remained relatively flat over the last quarter. At the macro level, the growth outlook has begun to improve. Q3 GDP growth of 4.9% in the USA was higher than anticipated, while the IMF recently upgraded China’s 2023 GDP growth expectations from 5.0% to 5.4%. To understand the potential impact of changing sentiment on the overall demand outlook we need to look more closely at the key energy transition sectors that underpin the supply chains for critical materials.
EV & battery demand
Car and light truck EV sales reached a new monthly peak of just over 2M in September, with y-o-y growth of 27.8%. While January sales were impacted by the end of some key local EV subsidies and the lunar new year in China, the last eight months’ sales show a return to growth. In September 2023, battery and plug-in hybrid EV sales were up by around 26% year-on-year. There was also significant growth in hybrid (36%) and mild hybrid sales (26%).
Despite recent macroeconomic headwinds impacting on discretionary spend across all major markets, the shift towards EV demand within the automotive sector continues to drive short-term demand.
China sales of EVs accounted for 65% of global sales in September 2023. European sales accounted for 20% and the USA 10%. EV penetration rates for battery and plug-in hybrid sales plateaued at 32% in China in September 2023. European penetration fell back to 20% in September, while the USA continued to achieve double figures percentage growth for the second month running (10%).
While EV penetration rates will inevitably continue to grow in all markets, the last 12 months have seen sustained increases in the US market, partially arising from renewed and newly introduced incentives relating to the Inflation Reduction Act.
European EV penetration rates fell significantly in early 2023, as previous incentives ended across major markets such as Germany. A similar trend can be observed in China, but a series of local price cuts and regional subsidies have seen EV penetration rates return to +30%.
Steel and alloys demand
Year-to-date world crude steel production reported by the World Steel Association was 1,408.9Mt as of September 2023, a 0.3% y-o-y increase for the same period. China’s production posted a 1.9% increase (with September output tracking a modest downward m-o-m trend) while ROW output was down 1.8%.
Production in China dropped to 82Mt in September, though remaining above 2021 levels, while dropping below 2022 levels. Globally, monthly steel production has been sliding steadily since March in line with China’s output. China’s steel exports reached 66.8Mt during the Jan-Sep period, benefiting from a weak Chinese currency.
India’s steel output continues to extend its y-o-y growth in line with a strong domestic market and a relatively insulated economy, with year-to-date output up 11.6% as of September.
Project Blue believes that China’s steel production has plateaued and will gradually decline over the remainder of the 2020s, reflecting a less steel-intensive maturing economy combined with carbon emissions limitation.
Outside of China, output growth will primarily come from large emerging economies, India, Brazil, Iran and Southeast Asia. India was the only significant steel-producing country that saw strong growth in output in 2022 and in 2023 so far. Growth in India is expected to continue and outweigh the modest decline in China.
New China solar power capacity installations increased by 52% in 2022. New China wind installations fell by 34% in 2022, continuing the decline from a 2020 peak of investment, following a significant impact on installations from Covid-lockdowns. In Q2 2023, new Chinese solar and wind installations were 2.5x higher than the same period in 2022, continuing the recent growth trajectory and taking into account a contracted H1 2022 as a result of COVID-enforced lockdowns.
New solar grid installations in the US were up 14% in 2022. In Q3 2023, new solar installations increased by 148% y-o-y, marking a record quarter for new installations. Measures and incentives set out in the Inflation Reduction Act are beginning to bite, along with a pick-up in solar panel imports following earlier US restrictions on imports from China’s Xinjiang province over concerns around forced labour.
New wind installations in the US were down 43% in 2022 as tax incentives fell away materially impacting investment in new projects. In Q3 2023, new wind installations increased by 17% quarter-on-quarter following on from a strong H1 2023 for new installations. 2023 numbers are boosted by measures and incentives set out in the Inflation Reduction Act and targets set by the Biden administration to install a total of 30GW of new offshore wind capacity by 2030.
New solar installations in Europe were also up strongly in 2022 with annual additions up by 50%. In H1 2023, Europe built up an inventory of 40 GW of Chinese-imported PV modules, following continued increases in imports throughout the six-month period. New investment returned to the European offshore wind industry in 2023 with more than 2GW of new capacity added in H1.
Total orders for September were 247, and 2,864 for the 12 months ended September 2023. This represents a 52% increase in orders as compared to the year-to-date value in September 2022.
Boeing orders reached a quarterly high in September 2023, totalling 224 aircraft orders. Vietnam Airlines ordered 50 Boeing 737Max, while Ryanair placed an order for at least 150 Boeing 737Max 10 aircrafts (anticipated for delivery between 2027 and 2033).
Continued recovery in air-travel demand has resulted in mounting pressure on supply chains, while raw material costs also remain a concern for aircraft deliveries. Additionally, the Russia-Ukraine conflict is also impacting the supply chain, as Russia and Ukraine represent significant titanium producers. Current trends suggest the continuation of substantial lag times, with delays of six months to two years to fulfil orders.
Demand outlook for 2024
Global GDP growth is currently forecast by the IMF to slip back to 2.9% in 2024 from 3.0% in 2023. China GDP growth is forecast to fall back to 4.6% in 2024 from 5.4% in 2023. However, demand sentiment, particularly in key energy transition sectors such as electric vehicles and renewables, has begun to stabilise and recover in late 2023. Recent lower critical material prices have played their part in providing a renewed stimulus in battery, solar panel and permanent magnet production.
Even in times of geopolitical and economic uncertainty, the wave of activity driving energy transition continues. While automotive and overall energy generation remain flat at best, the electric vehicle and renewables sectors continue to grow market share – securing a sustained future demand for key critical materials and offering new impetus for rising prices into 2024.