Dragoman Digest
14 June 2024
Japan-ASEAN seeks to counter China’s growing EV foothold
Plans for a 10-year auto strategy are in the works to challenge China’s cost competitive advantage in the EV market
In response to the increasing proliferation of Chinese electric vehicles (EVs) in Southeast Asia, Japan and ASEAN are reportedly planning to craft a joint strategy on automobile production through 2035. The strategy is expected to cover decarbonisation in production, mineral resource procurement, research into EV battery recycling, personnel training and investment into next-generation fields, such as biofuels. A global information campaign boasting the environmental friendliness of vehicles produced in ASEAN will be a secondary element. However, the strategy will not focus exclusively on EVs.
Japanese automakers have long had major factories in ASEAN and retain a significant market share across the bloc. Together, Toyota, Honda and other Japanese automakers assemble more than three million vehicles in ASEAN, accounting for 80 percent of total production. Though starting from a low base, total EV sales in Southeast Asia experienced the highest global year-on-year growth, at 894 percent. Consumer demand is particularly strong in Thailand, Vietnam, Indonesia and Malaysia. By 2025, at least 20 percent of all vehicles in the region are expected to be electric.
However, Japanese companies comparatively slow transition to EVs has led to a rapidly growing presence of Chinese competitors in the region. From 2021 to 2023, Chinese EV makers increased their market share in Southeast Asia from 47 percent to 74 percent. Last year, Chinese EV brands ranked either first or second in major Southeast Asian countries, with a 75 percent market share in Thailand, 44 percent in Malaysia, 42 percent in Indonesia and 34 percent in Singapore. This is largely owing to China's lower costs which are between 1.5 to 5 times cheaper than foreign competitors. The strategy taps into the desires of Japan and ASEAN member countries to develop their auto manufacturing ecosystem and decarbonise their economies towards net-zero. Nevertheless, it is unclear whether the initiative will alter the trajectory of the EV market for Japanese automakers in a regional market where cost competitiveness rather than environmental friendliness drives sales. Exports beyond ASEAN may hold greater promise. A fly in the ointment is that Japanese car producers are highly dependent on Chinese batteries for their EVs. If they capture larger market share, they will be highly dependent on Chinese battery supply.
US delays coal retirements in response to surging electricity demands
Concerns over the ability of renewables to meet forecasted demand spike prompts companies to delay retirement plans.
Surging electricity demand in the US is bringing into question the feasibility of coal retirement plants as they are currently scheduled. In April, the Environmental Protection Agency (EPA) finalised a rule which would mandate the closure of all coal fired plants without carbon capture systems by 2032. However, the US’ commitment to being a first mover in Artificial Intelligence (AI) has required an uptick in the data centres required to help train AI models. Data centres draw on vast electricity requirements to run and keep cool, with figures indicating that ChatGPT uses approximately 10 times as much electricity as Google Search. On current projections, by 2030, data centres could make up 9 percent of US power demand. The revival of US manufacturing is also adding to power demand. Electricity demand is now forecast to grow by 4.7 percent over the next 5 years, double the amount indicated by forecasts last year.
The projected surge in electricity demand has led companies including Alliant Energy and FirstEnergy to delay the retirement of coal from the grid. Alliant delayed plans to convert a Wisconsin coal fired plant to gas from 2025 to 2028, while FirstEnergy pushed plans to phase out 2 coal fired plants in West Virginia from 2030 to 2035 and 2040. On current trends, 54 gigawatts of the US’ coal fleet is scheduled to be retired by 2030, a figure which is a 40 percent decrease from last year’s projections. States as well as companies are pushing back at the EPA’s targets, as 25 states filed lawsuits against the EPA’s 2032 ruling. Whilst evidently a setback for Biden’s climate agenda, the delayed retirement of coal does not necessarily mean that coal fired plants will be used as much as previous years – only that they will remain in the grid as back-up capacity. The US example fits a global pattern of ambitious climate transition targets being set by governments but not being deliverable in practice.
Russia struggles to secure pipeline deal with China
China offers to buy limited Siberia 2 pipeline supply at heavily subsidised price
Putin’s latest visit to China in May garnered no discernible progress on negotiations for the Power of Siberia 2 pipeline. The Power of Siberia 2 would run from Russia’s West through Mongolia to China. Closing this deal would have marked a much-needed turnaround for Gazprom, after the company experienced its worst results in a quarter century last year, brooking US$6.9 billion in losses from cancelled European contracts. In 2023, Gazprom’s exports fell from an average of 230 billion cubic meters (bcm) of natural gas to 22 bcm. Negotiations for Siberia 2 began in October of 2021 but have since become essential to Russian attempts to redirect Western gas supplies which are otherwise almost entirely oriented towards Europe. Initial timelines indicated that construction could have begun as early as this year.
Power of Siberia 2 Pipeline project
Source: Petroleum Economist; Gazprom; FT research
China’s hesitation to finalise the Siberia 2 deal with Russia is evidently a reflection of the negotiation’s lopsided power dynamics. China has reportedly offered to buy only a small portion of Siberia 2’s planned annual capacity of 50 bcm at a heavily subsidised cost that is close to Russia’s domestic prices. China’s negotiating advantages are accentuated by the fact that most of its projected additional gas demand to 2030 will be met by existing contracts.
Siberia 2 is not entirely without possible benefit for China. Russian gas is geopolitically attractive in the sense that Russia is now a quasi-ally and because the supply route will avoid maritime routes which China may not be able to control in the event of a conflict. Gazprom Chief Executive Alexei Miller’s decision to travel to Iran instead of China in May suggests that a deal is far from imminent. Whilst China’s willingness to run the gauntlet of Western sanctions in supporting Russia is clear, it will only do so at commercially attractive terms.
Chile challenges China’s lithium gains
Chinese mining company voices concerns over return on billion-dollar investment into local Chilean lithium company
In its latest effort to gain greater state control of its significant lithium assets, the Chilean government has announced it will establish a joint venture with local mining giant SQM. The deal gives state-owned Codelco a 51 percent stake in the joint venture, providing the Chilean government access to the majority of the new entity’s profits and making SQM a minority shareholder. The joint venture will ramp up production at the Atacama deposit from 200,000 tons of lithium carbonate equivalent per year, to 300,000 tons. Between 2025 and 2030, the Chilean state will reportedly receive 70 percent of the venture’s operating margin from the new production, rising to 85 percent thereafter. The move has caused significant concern among SQM’s second largest shareholder and the world’s second largest hard-rock lithium producer, Chinese mining company Tianqi Lithium. Tianqi fears that the return on its US$4.1 billion investment in SQM is now at risk. Concerns over the deal were raised multiple times by Tianqi, including to Chile’s securities regulator and have led to speculation around potential legal action to block the partnership.
Chile holds the world’s largest lithium reserves and is the second-largest global producer, a position its President, Gabriel Boric seeks to capitalise on amid an anticipated five-fold increase in demand for the metal which is essential in electric vehicle batteries. Beijing lists lithium among its 24 strategic minerals and regards it as critical to national and economic security, and a key enabler of the development of strategic emerging industries. While China holds 65 percent of global lithium refining capacity, 55 percent of its supply is imported. To secure this supply, Chinese companies have made significant investments in overseas lithium assets.
Boric’s initiative reflects a broader trend of countries – particularly in the developing world – seeking to assert greater national control over key resources, and to incentivise greater domestic downstream processing amid intensifying competition for materials crucial to the green energy transition. Indonesia, for example, has tightened controls over nickel, tin and bauxite, in an effort to force more local value add. Mexico is seeking to nationalise and exert greater control over its lithium reserves, while Zimbabwe has banned the export of unprocessed lithium. These actions coincide with measures by Western countries to encourage their own domestic processing of critical minerals to support clean energy technologies and reduce supply chain exposure to China. Policies like the US’ Inflation Reduction Act, have sought to achieve this by tightening foreign acquisition laws of strategic mineral assets, implementing tax credits and other financial incentives. While this latest development may undermine the value of direct and indirect interests that Chinese companies like Tianqi have amassed in Chile and beyond, China’s position at the apex of the lithium supply chain is expected hold for some time.