What's driving the automotive sector forward now and how will this affect you? We look at key sector trends from Q3 2022.
You’ll also hear about how environmental headwinds are creating both opportunity and risk – from developments in electric vehicle battery recycling to five factors affecting residual values of battery electric vehicles, creating a headache for those who underwrite them.
Estimates from the International Energy Agency (IEA) say there is global capacity to recycle 180,000 metric tonnes of EV batteries – that is, 360,000 EV batteries – annually. This capacity is expected to rise as electric vehicles gain in popularity and early models come to the end of their life span. The IEA also forecasts that EVs purchased in 2019 alone will generate 500,000 tonnes (one million EVs) of battery waste over their lifetime. And by 2040 there could be 1,300-gigawatt hours’ worth (6.5 million metric tonnes/13 million EVs) of spent batteries that need to be recycled each year.
With constraints on raw materials and pressure on suppliers to meet original equipment manufacturers' (OEM) decarbonisation targets, consideration of access to green or renewable energy, low carbon approaches to raw material extraction, refinement and processing, and options for recycling end-of-life batteries will all play an important role to reduce environmental impact, and potentially the costs of production for batteries and EVs.
Let's start by looking at the two methods of recycling that are typically considered for EV batteries.
At the end of an EV’s useful life, the battery often still has a 60% to 70% usable charge. These batteries can be rehomed as energy storage solutions, usually in tandem with renewable energy sources. This method has proven popular with OEMs looking to provide a post-car use case for their EV batteries:
EV batteries are perhaps not ideally designed for static storage as they must maximise the amount of energy in the smallest package, but most commercial uses don't require such lightweight set-ups. Extracting the precious metals, such as cobalt and lithium, for reuse could therefore be more efficient. These materials can be removed through processes such as pyrometallurgy (heat-based extraction) and hydrometallurgy (water-based extraction).
Bloomberg New Energy Finance estimates that by 2030 more than 200,000 metric tonnes of lithium-ion batteries will have to be recycled in the EU, with expectations that this will double by 2035. These batteries will provide a crucial supply of precious metals with a clear origin. The European Commission is also likely to introduce new regulation for the battery industry which places further value on recycling and traceability throughout the value chain.
There is already work underway in Europe to develop battery recycling capabilities:
In the UK, the government is taking steps towards a more ‘circular economy’ – keeping resources in use, minimising waste and promoting resource efficiency – and recognises the need for established infrastructure to help manage lithium-ion batteries when they are removed from EVs.
There are currently multiple EV battery recycling facilities under development:
As more EVs reach their end-of-life stage each year, there will be an ever-growing demand for recycling capabilities and opportunities to fulfil it. Both second life and material recycling will play a crucial role in helping ease the reliance on precious metal extraction and provide supply chain security to companies using this new resource.
It should also be noted that as battery technologies continue to develop and the mix of raw materials changes, recyclers will have to adapt their processes to reflect these changes.
For more insight and guidance with developing business plans and financial models, get in touch with Owen Edwards.
Consumer confidence has weakened and is set to continue to deteriorate further in the coming months. The chart shows the GfK consumer confidence barometer has fallen to an all-time low of -49 in September 2022, exceeding its previous low of July 2008 during the global financial crisis.
Consumer confidence has been undermined by multiple factors, from pandemic and Brexit impacts to a growing pessimism towards the UK's economic outlook. Inflationary pressures have also intensified, with annualised consumer price inflation reaching 9.1% in May 2022 (see chart).
As the rate of inflation increases, the cost of goods and services rises, the purchasing power of money declines, and our disposable income doesn't go as far. We therefore feel poorer in a higher inflationary environment than in a lower inflationary environment.
Source: United Kingdom inflation rate – June 2022 data – 1989-2021 Historical – June Forecast (Trading Economics)
The Bank of England (BoE) has indicated that inflation could rise as high as 13% in the coming quarters. If this is the case, the average UK consumer will feel poorer in the future – unless wages increase at a faster rate, which looks unlikely to happen. According to the ONS, average weekly earnings in Great Britain (excluding bonuses) only reached 4.3% for the period of March to May 2022, and pay actually fell by 2.8% in real terms.
As higher inflation outstrips wage growth, the average consumer will have less money to spend and will feel less confident in spending the money they have.
Interest rates have risen, with seven consecutive increases between December 2021 and September 2022, bringing the BoE’s key rate to 2.25%. They remain at low levels historically, however, compared with their level of 5.75% in July 2007. The BoE is looking to control inflation and ultimately to return it towards its 2% target. Further increases in interest rates are widely expected as a result, with recent comments from the BoE and other sources suggesting that rates could exceed 4% by the end of the year.
Higher interest rates mean that consumers will feel less optimistic about the amount of money they have to spend. Borrowing costs – including mortgages and credit cards – will rise, and the future cost of automotive finance is also set to increase if the cost of borrowing is linked to the BoE base rate.
With inflation on the rise and UK economic growth slowing, we're facing what is known as a stagflationary environment. The first chart on this page shows BoE forecasts for contracting economic growth for five consecutive quarters, before the UK enters a period of stagnant-to-weak growth in the medium term to 2025.
At the start of the pandemic we focused on the steps that businesses could take in deteriorating economic conditions. Our thoughts remain the same. We still advocate taking a 'focus and grip' strategy:
With tough times ahead, re-examining the basic controls of your business makes sense now. These may have slipped in the changing environment as we've all been focusing on finding new and used vehicles, and enjoying high-profit margins. Vehicle shortages will remain for some time but rising overheads in automotive retail companies are also here to stay.
For further insight and guidance, get in touch with Owen Edwards.
Adoption of battery electric vehicles (BEVs) is expected to accelerate rapidly over the next decade, driven by government policy, tax incentives, UK and Euro emissions regulation and an increasingly environmentally-conscious customer base.
But key differences in the technology and consumer behaviour towards BEVs, together with limited historical data, present a significant potential risk to those underwriting the forecast residual value (RV) of such vehicles as part of contract hire, leasing and personal contract plan (PCP) agreements.
Here we outline five potential issues around forecasting residual values for BEVs.
1 Limited historical data
Market leaders have a well-established process for estimating residual values for three and four-year-old internal combustion engine (ICE) vehicles. This is backed by extensive historical data on model life cycles, influences of macro-economic drivers and actual versus forecast performance of existing methods. BEVs, however, form a limited proportion of new vehicle sales and there's little historical data available. RVs have thus been volatile given the low volume and evolving technology.
2 Limited comparable ICE / BEVs
Few models have like-for-like internal combustion engine (ICE) and BEV options, making direct comparisons challenging. Models that do have ICE and BEV options often have very different performance, power and price points. The new cost price of BEVs versus ICE vehicles on a comparable basis (power trim, etc) are still significantly higher.
3 Rapidly evolving technology
Battery technology is evolving at a rapid pace, with production efficiencies and improved technology leading to lower battery costs per kWh. On average, this has reduced at double-digit rates year on year since BEVs were launched, albeit this is now slowing. Such declines in battery costs have led to reduction in the new sales prices, as well as an increase in the range of BEVs.
4 Running costs
Running cost of BEVs, including electricity, vehicle excise duty and servicing, are lower for BEVs overall even in the higher electric price environment we currently find ourselves in. The total cost of BEV ownership can be better than that of an ICE over its life span.
5 Current market
The UK market for new BEVs is now being incentivised through benefit-in-kind tax benefits, thus this is creating greater than natural demand based on the list price of BEVs without these tax benefits. Such skewed demand in the market for benefit-in-kind vehicles could affect the volume, timing and types of used vehicles entering the used car market, which could have an onward impact the residual values of BEVs.
For some time to come, companies that underwrite residual values for BEVs will be exposed to this volatility risk. However, over time as more new BEVs are sold, values are likely to become less volatile. If you're exposed to RV risk from BEVs, get in touch as we have recently released a white paper on this subject.
To receive a copy or find out more, contact Owen Edwards.
