The 2022 federal budget calls for up to $3.8B to implement Canada’s first critical minerals strategy needed for the electric vehicle (EV) battery supply chain. Anthony Okolie speaks with Thomas Feltmate, Senior Economist, TD Bank, about the impact to Canada’s auto industry.
Originally published on April 19, 2022
- Thomas, before we get to your outlook on Canada's auto sector and the EV market, what's your take on the latest federal budget, and was there anything notable in there for you.
- Yeah, so in the most recent federal budget there is about $60 billion of net new spending announced. Of that there was $12 billion of climate-related initiatives. And within that, a third of which is going to be dedicated to significantly ramping up the mining of some critical minerals-- so lithium, nickel, cobalt, mainly to name a few-- which are direct minerals that are used in the production of lithium ion batteries, which are the key battery source that are used in electric vehicles today.
- Now, in the same vein, there's been a number of joint ventures announced in Canada recently with regards to the manufacturing of batteries for the EV sector. How significant are these deals for Canada?
- Pretty significant. I mean, it shows that global investors are looking to Canada and realizing that we are the cornerstone, really, of cell manufacturing for North America in the years to come, given our skilled labor force and also abundance of natural resources. The other thing to keep in mind, too, is that once cell manufacturing becomes well-established, we're likely to see other component suppliers, manufacturers also come to Canada, mainly because they want to have close proximity to their customers. So it really speaks to this bright future of Canada in the years ahead for establishing that end-to-end supply chain of battery manufacturing.
- And we need to talk about, certainly, the impact the Ukraine-Russia conflict has had on the supply of critical minerals. Can you talk a little bit about that, particularly when it comes to things like nickel, lithium, palladium? What impact has this conflict had on global auto production?
- Right. So the thing that we're looking at most right now is the impact on neon gas. So Ukraine's actually a huge producer of global-- of the global production of neon gas, accounting for nearly 50% globally on an annual basis. 75% of that goes directly into the wafer fabrication process of semiconductors. So there is likely to be some meaningful impact on semiconductor production going forward.
Now, what's interesting is semiconductor producers have so far been pretty quick to downplay this risk, citing both well-diversified supply chains and also having some strategic reserves of neon gas, which could last anywhere from three months to a year. So they claim that they're pretty insulated at this point. But our view is that supply chains have become pretty frayed over the last year.
Obviously, we know semiconductor production is well behind where we expected it to be. There's a significant backlog of orders that has accumulated. And now we're layering this additional risk on top of that. So I think when we're talking about globally in auto production going forward, certainly this points to some downside risk. And we've marked down our forecast accordingly.
- OK, so I want to move closer to home. Let's talk a little bit about the Canadian automotive sector. I know that you recently put out a report where you revised your auto production and sales outlook lower. So what drove this decision?
- So the conflict in Russia and Ukraine has certainly played some role in the impact on semiconductor production and ultimately what that is going to mean for how that's going to filter into auto production going forward. And also just what we're seeing right now in China with some of the more recent lockdowns-- we've seen spike in COVID cases. And the government seems to be very adamant in pursuing this zero COVID policy. So, like I said, it's led to lockdowns in Hong Kong, Shenzhen, and most recently Shanghai. These are all significant manufacturing hubs, both from an electronics standpoint and machinery manufacturing. So there's certainly likely to be some reverberations that are felt through global supply chains.
So putting that together with the slower recovery expected on semiconductor production, we've revised lower our auto outlook in North America over the next couple of years. We brought down our outlook this year to 15 million units, which is still an improvement from what we've seen over the last couple of years, but certainly lower than what we were previously expecting. And then kind of a similar story in 2023, where we have-- provided some of these production issues can start to ease in the latter half of next year, we do have production getting back to a level that would be more akin with 2019 levels, so about 16.3 million. But certainly when we're looking at the balance of risks right now, things are definitely skewed to the downside.
- And, of course, they can't talk about autos without talking about oil. And the price of oil, as we know, has recently been trading as high as $100 US per barrel. Could higher gas prices encourage more Canadians to switch from gas to electric much sooner than expected?
- I think in normal times, yeah, that's probably a fair thesis. What we're seeing right now, obviously, with some of the implications from the slower recovery of semiconductor production is obviously that it's hit the EV sector disproportionately hard. EVs are heavily intensive on the semiconductor side of things. By all accounts, they have twice as many semiconductors as a comparable gasoline model. So the rollout of models has been much slower this year.
Anecdotally, we're hearing customers are being told that wait times are anywhere from six months to a year. So certainly that is a factor, I think, that would enter into consumers' decisions at least over the near term. We've talked about some of the other issues in the past, to higher entry-level prices and then range anxiety as well.
Speaking to the federal budget, we did see some pretty significant announcements on both fronts. So the federal government has topped up the existing rebate program with an additional $1.7 billion over the next five years. They've also expanded eligibility to include used vehicles, CRVs, SUVs.
And there's also some talk that they're going to be lifting the cap for which the rebates apply, and then significant investments on the infrastructure front, too, over the coming years. Over $900 million is going to be allocated by the end of 2026, which could increase the charging infrastructure by more than five-fold levels today. So definitely steps in the right direction. As some of these supply constraints start to ease, I think we're certainly going to see an acceleration and uptake of EVs in the years ahead.
- Where do you see the Canadian's auto sector heading over the next 12 months?
- So right now we're forecasting that sales will come in about 1.7 million units for this year. So if we do a comparison to last year, we're basically on par. And then, provided that some of these supply constraints can ease next year, we do look for sales to kind of pick up and get back to the level that would be about 1.9 million units, which we would consider to be more consistent with underlying trend. But, again, a lot of factors have to go right here. So we'll definitely be watching the market in the months to come.
- Thomas, thank you very much for joining us.