China’s 4% consumption tax on lead-acid batteries — to be introduced on January 1 next year — may not be enough to slow production to the point that it aligns with slowing demand.

Analysts have questioned the timing of the move. “This tax has been talked about for some time, so its announcement is not really a surprise — only in doubt was the timing,” says Neil Hawkes, lead analyst at CRU, a commodity research consultancy.

“A 4% tax on the manufacture of lead-acid batteries is the government’s way of reducing the excess lead-acid battery making capacity in the country.” It also reflects the government’s wish to shift away from lead-acid toward other battery chemistries. China’s finance ministry has exempted Ni-MH, lithium-ion, lithium primary batteries, and solar cells from the tax.

The move continues an environmental clampdown that began in mid-2011, which has caused the number of battery plants to shrink. However, those remaining have looked to expand to try and take more market share, says Hawkes.
“Unfortunately, if too many survivors expand, alongside a still significant number of smaller-scale informal operators that continue to evade detection, this has continued to result in too many batteries still being made.”
He says that cut-throat competition coupled with an attempt to reduce excess battery stocks along the supply chain has resulted in lower battery prices. Other factors putting Chinese lead-acid battery makers under pressure include lower local lead prices and weaker battery demand growth — partly due to a slower e-bike sector, but also because all lead-acid battery sectors are growing at slower rate in recent years.

Hawkes says: “The big question is whether 4% consumption tax will push more battery makers over the edge and make them close, and will they exit in sufficient numbers to align battery making more closely in line with (slower growth) domestic needs?

“One sign of excess battery capacity is the rising Chinese battery exports last year, as companies look to raise exports to offset weaker domestic sales. Once the tax is imposed, we could see export flows start to wane.”

In 2013, a report titled Opinions on Promoting the Regular Development of Lead-acid Battery and Secondary Lead Industries was jointly issued by five ministries (Ministry of Industry and Information, Ministry of Environmental Protection, Ministry of Commerce, National Development and Reform Commission and Ministry of Finance). It labelled the lead-acid battery and secondary lead industries as the major ones with “backward” production capacities to be eliminated, and stated that the outdated capacities that had not passed environmental scrutiny and do not comply with access conditions must be eliminated by the end of 2015.

Nevertheless the overall outlook — all battery chemistries combined — for China’s battery market is positive. The sector is forecast to grow at a rate of over 8% in the next three years according to analysis last summer by SinoMarketInsight, a Beijing headquartered research consultancy.

SinoMarketInsight says growth will be driven by the demand from emerging downstream sectors like electric vehicle and energy storage equipment.

The most used chemical batteries in China are lead acid, lithium, NiMH and nickel-cadmium batteries. SinoMarketInsight says lead-acid and lithium ion batteries have a stable downstream demand and huge market size, However the prospect for enlargement of the nickel battery segment is poor due to issues such as their performance, environmental issues, and price.

China’s lead-acid battery output rose to 205 million KVAh in 2013, up 15.4% from a year earlier.