ACJC H2 ECONS P1 Case Study Q1 Answers

1    ©ACJC2018_H2Prelims_EC9757/01_suggested answers      Answer all questions. Question 1: The Rise of Electric Vehicles Figure 1: Global price of lithium-ion battery (US$/kilowatt hour) Source: Bloomberg New Energy Finance, accessed 5 July 2018 Figure 2: 2018 Lithium-ion battery global market share (%) Source: Statista, accessed 5 July 2018 Extract 1: Technology is fuelling the use of cobalt Cobalt is a hard, shiny and greyish metal which has many strategic and irreplaceable industrial uses as a result of its unique properties. Currently used in numerous industrial chemical processes, close to half of the world’s cobalt supplied today is used in lithium-ion batteries, putting it at the heart of the drive for alternative and renewable energy systems. There has not been a good substitute to make lithium-ion batteries without the mineral. In 2017, lithium-ion batteries used in portable consumer electronics took up around 72% of total cobalt used in lithium-ion batteries. Each new electric vehicle, which runs on lithium-ion battery, uses about 10 kg of cobalt. Panasonic Sanyo BYD LG Chem Samsung Wanxiang GS Yuasa Lishen 1000 800 600 400 200 0 2010 2011 2012 2013 2014 2015 2016  33  18 17  9   5   3   3

2    ©ACJC2018_H2Prelims_EC9757/01_suggested answers      In recent years, electric cars have knocked diesel off its perch as the fuel with the smallest carbon footprint. Diesel also releases greater quantities of nasty gases other than carbon, such as nitrogen oxides, than petrol does. Many cities in Europe and the rest of the world want to eliminate diesel cars from their roads as early as 2025. Governments hope that the void left by diesel will be filled by zero-emission battery-powered models. But mass adoption of such vehicles, which for now are expensive and have limited ranges, still appears a way off. Sources: https://www.dartoncommodities.co.uk/ (accessed on 21 July 2018) and The Economist, 13 February 2018 Extract 2: Charging ahead, China’s dirty race for clean vehicles After a decade of halting progress, electric cars are zooming ahead in China. Last year the number of registrations of new electric vehicles (EVs) in the country overtook that in America, making it the world’s biggest and fastest growing market. The category includes electric-only cars as well as plug-in hybrids that can also run on petrol. Analysts expect the market to grow by nearly 50% a year for the rest of this decade. The government has had a big role in the marked expansion of EVs in China. It doles out generous subsidies to local makers, to parts suppliers and to those who buy the final products. Last year alone, China shovelled over 90 billion yuan in subsidies into the industry, which it calls “strategic”. This has led to queues of EVs on the streets, mostly of poor design and quality. China has yet to produce an EV manufacturer that can compete at the level of America’s Tesla Motors. The Chinese government is also encouraging other Chinese firms, including the country’s tech giants, to innovate in the field. Tencent, a gaming and social media firm, is developing internet-connected EVs with Taiwan’s Foxconn. Alibaba, an e-commerce firm, is providing data and cloud-computing services to Kandi Technologies, a local EV-maker that is popularising the sharing of the vehicles. Source: The Economist, 28 July 2016 Extract 3: German cars have the most to lose from a changing auto industry Carmaking is Germany’s biggest industrial sector but cars are changing. Electric power and autonomous vehicles will alter radically the way they are used. The difficulty in adapting threatens not only future revenues and profits at the big three—Daimler, BMW and Volkswagen –but also Germany’s status as a mean economic machine. However, the German carmakers have ambitious plans to catch up. The German automobile industry is woefully behind in designing and selling electric vehicles (EVs), which consumers are increasingly taking to. It is not the Germans, supposedly the leading innovators in cars, but Renault-Nissan-Mitsubishi, a mass-market rival, that makes the world’s bestselling EV, the Nissan Leaf, the sales of which have reached some 300,000 since the car’s launch in 2010. Chinese carmakers are streets ahead. “Made in Germany” has become a guarantee of engineering prowess that has helped to promote the country’s exports of industrial equipment and a myriad of niche products. Around

3    ©ACJC2018_H2Prelims_EC9757/01_suggested answers      four-fifths of all cars made in Germany, worth €256bn (US$283bn) in 2016, are exported. A workforce of around 800,000 is employed directly or by suppliers. In theory, German carmakers have the skills and cash to respond quickly, by building high-quality hybrid, plug-in or all-electric cars. Volkswagen says up to 25% of its cars sold in 2025 will be electrified. But they will not come cheap. EVs are pricier to make than those petrol-powered. Source: The Economist, 1 March 2018 Extract 4: After electric cars, what more will it take for batteries to change the face of energy? The demand for vehicle batteries is expected to ov ertake that from consumer electronics as early as in 2018. Huge expansion is under way. The top manufacturers of lithium-ion batteries—Japan’s Panasonic, South Korea’s LG Chem and Samsung SDI, are ramping up capital expenditure with a view to almost tr ipling capacity by 2020. Tesla is building with Panasonic in Nevada a new gigfactory that will vastly increase its production capacity in 2018. There have also been large amounts of R&D inve stment to improve power density (more storage per kilogram) and better durability (more discharge-then-recharge cycles) of the batteries. The expansions have resulted in significant overcapacity. In 2016, the manufacturing capacity for lithium-ion batteries exceeded demand by about a third. The battery manufacturers were reported to either losing money or making onl y wafer-thin profits on every electric-vehicle battery they produce. Despite the seeming glut, though, they all have plans to expand, in part to drive prices even lower. Source: The Economist, 12 August 2017 Suggested Answers (a) Using examples from extract 1, distinguish between complements in demand and derived demand. [2] Question requirements:  Identify examples from Extract 1 that shows complement in demand and derived demand.  Explain the difference between complement in demand and derived demand.  Lithium-ion batteries and electric vehicles are complements in demand as lithium-ion battery is needed to run (used in conjunction/together) the electric vehicles  On the other hand, the demand for cobalt is derived from the demand for lithium-ion battery as cobalt is needed to manufacture (used as an input to produce) lithium-ion battery. Mark scheme:  1 mark for explaining that lithium-ion battery and electric vehicle are complements in demand.  1 mark for explaining that demand for cobalt is derived from the demand of lithium-ion battery.

4    ©ACJC2018_H2Prelims_EC9757/01_suggested answers      (b) Explain a factor that could be responsible for the trend in the global price of lithium- ion battery shown in Figure 1. [2] Question requirements:  Identify a factor from extract 1 that has resulted in the increase in global price of cobalt.  Explain that the increase in price is caused by an increase in demand and the magnitude of increase is influenced by the price elasticity of supply.  The increase in price of cobalt is due to an increase in demand as there has been an increase in the use