Some Chinese-funded automotive and new energy stocks surged today, with Geely (00175.HK) jumping 8.5% to HKD 17.44, and CATL (03750.HK) rising 7.5% to HKD 591. UBS Group issued a report stating that the current conflict involving the U.S., Israel, and Iran bears a striking resemblance to the situation in early 2022 when the Russia-Ukraine war caused oil and lithium prices to soar. Rising international oil prices and commodities are simultaneously driving up the operating costs of internal combustion engine vehicles (ICE) and the manufacturing costs of electric vehicles (EV). According to the bank's latest spot price estimates, compared to autumn 2025, the cost of producing a battery electric vehicle (BEV), extended-range electric vehicle (EREV), plug-in hybrid electric vehicle (PHEV), and ICE will increase by approximately RMB 7,000, RMB 6,000, RMB 5,000, and RMB 3,000 respectively. If oil prices remain at current levels, annual operating costs for ICE vehicles could rise by about RMB 2,000. This slightly improves the economic advantage of EVs over ICE vehicles, partially offsetting pressures from the phasing out of stimulus policies and the introduction of new purchase taxes starting in 2026.
The bank noted that looking back at early 2022, oil prices soared from USD 80 per barrel to USD 130, and China's retail price for grade 95 gasoline rose from RMB 7.3 per liter to RMB 9. Currently, oil prices have surged from around USD 60 per barrel in February to a peak of USD 120 per barrel in March, before retreating to USD 90 per barrel. If oil prices remain at this level, China’s retail gasoline price may rise again from RMB 7.5 per liter to about RMB 9, implying an additional annual expenditure of approximately RMB 2,000 for households using ICE vehicles. Given that the production cost of BEVs is about RMB 4,000 higher than that of comparable ICE vehicles, this equates to two years of extra operating costs for ICE vehicles.
UBS Group stated that compared to four years ago, there are several differences in the current situation: the rise in metal prices has been milder than during the 2022 cycle; the competitiveness of EV products has significantly improved; increased overseas sales have helped mitigate commodity cost pressures.
More importantly, from a total cost of ownership (TCO) perspective, the efficiency of the EV industry has greatly improved: lithium iron phosphate (LFP) battery prices have dropped to below RMB 500 per kilowatt-hour, about half of what they were at the beginning of 2022, while charging speeds have doubled. Additionally, the number of public charging stations in China has exceeded 300,000, roughly three times the number of gas stations, significantly improving convenience.
UBS Group pointed out that China’s EV stocks have underperformed the Hang Seng Index by about 10% year-to-date. The bank believes weak demand in the first quarter is already priced into the shares, and some of the profit pressure from rising commodity prices has been digested by investors. Current oil price volatility makes EVs more attractive from a TCO perspective. If inflation expectations regarding the transmission of commodity costs to vehicle prices take hold, demand may recover faster than investors anticipate, warranting renewed attention. The bank considers BYD (01211.HK), CATL (03750.HK), and Li Auto (02015.HK) — all rated “Buy” — to offer favorable risk-return characteristics. (wl/u)
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