Galaxy view of LI and EV marketASX ANNOUNCEMENT / MEDIA RELEASE Galaxy Resources Limited ABN: 11 071 976 442 Level 4 / 21 Kintail Road Applecross WA 6153 T: +61 (8) 9215 1700 F: +61 (8) 9215 1799 www.gxy.com 7 INDUSTRY AND MARKET UPDATE The lithium sector in China has come under pressure from weaker overall macro sentiment, with the US and China governments failing to reach an agreement on the current trade dispute. This has continued to negatively impact overall sentiment in the China market. With a backdrop of a weaker than expected economic growth, tighter credit and financial liquidity overall across many industries, and with battery material and cell manufacturers having undertaken significant destocking and maintaining a low inventory stance, lithium pricing continued to be soft. Domestic lithium chemical prices in China fell marginally in Q2 2019, with current spot prices of c. RMB73,000 – RMB75,000 (c. US$10,500 – US$11,000) per tonne for battery grade lithium carbonate and c. RMB83,500 – RMB90,000 (c. US$12,500 – US$13,000) per tonne for battery grade lithium hydroxide. Prices in China have maintained a weakened position in light of the midand down-stream sectors of the lithium battery supply chain continuing to anticipate potential weakness in New Energy Vehicle (“NEV”) sales and holding off ramping up production, as the market transitions into the new subsidy environment. In addition, an earlier than expected announcement from the Chinese government to transition from the China 5 to China 6 emissions standard has resulted in a rushed destocking of inventory of traditional internal combustion engine (“ICE”) vehicles by OEMs and distributors. Such is occurring at heavily discounted prices, resulting in further competition to NEV sales in an overall weaker domestic auto sales environment. The continued weakness in chemical pricing in China has contributed to further downward pressure on spodumene pricing as converter margins are diminished. Combined with continued de-stocking and maintenance of abnormally low inventory levels further down the supply chain, and the general tightness in financial liquidity currently seen across many industries, such has led to existing and new converter facilities being slowed in their ramp up and completion. The China Association of Automobile Manufacturers (“CAAM”) reported total NEV production and sales of c.347,000 and c.352,000 vehicles respectively in Q2 2019, representing growth of 32% and 31% year-on-year (“YoY”). Total production and sales of battery electric vehicles (“BEV”) throughout this period was c.289,000 (+41% growth YoY) and c. 283,000 (+35% growth YoY), respectively. Total production and sales of plug-in hybrid vehicles (“PHEV”) for the period was c.58,000 (flat YoY) and c.69,000 (+17% growth YoY), respectively. Growth in NEV volumes showed signs of decelerating in May, due to a transition into the new NEV subsidy framework and emissions standard, which resulted in sharp discounting on ICE vehicles that will not meet the new mandatory emissions standards. Despite this, growth rebounded strongly in June, with production and sales growth in the BEV subcategory being 78% YoY and 107% YoY, respectively. China has announced the implementation of new vehicle emission standards in a number of provincial regions that include Beijing, Shanghai, Tianjin, Hebei, and Guangdong. Starting July 2019, sales and registrations of new vehicles, and all existing vehicles in these regions will have to comply with some of the world's strictest rules on automobile pollutants. The new rules demand substantially fewer pollutants such as nitrogen oxides and particulate matters and introduce limits on particulates and ammonia. Further, at the end of June, the Ministry of Finance and the State Tax Administration jointly announced an extension to the vehicle sales tax exemption on NEVs until the end of 2020. The exemption from the 10% vehicle sales tax is expected to mitigate a substantial portion of the subsidy reduction. Notwithstanding the perceived market softness in China, confidence exhibited from strategic corporates in the electric vehicle (“EV”) supply chain has remained strong as capital continued to be deployed within the sector. Notably, Evergrande, one of the China’s largest conglomerates, committed investment of RMB160 billion (US$23 billion) to build three manufacturing facilities for electric vehicles, batteries, and electric motors in Guangzhou, Guangdong province. Outside of Asia, Europe has emerged as the one of the highest global growth regions for EV demand this year. In the first five months of 2019, the region reported plug-in vehicle registrations increasing c.55% YoY to c.227,300 units. Plug-in vehicle deliveries reported in the US throughout Q2 2019 were c.87,450 units, representing a 27% growth YoY and culminating in total deliveries of c.148,700 units in H1 2019 (+20% growth YoY). European governments and corporates continue to support vehicle electrification through incentives, emissions regulation and substantial capital investment. During the quarter, Germany extended its incentive program for EVs for a further 18 months and Ireland, through a new Climate Action Plan published in June 2019, committed to banning the sale of new petrol and diesel vehicles by 2030. BMW recently announced that it will be accelerating its electrification plan by two years with the launch of 25 EV models by 2023 and that it anticipates a growth rate in their EV sales of 30% per year through to 2025. China’s leading battery manufacturer CATL announced that it will increase its investment in battery production and research & development in Europe to EUR1.8 billion, a substantial increase on their original plan of EUR240 million. CATL management have indicated that they reassessed their development plans on the back of positive demand trends in Europe. Volkswagen announced plans to install 36,000 electric car charge points across Europe by 2025 and a EUR900 million investment in Swedish battery manufacturer Northvolt. Northvolt will begin ASX ANNOUNCEMENT / MEDIA RELEASE Galaxy Resources Limited ABN: 11 071 976 442 Level 4 / 21 Kintail Road Applecross WA 6153 T: +61 (8) 9215 1700 F: +61 (8) 9215 1799 www.gxy.com 8 construction of a new battery cell manufacturing facility in Sweden with a planned capacity of 16GWh in August. As part of the Volkswagen investment, Northvolt will also look to construct a second 16GWh facility in Germany. In other parts of the world, India is also emerging as a market with significant growth potential, as it continues to execute on an electrified energy storage shift. Faster Adoption & Manufacturing of Electric Vehicles in India (“FAME India”) was an initiative adopted in 2015 to encourage EV adoption. Most recently, FAME India 2 was initiated and is scheduled to run for three years with a budget of c.US$1.5 billion. Government subsidies will be used to bring a targeted 7,000 electric buses, 500,000 electric tricycles, 55,000 electric cars and one million electric two-wheelers onto the road. It will also support the construction of charging stations in cities and along motorways.