- Profit warnings and 2020 guidance updates during the past few months point to another weak year for lithium ahead – we compare it to Lycra as a possible proxy.
- Other Chemical Industry items of note: Clariant restructuring efforts; China rare earth consolidation; More hits to single-use plastic demand
- Is Lithium the next Lycra? Recent profit warnings and 2020 guidance updates [LINKS 1, 2 and 3] point to another disappointing year for Lithium ahead, with faster capacity additions and overestimating the value of quality (potentially) driving upsets relative to expectations and prior guidance. Lycra was an “untouchable” high quality elastic textile, heralded by DuPont throughout the 1990s as a product with such a wide technology moat that no-one could touch it (somewhat like the higher grades of lithium). DuPont’s error was not really understanding what the customer wanted and when cheaper “knock-offs” from Asia appeared, they were written off as too inferior to matter. But money usually talks, and it did for Lycra and is doing the same for Lithium. If the cheaper product is cheap enough, users will pay attention and will invest to find ways to make something acceptable using the cheaper product. In the case of Lycra, no-one really needed the durability that Lycra offered – clothes simply do not last that long in the average wardrobe. Here Lithium is indeed different; the leading edge will always pay for the best product – to get the best torque and the longest range in a high dollar car, or to get the highest power density where weight is critical – such as on aircraft. The unique supply/demand dynamics of the high-end market will dictate how much of a premium can be charged for the higher quality product versus the mass market, which is developing quickly. At the lower-end there are some markets where density matter less – such as grid battery backup storage and potentially in cheaper mass-produced cars where the overall cost is the primary factor rather than performance and aesthetics. Before the Tesla model S there was always a luxury car market with better engines requiring higher quality fuel, but this market is only 15% of the total in the US – 6 out of 7 cars sold in the US use regular gasoline – could we see an EV market where 6 out of 7 cars have compromised on battery quality because the vehicles do not need the quality and the associated cost? Independent of this thought, we do think EV adoption and sales will start to surprise to the upside as we move through this decade, especially if/when there is a break-through in autonomous tech., making it available to the masses either through direct ownership or “TaaS”. While Lithium might be long and prices weak today there is plenty of time for another up cycle in pricing sometime in the next 5 to 10 years, especially if current lower prices curtail investment. But short-term, Lithium has proven to be yet another commodity and even if prices show some recovery in the future [LINK], it is not likely Lithium producers, Albermarle, Livent and SQM, will be awarded the earnings multiple “benefit of the doubt” that they saw in the past. Albermarle equity has ~75% upside to reach its stock price peak of late 2017 – to get back there it may have to grow earnings per share by that amount.
Three other items of note:
- Clariant appears set further its restructuring efforts and put an auction in motion to divest its pigments unit, per the Reuters report in LINK. The divestment of this business would follow its recent masterbatch business sale to PolyOne for US$1.6bn and, per the report, and is estimated to fetch ~US$900m. Exiting these two businesses streamlines the Clariant business model to focus more on higher-growth specialty businesses. In our view, this type of restructuring, which we also found recently at Huntsman with its upstream intermediates sale to Indorama [LINK] among other notable examples, will remain quite common in 2020/21; and may lead to further larger consolidation moves – such as the original Clariant/Huntsman deal as companies reshape. We provide a LINK to a Clariant presentation to show how the pigments unit fits in its current portfolio.
- China controls the vast majority of global rare earth supplies, and we highlight an Argus report that comments to consolidation in these markets potentially cutting availability [LINK]. In our view, this could prove be most troublesome for catalyst producers under our global coverage, such as Johnson Matthey, W.R. Grace and Albemarle. This in mind, the impact would vary, and those with long-term dedicated contracts and market insight, such as at BASF – see the precious metal service in LINK – potentially could benefit from profit offsets if rare earth costs became a notable headwind. All of this in mind, we also highlight a report that advises buyers to not panic, comments to access to rare earths outside of China and notes a trend away from rare earths in some industries (the catalyst industry, in our view, is a prime example as it has moved away from rare earths in many products) – see LINK.
- Hits to the single-use plastics industry continue to mount. We flag an article discussing the steps France has outlined to cut all single-use plastics consumption by 2040 [see LINK] that is part of an aggressive overall EU effort to cut single-use plastics use and related waste. We note that China was also added to the list of countries outlining efforts to reduce its single-use plastics use [LINK], and we highlight an ICIS article discussing the potential impact of this ban on virgin PE demand in LINK. It is also important to keep in mind the counter argument to the elimination of plastics and moving to other materials is potentially worse for the global carbon footprint – we highlight two articles on this topic to provide a bit of perspective in LINKS 1 and 2.