ESG Focus: The Little Big Things – 29-04-2024

ESG Focus | May 01 2024

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FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:

ESG Focus: Little Big Things

Green geopolitics are heating up; analysts check out electric vehicles, lithium and critical minerals; and the AI push persists despite climate implications of data centres, which in turn bode well for power generators, transmission companies and copper.

-Checking out green politics and geopolitics
-China accused of hurting battery, electric vehicle and critical minerals markets
-Musk and Dimon oracles – and the winner is …
-Tesla moves to war footing on automation
-How legit is the climate change narrative given data-centre push
-Citi says EV penetration to rise in 2024, and accelerate in 2025

Compiled by Sarah Mills

China Causing A World of Hurt But Oversupply May Have Peaked

Little Big Things returns to US election politics and green geopolitics given the critical role it is playing in ESG this year.

The United States and Europe have stepped up their rhetoric against what they consider to be China’s aggressive manufacturing and pricing practices, enervated by an election year awash with protectionist politics.

Excess industrial capacity in China has suppressed prices in many markets, causing a world of hurt to industries globally.

US commerce secretary Gina Raimondo advised Washington was prepared to escalate its semiconductor sanctions campaign against China to prevent the country from catching up militarily.

Raimondo said the US will “do whatever it takes” to curb China Tech” then scoffed at Huawei’s heavily publicised semiconductor chip breakthrough, claiming “it’s years behind what we have in the United States”. 

US trade representative Katherine Tai in an interview with Bloomberg TV pulled no punches criticising several Chinese policies.

“There is now an established set of facts supporting the assertion that China’s rise as an economic power has hurt multiple countries and key industries around the world,” said Tai.

Most recently, the victims had been batteries, electric vehicles, and critical minerals.

The US is investigating China’s actions in the shipping industry and the Wall Street Journal says the US is readying sanctions to cut certain Chinese banks’ access to the world’s financial system (aimed mainly at Russian financial transactions).

Europe has been more diplomatic in its admonishment of China, but appears ready to legislate if no headway is made.

China, in its defence, blames the excess manufacturing capacity on the slump in its property development market.

But there may be light at the end of the tunnel.

The Economist Intelligence Unit reports China’s overall manufacturing overcapacity has peaked as global demand picks up in consumer sectors.

If so, much of the brou-ha-ha may be a storm in an election teacup with positive implications for many markets – catching the upswing will be the key (the Unit predicts a cyclical upturn in global retail sales in 2024).

Nevertheless, the Unit forecasts trade tensions will continue given Chinese companies’ rising competitiveness, and given capacity utilisation and underlying profitability “will probably remain worse than the pre-pandemic norm” through 2024.

This is particularly likely given, as the green transition progresses, China is blitzing it on the electrification front – but that’s fair play.

In a positive sign, Chinese companies are investing overseas at the swiftest pace in eight years, reports Bloomberg. While much depends on the nature of these investments, and no breakdown was available, at face value it suggests an expectation of business as usual on behalf of the global powerhouse.

Critical Minerals Glut 

Back to the more immediate practicalities of markets.

So-called critical minerals such as rare earths, graphite, gallium and cobalt have slumped thanks to China, and the EV glut isn’t helping.

Several analysts, such as Goldman Sachs, have issued updates on mining and metals in the light of Chinese oversupply calling for a stabilisation and mild recovery in pricing.

Morgan Stanley recently joined the fray and begged to differ, expecting continued supply disruption over 2024 for critical minerals, given US-China tensions during a hawkish US election year.

The analyst expects clean tech companies and renewable energy developers will bear the brunt of this, but on the flipside expects near-shoring beneficiaries will include metals and mining stocks, operating equipment manufacturers, and the auto sector. 

Citi Says EVs Penetration To Increase In 2024

While a glut of EVs overhangs the market and insufficient charging infrastructure remains an issue, Citi expects global battery electric vehicle volume to grow at a modest 12% this year, taking global penetration to 13% from 12% in 2023.

The analyst then expects an acceleration in 2025, viewing current sentiment as far too negative.

Citi forecasts EV penetration will hit 33% by 2030, with China leading the charge to attain a 48% market share.

The analyst does advise investors be selective in their choice of brand, siding with BYD, followed by Geely and Leapmotor. As a high-risk recommendation Citi nominates Li Aut as a Buy. Tesla is rated Neutral. 

Citi observes China is experiencing stronger growth in plug in hybrids than in electric vehicles. 

Citi also augurs a comeback for traditional automakers, favouring General Motors, followed by Ford. In Europe, the analyst plumps for Renault and Volkswagen, while Toyota (for hybrids which are enjoying decent margins) wins its vote followed by Honda. Elsewhere, it nominates Kia in Korea and Maruti in India.

Citi also views auto industry suppliers as a more defensive exposure to the EV theme.

Environmental Concerns Put Lithium Supplies At Risk

This column has long pointed out the risks to lithium from its poor environmental record, so it was good to see someone try and put a price on it. 

Morgan Stanley estimates 13% of global lithium supply is at risk due to environmental protection.

The analyst observes China is cracking down on its producers. The area in question accounts for 20% of China’s total lithium production and 13% of global supply in 2023. 

This could provide some relief for the lithium price at some stage and result in a slightly cleaner product, but demand is likely to continue to be at the mercy of Chinese supply near term.

A greater concentration of Chinese producers is also likely to prove a formidable force in the market.

Musk and Dimon Oracles – who is the greatest one of all

Readers will remember last year this column reported Elon Musk was of the opinion the US Fed would be forced to cut rates by March at the latest if it wished to progress the green transition and, in the case of EVs, Musk determined Tesla would not progress with its Mexican factory until rates fell.

His prediction rates would fall by March at the latest appeared to be holding sway until the Israel-Palestine conflict happened to break out in November, threatening supply chains and keeping interest rates “higher for longer”.

Ever resourceful, Musk dealt with the change in December by inviting Chinese EV-parts manufacturers to set up plants next to his factory in Mexico, infuriating Washington given the cars would qualify for the US tax credit.

But what was more interesting was that, while Musk was predicting interest rate falls, JP Morgan Chase’s chief executive Jamie Dimon in other less-publicised interviews begged to differ.

Dimon pointed out the world is still dealing with the largest QE and fiscal stimulation in peace time and yet still sports the biggest deficits and debt mountain ever. 

The banker observed the appetite for US treasuries is waning and therefore, he posited, interest rates need to go higher. Dimon points out the obvious – that conflicts require money and that will require governments sell bonds. 

When it comes to financial oracles, my money is on Dimon.

Musk may be correct regarding job losses (and to prove it made massive cuts at Tesla as EV sales slumped globally) but Dimon is the closest thing Wall Street has to a statesman and is “in like Flynn” with the political class. When it comes to geopolitics and rate forecasts, it helps to have friends in high places. 

Baby-faced Dimon is so “in” that the rumour mill has it the Democrats may be rolling him out as a possible replacement for Biden to enhance the Democrats’ election success in the likely face-off with the populist Trump and dark horse Robert F. Kennedy Junior (RFK).

Dimon is stepping down from his position as head of JPMorgan and has been preparing his successors and, at the NYT Dealbook Summit, aligned himself with some Democrat values.

Musk, on the other hand, appears to have been out of favour with the political class since tweeting he had “taken the red pill” and announcing he would not donate to either party. 

Meanwhile, US debt held by the public is forecast to hit 116% of GDP or US$48.3trn by 2034, up from 97% at the end of 2023, states the Congressional Budget Office.

And congress just passed a US$95bn emergency aid package for Ukraine – more money for the military industrial complex, which also means more money for semiconductors.

Musk On “War” Footing

Dimon may trump Musk on interest rate forecasting but I’d put my money on Musk when it comes to technology forecasting.

Musk has called out high interest rates as a major factor behind the electric vehicle sales slump, given its impact on fleet borrowing and household incomes. Much also has to do with Chinese oversupply and intense competition, which has created a glut of EVs in ports and other distribution centres globally.

The EV gluts in China, Europe and the US have left the industry reeling and are likely to continue to suppress lithium prices this year, observe analysts.Tesla shares and sales have plunged, leading Musk to activate “war-time CEO mode” and propose he is going “balls to the wall for autonomy,” reports Bloomberg, canning plans for a small cheap EV for the masses.

This prompted an exodus of executives and investors, but perhaps Musk is intuiting the challenges the industry is likely to face in the near term.

Toyota has benefited from standing back from the initial EV onslaught and fairly predictable carnage, and perhaps Musk may do the same with his small car. He already holds a dominant position and brand in his core markets (and the broader EV market) and his only serious challenger at this stage is China’s BYD.

The rules of branding suggest Tesla should remain No.1 unless it makes a critical misstep. Similarly, BYD should retain its position as No.2, albeit a small affordable car could be the wedge it needs (although Musk has announced plans to launch more affordable models and is likely ready to wheel out a tiny Tesla if need be). 

Overall, analysts are forecasting China as a whole will account for 48% of the global EV market in the not too distant future, buoyed by purchases from its own substantial market.

Tesla’s charging infrastructure also remains an advantage and, in a year of oversupply, charging infrastructure is a possible area of focus, not to mention the burgeoning battery market. 

Musk might also be intuiting that given the political sensitivity and national competitiveness of car manufacturing, that subsidies may interfere with branding norms, and that there is therefore increasingly an element of “innovate or die” at play. 

He is convinced his shift to using cameras to calculate distance will lead to unprecedented progress in autonomous driving, reports Bloomberg, and is laying his bets on robotaxis.

Bloomberg observes Tesla is building data centres in Buffalo, New York and Austin to process the footage and accelerate the project.

Data Centres Challenge Existentiality of Climate Change 

Speaking of data centres, they are chewing up the world’s energy and water resources at an alarming rate, and this trajectory is set to continue, begging the question:

If climate change is such an existential crisis to humanity, why is big capital barrelling down the path of AI when those funds could be put to decarbonising faster while simultaneously offering massive savings in carbon emissions? (Ditto for carbon capture and storage.)

No-one seems to have an answer. Given the fledgling state of AI, it is unlikely the massive energy savings that it “might” facilitate will eventuate any time soon. And logic suggests it will contribute to upward spiralling emissions short of massive innovation.

Morgan Stanley posits that AI energy demand might lead to higher fossil fuel emissions.

The analyst estimates generative AI will require 6GW of incremental power through 2027 (8% of current capacity); and an AlphaWise survey underpins Morgan Stanley’s forecast of five-fold growth in European data centres by 2030 (trends supported by a push to near-shoring data centres).

AI companies are cutting deals now to try and secure future energy sources and the analyst observes Nvidia is tying up with TYL Power I Malaysia (also known as YTL Power International Berhad).

Morgan Stanley expects power generation and transmission companies should be major beneficiaries of this trend.

Macquarie Group ((MQG)) is Australia’s major publicly listed global player in this space through Macquarie Asset Management, but the plane hasn’t quite landed yet and there are a few bridges to cross, particularly on the critical minerals front.

I guess even more copper will be needed to construct those data centres – analysts are bullish.

It looks like the AI horse (the EV element that is supposed to build barriers to entry) needs to come before the EV cart – or at least not lag too far behind – otherwise the competition would just be crazy, right? Musk’s thoughts perhaps?

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:

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