This article first appeared in Trend Investing on November 20, 2019; therefore, all data is as of this date.
Europe and China will lead the way in reducing vehicle emissions in 2020, as governments tighten emission standard rules.
In Europe, fines could reach 34 billion euros (~US$37.5 billion) if car manufacturers don't rapidly reduce emissions. The new emission standards will hit Europe in just 6 weeks' time, starting January 1, 2020. The European Union emission targets are that CO2 must be cut to 95 gram per km for 95% of cars from the current 120.5-rhodium, analysts at gram average.
The United Nations Climate Change group states:
In the EU alone, emissions must be reduced by up to a fifth over the next 5 years, meaning that some companies will need to increase their share of sales from EVs to 20% in order to meet the EU's 2021 targets.
China will also start implementing similar tough vehicle emission standards from January 1, 2020, and then go nationwide.
On October 3, 2019, Reuters quoted:
Rules entering force in China, the biggest auto market, from next year will require each vehicle to contain around 30% more palladium, platinum and rhodium, analysts at Morgan Stanley say.
Reducing vehicle emissions
There are several ways the vehicle industry can reduce emissions.
Catalytic converters are the main way to reduce emissions in conventional vehicles. Palladium is the main metal needed in catalytic converters. Some rhodium and platinum are often used. Some analysts are already forecasting US$2,000/oz palladium, and most see structural palladium deficits ahead as demand surges and supply is constrained. My view is in the short term, we may see a palladium price pull back, as China often plays games with raw materials imports to manipulate the price lower. Also, higher prices usually slow down demand or lead to substitution. In this case, I could well be wrong.
Palladium, platinum, and rhodium prices all higher in 2019
The charts below show palladium and rhodium have surged higher the past year, while platinum has risen a lot less. This is mostly due to the preference for palladium over platinum in catalytic converters and also platinum has many other uses such as jewellery.
Palladium 5-year price chart
Source: Trading Economics
Platinum 5-year price chart
Source: Trading Economics
Rhodium 5-year price chart
Source: Trading Economics
Miners that produce palladium, platinum, and rhodium (note, these have already rallied hard in 2019, so some caution required)
Norilsk Nickel (LSX: MNOD) (OTCPK:NILSY) - Price = USD 27.60
Norilsk Nickel is the world's leading palladium producer, producing about 40% of global supply. Palladium, copper, nickel (and cobalt) are the key drivers of Nornickel's revenue.
The stock is up 75% over the past year, so certainly a lot of the palladium price boom is already priced in. You can read more on Norilsk Nickel in my 2018 update article here.
Analysts' consensus is outperform with a price target of USD 28.02, representing 1.53% upside. Some sovereign risk due to Russian exposure.
I still like the stock long term but would rate Norilsk a hold at this time due to the risk that palladium prices may fall back a bit after more than doubling in the past year. A second benefit of Norilsk is their other main products are key EV metals nickel, cobalt, and copper. For those that are not already stockholders, I would accumulate on any dips greater than 10%.
You can read the latest company presentation here.
Norilsk Nickel has global leading reserves and grades (shown in orange)
The world's top palladium producers in 2018
Amplats is a good choice as they are the world's largest primary producer of platinum and also produce palladium, rhodium, iridium, ruthenium, osmium, copper, nickel, cobalt sulfate, sodium sulfate, chrome, and gold.
Analysts' consensus is a hold with a price target of ZAR 1,014 representing 16% downside. Some sovereign risk due to South Africa and Zimbabwe exposure.
Norilsk Nickel outlook - Positive on palladium and platinum
Source: November 2019 company presentation
Rhodium is the most effective at reducing nitrogen oxide emissions. Auto makers account for around 85% of rhodium demand. The rhodium market is very small (~1 million ounces pa compared to 10 million for palladium), and rhodium is often produced as a by-product of platinum mining. Most of the global rhodium comes from South Africa.
Some rhodium producers include Lonmin (now taken over by Sibanye Gold), Anglo American Platinum, Russian Platinum, Atlatsa Resources, Impala Platinum, and Norilsk Nickel.
Some caution required for now after recent stellar rhodium price rises. Despite this, the outlook for rhodium looks strong. Low risk of substitution.
Top rhodium producers in 2014
Catalytic converter manufacturers
Some leading global catalytic converter companies include Magneti Marelli S.P.A., Faurecia SA [FR:EO] (OTCPK:FURCF), Sango Co. Ltd. [JP:SANCLZ], Benteler International AG, Futaba Industrial Co. Ltd. [TYO:7241] (OTC:FBILF), BASF Catalysts LLC (OTCQX:BASFY), European Exhaust and Catalyst Ltd., Deccats, Yutaka Giken Co. Ltd. [TYO:7229], and Calsonic Kansei Corporation (OTC:CLKNF) [TYO:7248].
Companies that have emission reduction technologies
dynaCERT Inc. (TSXV: DYA, FRA: DMJ, OTCQB: DYFSF) - Price = CAD 0.48
dynaCERT manufactures, distributes, and installs Carbon Emission Reduction Technology (CERT) for use with internal combustion engines, and especially for diesel engines. Their flagship product is HydraGEN, which uses hydrogen and oxygen (created by an onboard electrolysis system) to reduce emissions, especially focused on diesel emissions. A side effect is better fuel economy. The Company claims to achieve "up to 19% in fuel savings, & up to 50% in carbon emissions."
dynaCERT is rapidly building global alliances and dealers (~40 so far) to sell their product. One recent alliance is with MOSOLF, who has agreed to purchase one thousand HydraGEN units in 2020. Another purchase order of 400 units is with KarbonKleen Inc.
Market cap is CAD 142m. The Company is not yet earnings positive but is growing revenue rapidly so should be earnings positive in the next year or two. Analyst's consensus price target is C$1.90, representing 296% upside. One to watch closely. I rate the stock as a speculative buy.
You can read more at the company website here. There is a nice introductory video.
HydaGEN lowers diesel emissions and improves fuel efficiency
Markets with potential for dynaCERT
Source: Company presentation
Electric vehicle [EV] companies
The current top 6 global electric car manufacturers are (in order): Tesla Inc. (TSLA), BYD Co. (OTCPK:BYDDY) (OTCPK:BYDDF) HK:1211, Beijing Automotive Group Co. (BAIC) (OTCPK:BCCMY, HK:1958), Shanghai Automotive Industry Corp. [SAIC] (CH:600104), BMW (OTCPK:BMWYY), and Nissan (OTCPK:NSANY). The leader in electric buses is BYD Co.
My top picks from the above right now would be Tesla and BYD Co.
Tesla due to their market-leading brand, global expansion, popular e-car products (Model S, X and 3), new product line coming (Model 3 China, Model Y, Pickup truck, Semi, Roadster 2, and huge potential with stationary energy storage Powerwall, Powerpack, and Megapack). The stock is up over 50% in the past few months. I rate Tesla a long-term hold or buy on significant dips.
BYD Co. due to their leading brand especially in China where they are number one in electric car sales. Also for their market-leading position in global electric bus sales, energy storage products, and electric monorail sales potential. The stock is currently way down due to profits falling as a result of the June 2019 China subsidy drop and the recent China EV sales slump. No doubt this will pass and BYD profits will rise again. I rate BYD as an accumulate.
For the ICE manufacturers making great progress towards EVs, my view is that Volkswagen (OTCPK:VWAGY) rates the best, followed by Nissan/Renault (OTCPK:RNSDF), BMW, and Hyundai (OTCPK:HYMTF)/Kia (OTCPK:KIMTF).
Tesla Model 3 - By far the world's best selling electric car in 2019
Li-ion battery manufacturers and EV metal miners - Lithium, cobalt, graphite, manganese, nickel, copper, rare earths
Li-ion battery manufacturers - The top 5 in 2018 were LG Chem [KS:051910] (OTCPK:LGCLF), Contemporary Amperex Technology Co. Ltd. (CATL) [SHE:300750], BYD Co, Panasonic [TSE:6752] (OTCPK:PCRFY), and Tesla.
Lithium producers - Albemarle (ALB), Jiangxi Ganfeng Lithium [SHE: 2460] [HK:1772], Sociedad Quimica y Minera S.A. (SQM), Tianqi Lithium Industries Inc. [SHE:002466], Livent Corp. (LTHM)[GR:8LV], Orocobre [ASX:ORE] (OTCPK:OROCF), Pilbara Minerals [ASX:PLS] (OTCPK:PILBF), Galaxy Resources [ASX:GXY] (OTCPK:GALXF), Altura Mining [ASX:AJM] (OTCPK:ALTAF).
Cobalt producers - Glencore [HK:805] [LSE:GLEN] (OTCPK:GLCNF), China Molybdenum [HKSE:3993] [SHE:603993] (OTCPK:CMCLF), Katanga Mining [TSX:KAT] [GR:31Z] (OTCPK:KATFF), Umicore SA [Brussels:UMI] (OTCPK:UMICY).
Nickel producers - Vale SA [BZ: VALE3] (VALE), Norilsk Nickel (LSX:MNOD) (OTCPK:NILSY), Jinchuan International Group Resources Co. Ltd [HK:2362], Glencore (OTCPK:GLCNF) [LSX:GLEN], BHP Group [ASX:BHP] (BHP), Independence Group [ASX:IGO] (OTCPK:IPGDF).
Rare earths producers - Dominated by China with the exception of Lynas Corporation [ASX:LYC] (OTCPK:LYSCF).
Starting January 2020, we will see tougher emission standards in Europe and China. Of course, this has been known for some time, so key catalytic converter metals such as palladium and rhodium have been bid up in price in 2019 and stockpiled by car manufacturers. This can mean, in the short term, we could well see some pull back in palladium and rhodium prices. Platinum has not risen so much the past year, so can be worth considering as a contrarian play hoping some manufacturers start to substitute platinum for palladium. This is currently not seen as likely as it takes ~2 years and the cost of palladium per car is not significant. Rhodium is a very small niche market and worth investigating further.
Catalytic converter manufacturers and companies that have emission reduction technologies all have the potential to do well. In particular, those focused on the European and Chinese market that can increase production will do best. Niche products like dynaCERT's HydraGEN which uses hydrogen added to the diesel fuel mix to increase performance and reduce emissions have great potential in the fleet industries that use diesel fuels.
Finally, EV companies, lithium-ion battery manufacturers, and EV metal miners (lithium, cobalt, graphite, manganese, nickel, copper) will all do well as global governments continue to reduce emissions. It may be that we will see a strong Q1 2020 EV sales as ICE OEMs try to delay EV sales to 2020 to meet the tougher emissions targets.
As usual, all comments are welcome.
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Disclosure: I am/we are long SLA, BYD CO 9HK:1211), ALB, SQM, JIANGXI GANFENG LITHIUM [SHE: 2460], JIANGXI GANFENG LITHIUM [HK: 1772], OROCOBRE [ASX:ORE], GALAXY RESOURCES [ASX:GXY], PILBARA MINERALS [ASX:PLS], ALTURA MINING [ASX:AJM], GLENCORE [LSX:GLEN], KATANGA MINING [TSX:KAT], ARDEA RESOURCES [ASX:ARL], SYRAH RESOURCES [ASX:SYR], MMC NORILSK NICKEL [LSX:MNOD], LYNAS CORPORATION [ASX:LYC], RNC MINERALS [TSX:RNX], AMUR MINERALS [LN:AMC]. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information in this article is general in nature and should not be relied upon as personal financial advice.