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Beyond Ratings Weekly Digest

Your briefing on augmented financial risk analysis

N°155 ▪ 26th July 2018


ANALYST INSIGHT

Lithium-ion batteries, a difficult reality?

It is stunning to see just how many companies have been raising funds, announcing new ventures, merging and competing to position themselves as big players of the booming energy storage business. Energy storage can take multiple forms, it can be central and stationary (pumped hydro, NaS batteries…) or decentral and mobile with three main existing technologies: hydrogen with mobile hydrogen tanks, electrical with the Superconducting Magnetic Energy Storage (SMES) and chemical with Li-Ion batteries. The latter is widely considered to be the most usable and efficient technology for our daily appliances and vehicles.

From lithium, cobalt and nickel extraction to cell production and battery assembly, manufacturers are in a race to make a profit by producing as many batteries as possible. This will supposedly limit the automotive industry’s impact on the environment. This insight will provide an overview of the current state of the market and the possible outlooks for the Li-Ion battery market considering the economic and ecological challenges it is facing.

 Energy storage has more than one application and the demand for batteries is very diverse. Of course, we need batteries for our phones and everyday devices, but energy storage brings also profit opportunities. Some advanced countries like Switzerland are already using energy storage (primarily through their hydro pumps) to make profits on exports upon the difference between the peak and off-peak electricity tariff. If well integrated, energy storage could help balance and optimize the grid. This is true at large scale but also at small scale. In private houses, for example, batteries can be integrated with solar panels to provide a continuous power flow. This is one of the drivers of battery demand with companies like Tesla that have already commercialized home batteries that can be installed to work with solar panels to improve energy recovery. Government incentives such as feed-in tariffs should only speed up the installation of home batteries.

Second, but not least, electric vehicles are expected to be the main driver of the global demand for batteries. A study by France Stratégie found that 1.2 million EV had been sold in 2017, half of them in China, the rest mainly in western and northern Europe or in California. Sales have increased by 60% compared with year 2016 and by 2030 this emerging supply chain is expected to produce a total of 340 million new electric vehicles (from passenger cars to trucks and buses) between now and 2030. These skyrocketing figures can be explained by a spectacular drop in battery price at 209 $/KWh in 2017 vs 1000$/KWh in 2010 (BNEF). Sales have also been boosted by government incentives and the fact that car manufacturers must face the spectre of government bans: 4 Europeans powers and India pledged to ban new thermic vehicles: the Netherlands and India in 2030, Scotland in 2032 and France and the UK in 2040.

This rising demand calls for a massive supply of batteries and more fundamentally of the raw materials that can be found in them. A typical electric car contains 50kg of Lithium and 20kg of cobalt. Both resources come from countries that don’t manufacture EVs. Lithium is extracted in Argentina, Chile, Bolivia (75% of production) while Cobalt originates primarily from the DRC (60%). The following graph displays the projected lithium demand (in Lithium Carbonate equivalent) for each application until 2030. The forecast is that global demand will nearly triple by 2025 mostly driven by EV growth.

Global demand per applications type, kt LCE

This increase in demand is reflected in the lithium prices that have gone up drastically but with an inflection point just recently due to industrial overcapacities. As a result of investment from these companies in new factories and production lines, production annual capacity should reach 400 GWh by 2021 vs 131GWh today (BNEF). This increase in production puts the stress on raw materials supply.  Cobalt is the other strategic raw material needed and is considered harder to obtain. Cobalt mining companies and intermediaries such as Huayou Cobalt in Congo aggregate productions from “artisanal” miners or “creseurs” as Congolese diggers call themselves. They then ship the production through Dar er Salaam or Durban and supply the companies we know: Tesla (Nevada and plans a new factory in Shanghai), LG Chem (Korea, US…), Daimler (Germany) or CATL China’s biggest producer… To stay aligned with battery productions, cobalt production has to double. Yet, a large share of cobalt originates from the DRC where reserves are limited and where work conditions, child labor, and environmental issues still exist as pointed out by Amnesty International and the Washington Post. The cost of corruption, political instability and the new mining code that should increase taxes are as many factors that drive the prices up. This gives a strong bargaining power to mining companies that can dictate supply. Forecasts estimate that cobalt supply will not meet the demand by 2025 and there are concerns that a cobalt cliff could be detrimental to EV’s sales.

Companies are exploring new options to address these challenges including less cobalt intensive and cobalt-free batteries as well as cobalt recycling that currently accounts for only 5% of the global supply. This resource limitation and technological competition make the energy storage market a very strategic one. This is not to forget that raw materials are also put under stress in producing of decarbonized electricity: quartz for solar, rare-earth elements for wind energy… Currently, China holds the economic lead (73% of the global Li-On batteries capacity) while European countries have taken a political lead by implementing strong regulation. Yet, Europe is still struggling to secure a regional supply even though the European Commission has called for an Airbus-style consortium to develop European production. But it may already be too late to catch up with the Asian train.

Nathan Breen, Climate Analysis Team  –  Sources: Beyond Ratings, BNEF, Washington Post

 


WEEKLY FOOD FOR THOUGHT

Sovereign Risk

Inflation in Venezuela will be 1,000,000% by the end of 2018!!!

According to the International Monetary Fund (IMF), the inflation rate in Venezuela will surge to 1,000,000% by the end of this year. At this point the actual number doesn’t really matter. The fact is that (hyper)hyperinflation has undoubtedly arrived. The pace of price increases in Venezuela has reached levels comparable to the Weimer Republic in 1923 or Zimbabwe in the late 2000s, the IMF announced on Monday, July 23rd. Venezuela’s currency has been collapsing for years now. Strict capital controls have turned food and medical-supply shortages into a full-blown humanitarian crisis. The IMF forecasts that the economy will contract by 18% this year, its third consecutive year of double-digit GDP declines. Meanwhile, GDP per capita will fall below USD 10,000. “Venezuela remains stuck in a profound economic and social crisis”, the IMF said.

Comparisons to 1920s Germany and late-aughts Zimbabwe are ominous. Zimbabwe ultimately had to abandon its currency after the country started printing 100-trillion-dollar banknotes. In late 2008, prices in the country took just 25 hours to double. In 1923 Germany, the monthly inflation rate was 29,500%. That hyperinflation and the surrounding economic crisis provided an opening for Hitler’s rise to power. What is certain is that it is now too late for President Maduro to take political and economic corrective measures. Let us hope that this crisis does not know the tragic or painful ends of the examples from which it draws its characteristics.

To be continued…

Julien Moussavi, Head of Economic Research – Sources: Beyond Ratings, Reuters

ESG

MethaneLeaks: a new world scandal?

Methane fugitive emissions (2012)

In a climate change perspective, natural gas (mainly methane) has a redeeming quality: it burns cleaner than oil and coal. Indeed, its combustion releases less greenhouse gas (GHG) than other fossil fuels for the same level of delivered energy. In that sense, it seems to be an objective ally of climate. Unfortunately, methane, directly released in the atmosphere, happens to be a powerful GHG (28 times as powerful as CO2 on a 100-year perspective). Consequently, any methane leaks during fossil fuel extraction and natural gas transport or usage should be monitored carefully in order not to diminish the benefits of natural gas combustion. For example, according to the EPA, U.S. methane emissions in 2016 reached 202 MtCO2eq (3.4% of 2016 US emissions). The Environmental Defense Fund (EDF), an American NGO that works with industries to reduce methane emissions, proved that current methane leaks are underestimated by 60% for the U.S., especially due to the undervaluation of massively large-scale leaks. The 2016 Californian leaks released 100,000 tons of methane in just a few weeks that was equivalent to 9.2 MtCO2. It is even more disheartening that the International Energy Agency reported in 2017 that 40 to 50 percent of methane emissions from natural gas infrastructure could be eliminated at no cost and the U.S. leaks are worth $2 Bn. If it is an issue for the United States, the paucity of information of other countries such as Russia, Angola and Nigeria is even more disquieting as we can speculate that the environment is not at the top of their priorities.

Emeric Nicolas, Head of Data Science Dpt.  –  Sources: Beyond Ratings, EDF, EPA, IEA, Edgar

Carbon/Climate Change

Stranded fossil fuel assets: winners and losers

This month Nature Climate Change published an article estimating the potential macroeconomic impact of stranded fossil fuel assets across countries and according to different scenarios. In their study, they found that a certain amount of stranded fossil fuel assets will already occur due to the ongoing technological trajectory. Moreover, if new 2°C-compliant policies are implemented, the loss in global wealth may range from USD 1 bn to USD 4 bn, the latter being comparable to the loss of the 2008 financial crisis.

Stranded fossil fuel asset losses and impacts across countries

According to the article, implementing new 2°C-aligned policies will create winners and losers. As these policies would result in a decline in fossil fuel demand, net importers (mainly the EU and China) could stand to gain from these policies. Producers with high marginal costs of fossil fuel production – like the United-States, Canada, and Russia – would be the losers in this scenario. Furthermore, a single producing country cannot alter the trajectory on its own. Only the decisions of the sum of the consuming countries determine the amount of wealth lost. This should be considered by policymakers willing to revive fossil fuel industries unless they are betting that we will not be able to limit the increase in global temperature at 2°C above pre-industrial levels.

Ruben Haalebos, Data Analyst  – Sources: Beyond Ratings, Nature Climate Change


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Photo credit via Visualhunt/CC BY-SA or other: Front page ▪ Credit 1: CECAR – Climate and Ecosystems Change Adaptation R; Credit 2: Tony Webster; Credit 3: Kiefer.; Crédit 4: NASA Goddard Photo and Video / Research notes ▪ Credit 1: DnDavis (via Shutterstock.com); Credit 2: zhu difeng (via Fotolia); Credit 3: Mny-Jhee (via Fotolia); Credit 4: xmentoys (via Fotolia)

2018-07-26T17:21:50+00:00

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