Brief Australia: Battery Technology- The Key To An Electric Vehicle Future and more

In this briefing:

1. Battery Technology- The Key To An Electric Vehicle Future
2. More Volatility in the LNG Markets as JKM Drops Below TTF – Oil Majors Increase Exposure to US LNG
3. Yield Grab Supports the USD, Japanification Fear Weakens EUR
4. Manikay Caves and Accepts KKR’s Reduced (And Now Final) Offer
5. What Next in the Inflation / Deflation Debate and What Does It Mean for Asset Prices?

1. Battery Technology- The Key To An Electric Vehicle Future

The Insight is structured as follows:

• A. Key  Conclusions
• B. Report Highlights
• C.History of Electric Vehicles
• E. History of Rechargeable Battery Technologies And An In-Depth Analysis on Li-ion Batteries
• F. Batteries Beyond Li-ion
• G. Supply Constraints for Key Raw Materials
• H. The Competitive Landscape

A. Key  Conclusions

Global sales of EV’s reached 2m units in 2018. As a base case scenario, we expect a combination of improving EV battery cost-effectiveness, increasingly challenging emissions standards and ongoing incentives by various governments to propel unit sales to 8m units annually by 2025. Against this, we consider battery material price increases, a reduction of EV incentives in the US and China and political and environmental risks from the mining of metals used in batteries as downside risks which could delay the growth of the EV market.

Surprisingly, the EV battery technology that will drive us towards that 8m unit goal is still very much a work in progress. While Lithium Ion is the by far the dominant technology, there are striking differences between variants of the technology, battery pack design, battery management systems and manufacturing scale between the leading contenders. Furthermore, while there’s nothing on the horizon to completely displace Lithium Ion within the next decade, it remains unclear whether the technology will be the one to achieve the $100/kWh price target that would make the EV cost-neutral compared to its internal combustion predecessors. 

Quite apart from the technology,  the EV battery segment faces other significant challenges including increasing costs for core materials such as Cobalt, increasing safety concerns as the mix of that very same cobalt is reduced in the cathode, the growing risk of litigation amidst a fiercely competitive environment and last but not least, the appetite of various governments to maintain a favourable subsidy framework. 

2. More Volatility in the LNG Markets as JKM Drops Below TTF – Oil Majors Increase Exposure to US LNG

The JKM has halved its value since December, continuing its steady decline and dropping below the TTF, the benchmark for European LNG prices. Asian LNG spot prices are now at their lowest level since May 2015. While a prolonged LNG price downturn could force many projects to be cancelled, the winners among the developers are starting to emerge, aggressively pushing ahead their projects closer to the final investment decision.

Both Tellurian Inc (TELL US) and NextDecade Corp (NEXT US) signed high-profile deals, respectively with Total Sa (FP FP) and Royal Dutch Shell (RDSA LN), that could significantly de-risk their proposed LNG projects and increase the probability to reach FID in 2019. In Russia, LNG newcomer Novatek PJSC (NVTK LI) agreed two long-term offtake deals with Repsol SA (REP SM) and Vitol thereby moving a step closer to FID its Arctic LNG 2 project.

3. Yield Grab Supports the USD, Japanification Fear Weakens EUR

FX markets are meandering with no clear trends, and it seems investors have little market conviction.  This appears to be resulting in choppy price action influenced mainly by short term technicals rather than macroeconomic developments.

We have noted that in recent years the FX market has appeared to be less pre-emptive, and often responds surprisingly sharply after the event.  As such we remain wary of a reversal of recent USD strength if, as it seems increasingly likely, a negotiated trade and Brexit deal might be found relatively soon.

 If there is a trend, it is a mild downtrend in the EUR that has underperformed most other currencies over the last six months.  It failed to rise much in January when most other currencies experienced a rebound against the USD, and it has continued to drift lower, in recent months, during a period of mixed to weaker price action in other currencies against the USD.

The market may be moving into a yield-seeking mode.  Yield compression tends to shift capital to higher-yielding assets, resulting in a stronger performance for higher-yielding currencies even as their yield spreads narrow. The USD is now one of the higher-yielding currencies.

4. Manikay Caves and Accepts KKR’s Reduced (And Now Final) Offer

Originally I had thought KKR’s offer could go higher. Instead, it came in lower at A$3.40 and KKR gave MYOB Group Ltd (MYO AU) management all of a couple of days to think about it.

The title to my subsequent piece was MYOB Caves And Agrees To KKR’s Reduced Offer.

Manikay Partners started buying up shares and by early March had reached a position of 11%. They made noise. The Scheme Booklet came out on the 14th of March. Four days later Manikay announced their position was now 13.61% and the following day Mawer announced re-upped its stake from the mid 8s to high 9% level.

The 20th saw a Scheme Update from MYO announcing receipt of a letter from KKR saying that the A$3.40 price was their “best and final offer”, making it clear under Truth in Takeovers language that Manikay was not going to get a higher price out of them.

Manikay continued to buy shares on the 20th and the 21st, getting to 16.16% of the company as filed on the 22nd.

On Monday 1 April, MYOB announced a supplemental disclosure to the Scheme documents noting KKR’s final intention, and that the directors continued to unanimously recommend the Scheme.

Today we have new news.

Manikay Caves and Agrees to KKR’s Reduced (Now Final) Offer

Earlier today a Reuters story about Manikay accepting the offer popped up and MYOB shares popped from A$3.34 to A$3.38-39 area where they closed. Partway through the day MYOB released a document on the ASX feed saying that Manikay had sent a letter saying…

In order avoid speculation regarding our voting intentions in respect of the Scheme, we are writing to inform you that we, Manikay Partners, intend to vote all the MYOB shares that we own or control FOR the upcoming Scheme, subject to there being no proposal that we consider to be superior prior to the vote.

We remain very disappointed that, despite our repeated efforts to convince you otherwise, you failed to change your recommendation in light of the material improvement in market conditions since announcement of the Scheme, among other factors. We are also disappointed that the disclosures to MYOB shareholders did not fully explain the impact of such improved market conditions on the value of MYOB.
excerpt of the letter.

5. What Next in the Inflation / Deflation Debate and What Does It Mean for Asset Prices?

Despite some signs of stabilization in China’s factory gauges the primary trend is still weakness and it might be rash for investors to read too much into the recent data given the apparent weakness in the Eurozone and the moderation form a high level of growth in the United States.  Quantitative tightening is on hold in the United States but a sharp “U-turn” to easing has not happened yet and is politically embarrassing. As inflation falls real rates are rising. Housing markets are showing signs of price weakness. Investors need to watch for signs of credit quality decay that could be an indicator of the next period of severe financial distress.