As the widespread adoption of electric cars gradually becomes reality, battery power is brightening the outlook for some commodities. This emerging theme appears set to drive increased demand for a surprisingly broad array of commodities – some with very little historical industrial demand, and others with a long history of industrial usage. Here our Global Resources team look at one stock positioned to benefit from shifting resources demand.
While investors scuffle for ways to benefit from the surge in battery power, we favour LG Chem, one of the global leaders in lithium ion battery technology. A deep dive into the broader battery supply chain, where we explored upstream materials like graphite, cobalt, lithium, copper and nickel to downstream Electric Vehicle (EV) manufacturers like Tesla, revealed two compelling reasons to invest:
The automobile industry is committed to the future of electric vehicles
They see a big change coming for their market and don’t want to be left behind. Ford is spending US$4.5bn on research and development into 13 new electric models out to 2020. Volkswagen is targeting 2-3 million sales by 2025. Volvo expects 10% of its sales to be electric by 2020. Meanwhile Mercedes expects up to 25% of its sales to be electric by 2025. Notice a pattern: the traditional builders of cars are becoming builders of EVs. This is not just about Tesla. Even the vacuum manufacturer, Dyson, has committed US$2.6bn to development of an EV. While they don’t get as much media attention as others, LG Chem is one of the largest suppliers of EV batteries in the world.
LG Chem has an established client base and diversified revenue streams – injecting cash back into its battery business
LG Chem offers a unique investment opportunity into this market. Not only do they have a wide set of existing battery customers and the most widely accepted battery technology (NMC), they also have resilient cashflows from their base business in plastics, polymers and chemicals. This business fabricates a complex and eclectic suite of products used in everything from golf balls to solar cells, diapers, adhesives, shoe soles, mobile phones and Duplo. These consumer-oriented markets provide a resilient source of cashflow, allowing LG Chem to invest into growing its battery business.
The investment in LG Chem has been a strong contributor to performance of the CFS Wholesale Global Resources Fund, with the stock up 60% in the last twelve months as at October 9 2017. The team continues to look for opportunities to prudently invest in the battery supply chain and the broader energy transition.
This is the first in a series of blogs from our Global Resources team looking at sustainable resources investing. Sign up here to receive these blogs and more from our investment teams.
References to “we” or “us” are references to Colonial First State Global Asset Management (CFSGAM) a member of MUFG, a global financial group. CFSGAM includes a number of entities in different jurisdictions, operating in Australia as CFSGAM and as First State Investments (FSI) elsewhere. Past performance is not a reliable indicator of future performance. Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell. Reference to such securities or the names of any company are merely to explain the investment strategy and should not be construed as investment advice or a recommendation to invest in any of those companies. Neither MUFG nor any of its subsidiaries are responsible for any statement or information contained in this document. Neither the MUFG Group nor any of its subsidiaries guarantee the performance of any securities or companies mentioned herein or the repayment of capital in relation to such securities or companies. Investments in such securities are not deposits or other liabilities of the MUFG Group or its subsidiaries, and such investments are subject to investment risk, including loss of income and capital invested.