Energy transition and emerging markets – picking leaders

No other sector is as directly impacted by climate change as basic industries.

The Paris Agreement has reached a consensus to keep the long-term increase in global average temperatures lower than 2 degrees above pre-industrial levels in this century, with significant ramifications for companies in this sector.

This will bring many challenges for “old” industries, with several at risk of becoming stranded assets, including thermal coal mines, and many oil and gas resources, with greener solutions coming out as clear long term winners.

This backdrop brings long-term opportunities for companies exposed to renewables, energy storage systems, and hydrogen value chains, as these technologies not only enjoy policy support, but are also scaling up and becoming more competitive, with cost parity expected to be reached within the next few years.

With respect to Industrials, Capital Goods and Materials sectors, over the past decade Chinese companies have displaced their global peers in the domestic market in sectors such as construction machinery and railway equipment because they have been able to make technological breakthroughs and rapidly iterate products.

Amid increased pressure on supply chains from geopolitical tensions and more stringent ESG rules on manufacturing processes, we foresee even stronger demand for industrial automation like robots, laser processing and advanced machine processing.

China is also producing high quality low-cost ceramic materials with potential promising downstream applications including electronic, bio-medicals, and environment protection.

Lastly, with respect to mining and batteries, we also observe a divergence in terms of winners and losers, driven by the debates around climate change and ESG.

Higher social and environmental operating costs are raising the risk of stranded assets for some commodities and select regions.

On the other hand, these trends will require big investments in electrification and new markets (e.g. electric vehicles, renewables, batteries, power grid), which will bring opportunities for the mining complex on rising demand for many of its products, including lithium/ nickel (batteries), copper (electrification), and PGMs (auto catalysts, hydrogen), especially for companies operating in countries with low costs and ample resources (e.g. lithium miners in Chile, copper in Mexico, PGMs in Russia and South Africa, etc.).

Just as an example, assuming 100% penetration of electric vehicle production, lithium demand would increase by 2,511%, nickel by 118%, and copper by 21%, according to UBS estimates.

Moving down the value chain towards batteries within the electric vehicle space, we think Chinese and Korean players along the EV component value chain are likely to benefit based on their first mover advantages, technological investments, cost leadership, operational expertise as well as government support.