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The Essential Podcast, Episode 31: Conviction Over Charisma — Making Your Ideas Backable

Daily Update: September 24, 2020

Subscribe on LinkedIn to be notified of each new Daily Update—a curated selection of essential intelligence on financial markets and the global economy from S&P Global.

The electric vehicle (EV) market is experiencing a shake-up as demand for innovation across the sustainable automotive industry intensifies.

Tesla is planning to produce lithium-ion batteries for its electric vehicles that are free from cobalt—the most expensive component of such batteries—and have more energy storage. During the company’s annual shareholder meeting on Sept. 22, which Tesla titled Battery Day, the EV maker announced the effort as a means to integrate its supply chain, make its vehicles more affordable, and act on its sustainability commitments by cleaning up its mining practices. To accomplish this, Tesla said it will bring its upstream and downstream mining operations in-house to accerate production and slash the costs of doing so.

“It's absolutely critical that we make cars that people can actually afford. Affordability is key to how we scale,” Tesla CEO Elon Musk said during Battery Day.

“Increasing nickel is a goal of ours and really of everybody in the battery industry, but one of the reasons cobalt is used at all is because it's very stable,” according to Drew Baglino, Tesla’s powertrain and energy engineering senior vice-president, who said at the event that the company’s goal is to increase the batteries’ nickel content and eliminate cobalt. “We’re going to go and start building our own cathode facility in North America, leveraging all of the North American resources that exist for nickel and lithium, and just doing that—just localizing our cathode supply chain and production—we can reduce miles traveled by all the materials that end up in the cathode by 80%.”

“We really need to make sure that we’re not constrained by total nickel availability,” Mr. Musk said. “I spoke with the CEOs of the biggest mining companies in the world and said, ‘Please make more nickel.’ So I think they are going to make more nickel. But I think we need to have a three-tiered approach to making batteries.”

Tesla is facing pressure to disclose how it tracked human-rights risks in its supply chain. The company has previously secured the majority of its cobalt from the Democratic Republic of the Congo, where more than 60% of the world’s cobalt is mined, despite concerns over mining practices in the country. As such, the Battery Day announcement drew praise for addressing environmental, social, and governance (ESG) factors.

"It was surprising to hear that Tesla made a commitment (if not time-bound) to phase out cobalt from its batteries. From a social-impact perspective, this is quite significant given the human rights issues around cobalt in the supply chain,” Manjit Jus, managing director and global head of ESG research and data at S&P Global, told S&P Global Market Intelligence. “Of course, from an ESG perspective, a more firm commitment to when this will happen would have been welcomed (not to mention the fact that it will bring down the price of batteries).”

Still, many analysts and market participants were skeptical of the announcement.

"According to [Musk], the environmental impact will be minimized, but he acknowledged that this is a brand-new process that has never been used before—so, at a minimum, some operational complications are likely, which means we should not hold our breath for Tesla's in-house lithium supply over at least the next 12 to 18 months," Raymond James analyst Pavel Molchanov said in a Sept. 23 note, according to S&P Global Market Intelligence.

Morgan Stanley analysts said they "believe the excitement will be replaced by concerns, as the new technologies announced can reduce lithium usage and production costs. Lithium stocks are driven by lithium price expectations and should underperform, in our view," according to S&P Global Platts.

"We remain steadfast in our belief that cobalt will continue to be an essential component in nickel-rich batteries. The timeline from concept to commercialization of any new battery technology will take 10 or more years," the cobalt mining company First Cobalt said.

Meanwhile, Japanese carmaker Toyota is planning a late foray into the battery-electric vehicle market, according to S&P Global Market Intelligence. Despite having pioneered emissions-reducing technology in its first-generation Prius more than 20 years ago in 1997, the company doesn’t plan to produce any battery-electric vehicles within the next five years. Instead, Toyota is planning to produce 1 million battery-electric and hydrogen fuel cell car sales by 2035.

"Toyota is betting on seeing a quantum leap in its EV development and EV success from 2025 on, when its solid-state battery will arrive, and be ready for a more aggressive approach by then," Julie Boote, an analyst at Pelham Smithers, said in a research note, according to S&P Global Market Intelligence.

"One risk would be consumers in developed markets don't think of them as a [battery-electric vehicle] BEV firm but Toyota has plenty of marketing dollars to catch up fast," David Whiston, an analyst at Morningstar, told S&P Global Market Intelligence.

In addition, some of the biggest news to ripple across the EV market this week was the resignation of Trevor Milton from his positions as founder and executive chairman of electric truck maker Nikola Corp. while facing allegations of misleading investors about how ready and propriety firm’s technology is.

Today is Thursday, September 24, 2020, and here is today’s essential intelligence.

Uncertainty in the Global Economy

First In Human: In Race Against COVID-19, Early-Stage Vaccine 'Noise' Pervades

The acceleration of clinical trials for COVID-19 vaccine candidates has raised concerns that conclusions will be difficult to draw from study results, particularly as early-stage research blends into larger-scale trials, experts say. On top of the fundamental rush for a working vaccine, several of the top contenders to be first to market are new technologies — like mRNA vaccines from Moderna Inc. and Pfizer Inc.-BioNTech SE or non-replicating vectors from AstraZeneca PLC. Such vaccines hold promise but lack the tried-and-true nature of more traditional approaches to producing inoculations.

—Read the full article from S&P Global Market Intelligence

China Auto's Recovery Path Is Accelerating

China auto sales look set to recover earlier than S&P Global Ratings expected. In this chart book, Ratings showed the data that led to increase in assumptions to 4%-6% auto sales growth in 2021, up from Ratings’ earlier range of 2%-4%. S&P Global Ratings now expect a smaller decline in 2020 of 6%-9%, from 8%-10% previously.

—Read the full report from S&P Global Ratings

Market Volatility

Cannabis M&A To Accelerate As Valuations Bounce Back From 2019 Drop – Experts

A drop in company valuations complicated by the coronavirus-triggered capital squeeze hindered cannabis deal-making during the first half of 2020. However, experts say mergers and acquisitions in the fledgling industry will pick up heading into the new year. Cannabis-related companies completed or announced 124 deals in the U.S. or Canada during the first seven months of 2020, less than half of the prior year's total for the same period and even further behind 2018's total, according to an analysis by S&P Global Market Intelligence. Capital raising for cannabis companies in 2020, meanwhile, continues to trail levels in either of the prior two years.

—Read the full article from S&P Global Market Intelligence

Activist Shareholder Stirs Up US Cable Business

Comcast Corp.'s stock performance amid the coronavirus pandemic is a tale of two diverging business segments, a dilemma that has attracted the attention of activist investor Trian Fund Management LP. The hedge fund, which describes itself as "a highly engaged shareowner," bought up 20 million shares of Comcast, the largest U.S. cable operator. A Trian spokesperson said it believes Comcast's stock is undervalued. "We have recently begun what we believe are constructive discussions with Comcast's management team," the Trian spokesperson said in an emailed statement. Comcast declined to comment on the matter.

—Read the full article from S&P Global Market Intelligence

Profitability, Liquidity, and Investability: The Key Drivers of Long-Term Outperformance of S&P SmallCap 600® versus Russell 2000

The S&P 600TM has outperformed the Russell 2000 since its launch in 1994. From Dec. 31, 1994, to Aug. 30, 2020, the S&P SmallCap 600 had an annualized return of 11.77% (with an annualized volatility of 18.96%) versus the Russell 2000’s annualized return of 10.49% (with an annualized volatility of 19.70%). The historical performance divergence is due to differences in index construction. Notably, the inclusion criteria of positive earnings, liquidity, and public float result in the constituents of the S&P SmallCap 600 being more profitable, more liquid, and more investable than those of the Russell 2000. In this blog, S&P Dow Jones Indices explores the validity of profitability, liquidity, and investability screening in index construction.

—Read the full report from S&P Dow Jones Indices

The Future of Credit

Retail Trends In August Illustrated Consumers' Resilience And Shifts In Spending

The impact of the pandemic on the U.S. retail sector has resulted in a wide variety of unexpected dynamics (for example, the demand for products that enhance life at home). S&P Global Ratings paid special attention to the benefits consumers received from the federal government (from either stimulus checks or supplemental unemployment benefits) through the spring and early summer months. Many retailers and restaurants reported significant upticks in demand when these benefits were distributed (Walmart Inc. reported a pop in sales of discretionary items at the end of their fiscal first quarter driven in large part by the stimulus).

—Read the full report from S&P Global Ratings

Banking Sector Under Pressure

Global Banking: Recovery Will Stretch To 2023 And Beyond

COVID-19 and the oil price shock of 2020 are taking a heavy toll on global banks. S&P Global Ratings has taken 335 negative rating actions globally since the outbreak began, and S&P Global Ratings anticipates it will be difficult for the financial strength ratings on financial institutions to return to pre-crisis levels. S&P Global Ratings doesn't expect the world's largest banking sectors, including more than half of G20's, to recover to pre-COVID-19 levels until 2023, or beyond.

—Read the full report from S&P Global Ratings

ECB Warns UK Banks To Prepare For No-Deal Brexit But They Want To Work From Home

The European Central Bank has demanded U.K.-based lenders with EU offices complete "action plans" showing they are ready for a no-deal Brexit as banks claim the success of working from home during the coronavirus pandemic makes staff moves less necessary. The central bank has warned that some banks still have not moved sufficient staff or resources to their EU operations or provided details on how they intend to operate in the event of a no-deal Brexit with the end of the year-long post-Brexit transition period approaching. Major U.S. banks are understood to be the main targets of the ECB's request.

—Read the full article from S&P Global Market Intelligence

German, Swiss Bank Executives See M&A Wave, But Not In Home Markets

Consolidation in the fragmented European banking sector is likely to continue given the pressure on companies from negative interest rates, the impact of the COVID-19 pandemic and the regulatory push for M&A, executives from UBS Group AG, Credit Suisse Group AG, Deutsche Bank AG and Commerzbank AG told a conference Sept. 22. They see domestic mergers as easier to complete and more likely to generate synergies than cross-border deals, but they are not expecting big M&A moves in their home markets of Germany and Switzerland, at least in the near term.

—Read the full article from S&P Global Market Intelligence

Antitrust Overhaul Could Open Door For More US Community Bank M&A

Some U.S. community banks could soon find themselves better positioned competitively and engaging in more M&A discussions as the Justice Department reconsiders its antitrust review process. The DOJ is seeking public comment on whether it should revise the 1995 Bank Merger Competitive Review guidelines. A series of questions, released on Sept. 1, touches on topics such as including online banks and credit unions in reviews, whether urban and rural areas should have different market-concentration thresholds, and a de minimis exception for transactions under a certain size.

—Read the full article from S&P Global Market Intelligence

Technology & Innovation

China TMT Outbound Investment To Drop Further Amid Complicated Environment

Chinese outbound investments in technology, media and telecom companies have steadily decreased since 2016, data compiled by S&P Global Market Intelligence shows. The value and number of transactions with the U.S. in particular could fall further, analysts said.

—Read the full article from S&P Global Market Intelligence

China's Startup STAR Board Will Still Have Long Way To Go After Ant's Mega-IPO

Shanghai's STAR Market, one of the world's youngest and most expensive trading venues, will likely need more than a few mega-IPOs to challenge Hong Kong and the U.S. as the preferred listing destinations for Chinese technology startups and new-economy companies, experts say. The Science and Technology Innovation Board, as the startup market is formally called, is China's response to the Nasdaq, which is still home to some of the world's biggest technology companies. After its debut in July 2019, the STAR Market has become a popular alternative for Chinese IPO hopefuls seeking to avoid the additional scrutiny in the U.S. amid tensions between Washington and Beijing.

—Read the full article from S&P Global Market Intelligence

Insight From Shanghai: China Chases New Economic Model With High-Tech Infrastructure Push

Walking down a street right now in Shanghai, one would be forgiven for thinking the pandemic never happened. At times it’s hard even to spot someone wearing a mask. Dig a little deeper, though, and it’s clear that recent events have had a profound impact on the Chinese economy. Foreign investment and exports turbocharged the Chinese economy for nearly two decades after China entered the WTO. But now things have changed.

—Read the full article from S&P Global Platts

Nvidia's Arm Assurances Could Help Deal Secure UK Approval — Experts

Nvidia Corp. may make legally binding, post-offer commitments to the U.K. government to prevent further scrutiny of its acquisition of Arm Holdings Ltd, according to legal experts. The $40 billion deal comes at a time when the U.K. government is looking at ways it can better protect home-grown companies from foreign takeovers. Although Arm is already owned by Japanese company SoftBank Group Corp., its importance to the U.K. economy means it could still be subject to intervention from Prime Minister Boris Johnson's government.

—Read the full article from S&P Global Market Intelligence

Contradicting Statements, National Security Concerns Cloud Tiktok Deal Forecast

While confusion still surrounds the planned sale of TikTok Inc., security and foreign policy experts said Beijing Byte Dance Telecommunications Co. Ltd.'s plan to retain a controlling stake in TikTok would leave the national security concerns around the video-sharing app unresolved. Chinese internet company ByteDance said Sept. 21 that under a deal with the U.S. government, Oracle Corp. and Walmart Inc. will jointly acquire a 20% stake in a newly formed company dubbed TikTok Global, which will be headquartered in the U.S. ByteDance said it will retain a controlling stake, though it also plans to pursue an initial public offering for TikTok Global sometime down the road. Notably, ByteDance does not intend to transfer its algorithms or technologies to Oracle as part of the deal.

—Read the full article from S&P Global Market Intelligence

ESG in the Time of COVID-19

Thermal Coal Companies Removed from the S&P 500® ESG Index in Response to Market Demand

The fast-changing nature of the ESG landscape is no stranger to those within it. Competing definitions, variability in scoring methodologies, and a spectrum of individual investor objectives have made fertile ground for divergent approaches. However, among this slew of sustainable investment strategies, common threads have emerged. When the S&P 500 ESG Index was launched in January 2019 as an accessible starting point for ESG investors around this world, it did so by excluding the types of business activities deemed unacceptable by the broadest possible majority of sustainability-minded investors and selecting constituents according to their relative S&P DJI ESG Score performance within index and industry groups.

—Read the full report from S&P Dow Jones Indices

Transparent Pricing, ESG Metrics Helping Move Energy Transition Forward: Experts

Investors remain focused on the energy transition despite coronavirus pandemic related market disruptions, and while there is a long way to go toward decarbonizing society, transparent commodity pricing, clear ESG metrics and continued corporate action can help, experts across S&P Global said Sept. 22. "COVID is leaving its mark on the world and it is impacting the energy transition," Roman Kramarchuk, head of energy scenarios, policy & technology analytics at S&P Global Platts Analytics, said during a New York City Climate Week event called "Transitioning to a Low Carbon Economy."

—Read the full article from S&P Global Platts

Tesla's Battery Day Had Hype For Future Commodity Plans But Little Else

Tesla Inc. CEO Elon Musk has proclaimed the electric vehicle giant is ready to move upstream and enter the mining industry as part of an effort to vertically integrate its supply chain. However, analysts have dampened the hype Musk laid out and assert that the billionaire's plot will need to be seen to be believed. Musk and other executives announced a raft of downstream plans at Tesla's Sept. 22 Battery Day, including expectations to grow vehicle deliveries by 30% to 40% year over year in 2020 even amid the coronavirus pandemic. Similar to his plea over the summer for environmentally friendly nickel supplies, the illustrious CEO used the event to detail Tesla's mineral supply needs and its ambitions of entering the mining sphere, including confirmation that the company acquired a 10,000-acre lithium deposit in Nevada.

—Read the full article from S&P Global Market Intelligence

First Cobalt Stresses Cobalt Role In Batteries After Tesla Elimination Plan

First Cobalt has emphasized the importance of cobalt in nickel-rich batteries, despite an announcement at the Tesla Battery Day that the electric vehicle maker plans to eliminate cobalt in its cathodes. Tesla CEO Elon Musk said Sept. 22 that the automaker planned to make electric vehicle batteries with cobalt-free, nickel-heavy cathodes in-house, which would make its EVs more affordable.

—Read the full article from S&P Global Platts

New Tech Could Open Doors To Next-Level Batteries – Platinum Group Metals CEO

With the support of platinum group metals miner Anglo American Platinum Ltd. and growing research behind the technology, the "next stair-step up in battery performance" is around the corner, said R. Michael Jones, president, CEO and director of Platinum Group Metals Ltd. Lion Battery Technologies Inc., a venture Platinum Group Metals launched with Anglo American Platinum in 2019, recently received a patent related to the use of platinum group metals, carbon nanotubes and other innovations to boost lithium battery performance. Under a US$3.0 million, three-year sponsored agreement with Florida International University, Lion Battery Technologies is funding research and patent agreements to unlock lithium-air and lithium-sulfur battery potential by using the catalytic properties of platinum and palladium.

—Read the full article from S&P Global Market Intelligence

California To Require All New Cars, Passenger Trucks Be Zero Emission By 2035

California, the top US gasoline-consuming state, aims to end new sales of gasoline-powered cars and passenger trucks by 2035, according to an executive order announced Sept. 23 by Governor Gavin Newsom. The order directs the California Air Resources Board to develop regulations requiring increasing sales of new zero-emission vehicles in the state to the target of 100% by 2035.

—Read the full article from S&P Global Platts

Renewableuk Calls For Hydrogen Strategy Backing 5 GW Electrolysis By 2030

California, the top US gasoline-consuming state, aims to end new sales of gasoline-powered cars and passenger trucks by 2035, according to an executive order announced Sept. 23 by Governor Gavin Newsom. The order directs the California Air Resources Board to develop regulations requiring increasing sales of new zero-emission vehicles in the state to the target of 100% by 2035.

—Read the full article from S&P Global Platts

The Future of Energy & Commodities

Infographic: Political Debate Over Nord Stream 2 Gas Pipeline Enters Overdrive

The Nord Stream 2 gas pipeline from Russia to Germany is almost complete with a little over 150km left to lay in Danish and German waters. The threat of US sanctions has prevented its completion, while in Europe calls have intensified to halt the project in response to the poisoning of Russian opposition politician Alexei Navalny.

—Read the full article from S&P Global Platts

Coronavirus Pandemic To Blunt Global Gas Demand Growth To 2030: S&P Global

Over the next decade, natural gas demand globally will grow at a slower pace as the industry responds to emerging financial and policy pressures brought on by the novel coronavirus pandemic. That's the conclusion of a new cross-divisional energy transition report from S&P Global units S&P Global Platts Analytics and S&P Global Ratings.

—Read the full article from S&P Global Platts

Written and compiled by Molly Mintz.