The global chemicals industry may be affected significantly as trends in the automotive industry shift toward the adoption of electric vehicles (EVs) and light-weighting of vehicles. These effects may be a huge positive for some in the industry and a long-term negative for others. As S&P Global Ratings thinks about the adoption of EVs globally, we expect a greater focus by governments and companies on sustainability and the push for an alternative to fossil fuels in an effort to lower their carbon footprint. We expect that the adoption of EVs (both plug-in hybrids and battery) will increase significantly, with the U.S. lagging Europe and China. S&P Global Ratings expects that EVs could approach a 10% share of U.S. vehicle sales by 2025 (compared with about 1% globally in 2017), behind our forecast of 25% share in Europe and 20% share in China (see "The Road Ahead For Autonomous Vehicles," May 14, 2018).
As the penetration of EVs increases, so does demand for the lithium-ion battery, a key component in battery EVs. Three major global lithium producers--Albemarle Corp., Sociedad Quimica y Minera de Chile S.A. (SQM), and FMC Corp.--stand to benefit from the increased EV market penetration and have announced plans to accelerate lithium capacity expansions. Partially tempering this is that the composition of the primary battery used for battery EVs is lithium-based, which could shift in the future and hinder earnings for the sector and lithium producers overall.
FMC announced plans to spin off its lithium business in the second half of 2018, as the company completes its transition to pure-play agricultural chemicals. The company expects to pursue an IPO as opposed to an outright sale, in large part due to the tax-free nature of a spinoff. The IPO would lead to a listed pure-play U.S. lithium producer, following China's Ganfeng Lithium (unrated), which filed an IPO this year.
Global Chemicals Industry Isn't Entirely Plugged In To EVs
Certain producers of lithium, specialty plastics, polymers, and silicone aim to benefit from the shift toward EVs and light-weighting in the automotive industry. But the news is not all positive for the global chemical industry. We believe the chemicals sub-sector most adversely affected would be companies that serve the global oil additive industry.
As the global automotive industry seeks to reduce emissions with more light-weighting and investing heavily in EVs, it could have a significant long-term impact on the earnings potential of oil additive producers such as NewMarket Corp. and SK Invictus Intermediate II S.a r.l. The impact will most likely be longer-term as internal combustion engines will still make up the overwhelming majority of light-vehicle sales globally for the foreseeable future. The shift toward light-weighting will also have a negative impact on these companies as the emissions and efficiency to achieve better gas mileage means less need for oil additives. Overall, we believe that increased demand for battery EVs and light-weighting will slow growth for oil additive companies rather than halt it as heavy-duty trucks and larger vehicles will trail the light-vehicle shift to electric.
Overall, we believe the global car parc (cars on the road) will increase, and therefore use of oil additives should increase; however, we believe this growth will be at a slower pace. For context, each 1 million EVs (roughly equal to 2017 EV sales) only replace about 20,000 barrels per day in oil demand (see "Tech Disruption: Which Sectors Will Electric Vehicles Disrupt Most?" Feb. 21, 2018). Further, with plug-in hybrid electric vehicles (PHEV), automakers are not completely demotorizing as with battery EVs. As such, they will still require oil additives from companies like NewMarket via Afton Chemicals. In addition, internal combustion engines will still likely be required in heavy-duty machinery and diesel tractors.
Further Potential Winners
In addition to beneficiaries serving the lithium market, we view plastic providers such as Trinseo S.A. and silicone manufacturers such as Momentive Performance Materials as potential winners as well, given the trend for light-weighting components in the automotive industry continues. Also among potential winners are large multinational chemical providers such as E.I. du Pont de Nemours and Co., The Dow Chemical Co., and LyondellBasell Industries N.V..
The global chemical industry represents products externally, internally, and under the hood when thinking about the automotive industry, and all are areas in which auto manufacturers are looking to capitalize when thinking about reducing the weight of vehicles. As automakers look to improve fuel efficiency, they look to plastic and polymer suppliers for solutions. For example, E.I. du Pont de Nemours and Co., often referred to as DuPont, through its thermoplastics business has helped auto manufactures come up with light-weighting solutions throughout the entire vehicle. Dow, through its high performance composite resins and composite bonding systems, helps automakers reduce vehicle weight drastically. Throughout the sector, chemical providers are leveraging technology and the push for light-weighting to come up with solutions and improve overall earnings prospects. Another supplier to the industry is silicone producer Momentive. Through its elastomer business, Momentive focuses on solutions for the auto industry by not only making cars lighter and more fuel-efficient, but also stronger. Its product can be a lighter substitute for metals used on vehicles.
The auto industry is one to watch and one in which chemical providers are heavily involved. Perhaps they will help shape the future of the industry and EVs as light-weighting and fuel efficiency become greater focuses across the globe.
We believe that the shift toward EV adoption to be more of a positive than negative for the global chemical industry, and that any rating implications to be longer-term in nature. We expect growth capital spending to continue, driven by increased demand in lithium carbonate and lithium hydroxide demand. Additionally, we expect specialty chemical companies to continue to improve technology and increase research and development (R&D) spending to help automotive customers solve complex issues on further improving efficiencies and overall light-weighting across the industry. While we expect volume growth in the lithium industry to be super-charged, aggressive growth plans and some financial policy uncertainty constrain near-term upside potential among key players.
Only a rating committee may determine a rating action and this report does not constitute a rating action.
|Primary Credit Analyst:||Edward J Hudson, New York + 1 (212) 438 2764;|
|Secondary Contact:||Daniel S Krauss, CFA, New York (1) 212-438-2641;|
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