Where Is The Big Money Headed In The Global Shift! 👀

As countries return to work to ensure food security while working on the energy transition: there are potential opportunities in the electric vehicle (EV), energy supply, and fertilizer sectors.

• The EV market is booming, and the demand for lithium is expected to grow.
• Nuclear energy is seen as a promising alternative to fossil fuels, and SMRs are a cost-effective option.
• The agricultural sector is facing challenges, but there are opportunities for sustainable solutions.

This EasyResearch article explores the potential opportunities that could arise in these sectors as countries work to ensure food security as well as the energy transition.

Electric Vehicles (EVs)

The electric vehicle market is booming. In an article in April 2023, the International Energy Agency (IEA) stated that the EV market is expected to increase its share in the automotive industry, with sales projected to jump 35% globally this year. IEA Executive Director Fatih Birol said, “Electric vehicles are one of the driving forces in the new global energy economy that is rapidly emerging.”

Lithium-ion batteries are the most common type of battery used in EVs due to their high energy density, low self-discharge, and fast charging capabilities. Most lithium is mined in Chile and Australia and primarily processed in China. In May 2023, Tesla Inc (NASDAQ: TSLA), the EV pioneer, announced its plans to build its own lithium refinery in Texas. Earlier this month, the Australian Resource Minister mentioned that a tax break for lithium processing plants, among other critical minerals projects, is under consideration following calls from Tesla.

Global demand for lithium is expected to grow significantly in the coming years, and a potential tax break on lithium processing in Australia would further bolster the industry's outlook by making it more profitable for companies to invest in lithium mining and processing projects. Mining.com reported that emerging Australian lithium companies are being acquired by top producers seeking to secure supplies. One of Australia's largest lithium miners, Pilbara Minerals Limited (ASX: PLS), also intends to pursue acquisitions following strong output. Here are the latest financials.

Albemarle Corp (NYSE: ALB) is a leading provider of lithium and bromine products and solutions, with operations across the Americas, the Asia-Pacific region, Australia, Europe, and the Middle East. In September 2023, the company confirmed its intention to acquire Liontown Resources Ltd (ASX: LTR), a lithium explorer that controls two major deposits in Western Australia. Shortly after, Hancock Prospecting Pty Ltd, owned by Australia's richest woman, purchased shares in Liontown, stating, "Hancock can contribute to Liontown’s future direction alongside other Liontown shareholders." The explorer had $305.4 million in cash in its bank as of June 30, 2023, and had drawn down $118.8 million from a $300 million Ford finance facility in the quarter.

In Chile, Albemarle is one of the two companies licensed to produce lithium in the country, the other being Sociedad Química y Minera de Chile S.A. (NYSE: SQM). By the end of April 2023, the government of Chile announced a strategy that calls for public-private partnerships for future lithium projects, a strategy that has yet to be voted on. The contracts of the two lithium giants, SQM and Albemarle, are set to expire in 2030 and 2043, respectively. Albemarle is also expected to restart its lithium mine in the US, and the company received funding from the US Department of Defense on September 12, 2023.

Energy Supply

Several developments are taking place regarding household energy supply as more countries consider the potential use of nuclear energy. Nuclear energy is viewed as an alternative to fossil fuels, providing a clean and efficient way to generate electricity. While larger nuclear plants have longer construction timelines, small modular reactors (SMRs) are considered an alternative due to their shorter construction times, cost-effectiveness, and flexibility. SMRs were also mentioned in the G20 summit declaration, where their advancement was discussed.

In September 2023, Rolls-Royce SMR (a subsidiary of Rolls Royce Plc (LON: RR)) launched a supplier portal to identify UK companies for potential partnerships. This initiative followed the UK government's revival of the Great British Nuclear program. One of the Rolls Royce SMR partners is the Qatar Investment Authority, the sovereign wealth fund for Qatar, which acquired a 10% stake in Rolls Royce Plc in late 2021.

This month, The Sunday Times revealed that a Qatar NPO is set to announce a billion-dollar investment in UK green energy development, "We continue to work alongside Rolls-Royce to develop new, leading climate tech ventures and technology hubs, both in the UK and Qatar," the organisation said.

Rolls Royce PLC is currently 47% Civil Aerospace, 28% Defence and 25% Power Systems. For its new markets (which include SMR), the company said:

"Rolls-Royce SMR is progressing well through the regulatory process in the UK, entering stage 2 of the Generic Design Assessment (GDA) process. First power is still planned in the early 2030s, which will be dependent on securing orders and the outcome of the final investment decision by the UK Government."

Rolls Royce Plc reported £6.95 billion in revenue and £1.515 billion in gross profit, with a gross profit margin of 21.8% in the first half of 2023.

Food

The agricultural sector has been in the spotlight, primarily due to the rise in fertilizer prices, which peaked in 2022 due to supply disruptions associated with geopolitical events in Russia and Ukraine. As the saying goes, "the cure for high prices is high prices," prices started to decrease as the agricultural sector adapted to higher prices.

However, BHP Group (JSE: BHG/ASX:BHP) remains committed to leading the fertilizer industry. The mining giant is developing its potash mine in Canada that will be using EVs - a strategy that can also help reduce the risk of exposure to fossilflation, inflation caused by the rise of fossil fuel prices. BHP stated in its most recent commodity outlook, "Longer-term, we see potash as a future-facing commodity with attractive fundamentals. Demand for potash stands to benefit from the intersection of global mega-trends: rising population, changing diets, and the need for the sustainable intensification of agriculture." Potash is a crucial ingredient in fertilizers.

In June of the previous year, BHP partnered with the Canadian government. Minister of Innovation, Science and Industry remarked, "We know how critical potash is for our country when it comes to food security." The Canadian Minister of Agriculture and Agri-Food added, "Our government's investment in the world's greenest potash mining facility will help our farmers feed a growing world population." In January, the government announced a $100 million investment in the mining giant's potash mine.

BHP had a strong financial position by June 2023, with a net operating cash flow of US$18.7 billion, capital and exploration expenditure of US$7.1 billion, resulting in free cash flow of US$5.6 billion, and a gearing ratio of 18.7%.

Gearing is a financial metric that represents the proportion of a company's debt in relation to its equity, indicating its level of financial leverage or debt risk.

Conclusion

Central banks worldwide closely monitor inflation to determine the next move for interest rates. Governments are also expanding projects to combat inflation and stabilize prices, which may offer opportunities for investors but could also bring volatility.

The expansion and transition to renewable energy are also seen as a means to reduce reliance on fossil fuels and combat fossilflation. Such a transition will not occur overnight. Increased access to new technologies, such as EVs and SMRs, in the broader market due to technology commoditisation could provide long-term benefits to specific companies, considering their output and market size.