July 26th, 2023 | 07:10 CEST
Raw materials war - is China getting serious? BASF, Mercedes-Benz, Almonty Industries
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"[...] China's dominance is one of the reasons why we are so heavily involved in the tungsten market. Here, around 85% of production is in Chinese hands. [...]" Dr. Thomas Gutschlag, CEO, Deutsche Rohstoff AG
Almonty Industries: Jump in sales and profits from 2024
"Once the downstream plant is running at 100% utilization from 2026, we could provide up to 30% of non-Chinese tungsten supply," Almonty CEO Lewis Black said at an investor conference in May this year. Almonty aims to start making money as early as 2024 when it ramps up its Sangdong mine in South Korea. In addition, the Company already operates three smaller mines on the Iberian Peninsula. However, the focus is clearly on the Sangdong development. Analysts at Sphene Capital expect Almonty to generate an EBITDA of CAD 23.2 million and a net income of CAD 8 million as early as next year. In 2025, profits are expected to increase, climbing to CAD 47.7 million (EBITDA) and CAD 26.2 million (net income).
Almonty is currently valued on the stock market at only CAD 140 million. Given the expected earnings, this is too little. Planning security is provided by the 15-year offtake agreement already in place with the Austrian raw materials conglomerate Plansee. The Austrians are one of the world's leading tungsten suppliers, with around 11,000 employees and production sites in around 50 countries. The terms for Almonty are very attractive: the minimum purchase price is USD 235 per metric ton unit (MTU). The agreement covers around 50% of production, and the remainder can be sold on the market at spot prices. Almonty should not be worried about sales issues, mainly because the mine is located in South Korea, a country with the highest global demand for tungsten.
Mercedes relies on exponential growth for electric cars
Mercedes is also likely to be dependent on tungsten. That is because it expects exponential growth in electric cars in the future. Exactly when remains unclear, but at least in the course of this decade. That is why Mercedes CEO Ola Källenius wants to "up the ante," he told Handelsblatt in an interview. The previously planned EUR 40 billion for research and development of electric drives will be increased. Mercedes is relying on four electric architectures to create the basis for growth in the future. However, sales of electric vehicles are currently relatively manageable. The goal of having pure electric vehicles account for around 50% of total sales by the middle of the decade has been scrapped. The new target is now set for 2026.
As far as the current sales figures are concerned, analysts are generally optimistic. Bernstein Research, for example, expects Mercedes to achieve its targets for 2023. This is ensured by the high order backlog. However, the analysts also pointed out the sales problems with e-cars and the somewhat restrained consumer sentiment in China. Nevertheless, they rate the Mercedes-Benz share as "Outperform". The price target is EUR 90. Currently, the share is trading at around EUR 71.
BASF: Dividend at risk?
Instead of focusing on future new raw material suppliers, BASF is taking a different approach. The chemical giant is investing massively in China. Most recently, the construction of a huge offshore wind farm was announced. In a joint venture with the Chinese energy company Mingyang, BASF plans to build a 500 MW wind farm in Zhanjiang. A BASF Verbund site is also located there. The expansion is currently underway. A world-scale polyethylene (PE) plant is scheduled to come on stream in 2025. It will have an annual production capacity of 500,000 metric tons of PE and serve the rapidly growing demand in China. "The Zhanjiang Verbund site is strategically located close to our customers. It is fully backward integrated to provide them with high-quality and reliable PE products for a wide range of durable applications. These include pipes, specialty films and blow-molded parts for household and industrial chemical containers, especially for the South China market," said Bejoy Chandran, Vice President Basic Business Management & China Sales Management, Petrochemicals Asia Pacific at BASF. BASF's focus on China has faced criticism in recent months from shareholders at its annual general meeting and also politicians. However, the Company seems unfazed by these criticisms.
The majority of analysts are not impressed by the prospects for BASF shares. Most recently, Barclays reduced its price target for the chemical giant's stock from EUR 68 to EUR 61. The analysts rate the share as "Equal-Weight". With the upcoming quarterly figures, the experts hope for clarity as to whether price discounts currently have to be granted or demand is low. In any case, the earnings estimates have already been reduced as a precaution. Prior to this, Berenberg had already lowered the price target for BASF shares from EUR 54 to EUR 50. Analysts anticipate that the DAX-listed company will cut its dividend for 2023.
Uncertainties about raw material supplies for key industries will likely be with us for years to come. The current dependence on China and Russia is too great. In the tungsten sector, Almonty emerges as a promising candidate, poised to enter a different league on the stock market, especially with the commissioning of the Sangdong Mine. A prior positioning seems promising. Mercedes is an example of the situation in the German auto industry. The order backlog secures sales in 2023, but what comes after that is a worry. With its focus on China, BASF is effectively going all-in.
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