Catalysts and metal recycling

Transcription

BERENBERG EQUITY RESEARCH
Catalysts and metal
recycling
Expectations are too high
Evgenia Molotova
Analyst
+44 20 3465 2664
[email protected]
Jaideep Pandya
Analyst
+44 20 3207 7890
[email protected]
John Klein
Analyst
+44 20 3207 7930
[email protected]
15 July 2013
Chemicals
Chemicals
For our disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) and
our disclaimer please see the end of this document.
Please note that the use of this research report is subject to the conditions and restrictions set forth in the disclosures and
the disclaimer at the end of this document.
Chemicals
Table of contents
Catalysts and metal recycling: expectations are too high
4
Executive summary
5
Porter’s five forces analysis
8
Catalysts
10
Recycling
53
Umicore: Recycling at risk
Umicore: investment thesis
85
87
Valuation
126
Umicore: company overview
127
Financials
131
Johnson Matthey: Near-term expectations too high
135
Johnson Matthey: investment thesis
137
Johnson Matthey: company overview
156
Valuation
158
Financials
160
Disclosures in respect of section 34b of the German Securities
Trading Act (Wertpapierhandelsgesetz – WpHG)
164
Contacts: Investment Banking
167
Chemicals
Expectations are too high
● With this note, we initiate coverage of Johnson Matthey and Umicore.
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We rate Johnson Matthey Hold with a price target of £28.00/share
and Umicore Sell with a price target of €26/share.
We have conducted an in-depth, bottom-up analysis of two industries:
metal recycling, and automotive and process catalysts. We think that in
both industries the market tends to rely on the forecasts of the main
players and lacks visibility on key industry drivers, the stakeholders
involved in the process and the risks associated with the industry.
Medium-term, we are more positive on the prospects of the catalysts
industry than we are on the recycling industry. Short-term, we have
concerns for both industries.
Johnson Matthey is the leading company in the area of automotive
catalysts; it also has precious metals recycling and production
capabilities. We think that in the long term Johnson Matthey is well
positioned within the majority of the industries in which it is present;
however, in the short term we see some risks to consensus numbers.
In automotive catalysts, we think that the market is overestimating the
effect of Euro VI legislation on the catalyst value per vehicle. We also
think that the Chinese heavy-duty diesel (HDD) catalyst market will
develop more slowly than consensus expects. Finally, short-term prebuying of Euro V trucks ahead of Euro VI implementation could slow
the penetration of Euro VI in 2013-14.
Our expectations for Johnson Matthey’s Precious Metal Products
division are also below consensus. The loss of the Anglo Platinum
distribution contract will result in a £35m loss of EBIT. In our view,
the market seems to believe that a similar contract can be signed with
another precious metals producer, which will restore divisional
profitability to the level of 2011. We view this as unrealistic.
Umicore is one of the leading companies in the areas of recycling and
automotive catalysts. It has unique technical capabilities that allow it
to recycle various feedstock streams and recover up to 20 metals. The
recent underperformance of the stock reflects, in our view, market
concerns about the short-term performance of the largest division –
Recycling (c61% of group EBIT in 2012) – due to declining precious
metal prices. We expect the competitive dynamics of the recycling
industry to deteriorate significantly in the medium term.
We expect a decrease in the availability of key recycling feedstocks:
electronic scrap (e-scrap) and industrial residues. Contrary to market
expectations, we do not expect e-scrap availability to increase in the
medium term. On the other hand, recent capacity additions in e-scrap
treatment have led to significant overcapacity in the market. Industrial
residues – PGM-containing slimes of base metals (copper, lead, zinc)
– were historically treated by Umicore. Recently, however, a number
of metal refiners have invested in their own capacities. For instance,
we believe the termination of the company’s supply agreement with
Aurubis might lead to around a 10% fall in Umicore’s gold output.
The company’s other divisions will not be able to compensate for the
deterioration in Recycling.
We are 9% below Bloomberg consensus for Johnson Matthey’s 2013
EPS and 12% below consensus for 2014 EPS. We are 8% below
consensus for Umicore’s 2013 EPS; for 2014 we are 24% below
consensus.
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Umicore SA
Sell (initiation)
Current price
Price target
EUR 33.26
EUR 26.00
11/07/2013 Brussels Close
Johnson Matthey plc
Hold (initiation)
Current price
Price target
GBp 2,807
GBp 2,800
11/07/2013 London Close
Rating system: Absolute
15 July 2013
Evgenia Molotova
Analyst
+44 20 3465 2664
[email protected]
Jaideep Pandya
Analyst
+44 20 3207 7890
[email protected]
John Klein
Analyst
+44 20 3207 7930
[email protected]
Chemicals
Executive summary
In this note, we analyse two industries in detail: catalysts (process and automotive)
and metal recycling.
We think that in both industries the market tends to rely on the forecasts of the
main players and lacks visibility on key industry drivers, the stakeholders involved
in the process and the risks associated with the industry.
The process catalysts market is driven mostly by growth in the underlying
customer industries. We have examined key trends in the refining, hydrogen,
ammonia, methanol and alternative fuels industries in order to determine mediumterm growth rates for process catalysts.
Legislative changes are driving industry growth in automotive catalysts. We have
made a detailed analysis of future legislative changes globally and determined which
catalytic technology is required to implement these changes. We also looked at how
these technologies are translating into monetary value per vehicle. Lastly, we
assessed the relationship between global automotive players and catalyst producers
by determining key catalyst suppliers for each leading OEM producer in both
passenger and commercial vehicles. Based on the market shares of auto
manufacturers in different parts of the world, we estimated the market shares of
leading catalyst producers in each region. This analysis allowed us to develop a
more critical view on the prospects for both revenues and profits in the
automotive catalyst industry.
The metal recycling universe within the chemicals sector is limited to two
companies – Johnson Matthey and Umicore – and we believe financial markets
tend to underestimate the industry’s complexity. We looked at the whole chain of
different feedstock streams, from e-scrap to residues from metal refiners, and
reached conclusions which differ substantially from current market perceptions.
We think that the market underestimates capital intensity, competitive rivalry and
supply dynamics; and we believe the fundamentals of the metal recycling industry
will deteriorate in the medium term.
Process catalysts
The process catalysts segment is growing substantially faster than the underlying
industries due to constant innovation, which helps client companies save money
and allows catalyst companies to charge a premium for their products. Contrary to
market perception, specialty process catalyst companies generate higher margins
than automotive catalyst companies. For instance, we expect that Johnson
Matthey’s process catalysts division will remain one of the key drivers of the
company’s profitability.
Automotive catalysts market
We are more critical than the market regarding the future fundamentals of the
automotive catalysts industry.
In light-duty vehicles (LDV), catalyst technology is mature. The market is highly
consolidated, with three key players (BASF, Johnson Matthey and Umicore)
controlling c90% of the total available market. Substantial revenue growth or a
shift in market shares is only possible if there are legislative changes or if one of
the players comes up with new, disruptive technology. We expect the European
LDV catalyst market to increase in value by 2-2.3x within the next two years due to
the introduction of the Euro VI standard. Thereafter, we expect growth to slow.
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As there are no considerable legislative changes in LDV until 2015, we expect
average annual market growth to be 5-5.5%, still higher than global auto
production growth. The maturity of the market in developed countries and the
slowdown in legislative changes (as emissions control in these regions is already at
a very high level) could lead to an erosion of catalyst producers’ pricing power.
Less than a decade ago, the HDD catalyst market did not exist, but it is now
growing very rapidly, driven mostly by the legislative changes discussed above.
Johnson Matthey forecasts the HDD catalyst market to reach $2.1bn by 2015 and
$3bn by 2020. We are more cautious and expect the HDD catalyst market to reach
$1.9bn by 2015 and $2.5bn by 2020.
Short-term growth in the HDD market will be driven by the introduction of the
Euro VI standard in Europe and Phase IV (similar to Euro IV) in China. Both are
expected to come into force at the beginning of 2014. Based on our analysis, we
expect the European HDD catalyst market to double due to this change in
legislation.
We see the development of the Chinese market as more problematic. Low-sulphur
fuel is necessary for Phase IV implementation and it is not yet clear whether this is
available throughout the country. For the last four years, Chinese oil refineries have
struggled with the capacity upgrades required for low-sulphur fuel production.
Phase IV does not require sophisticated technology, so the catalyst value per
vehicle will be much less than it is in developed countries. Implementation will also
attract local competitors to the market, so the catalyst majors’ market share will be
smaller in China than in the developed world.
Lastly, it is not clear how the change in legislation will be enforced in China. In
Europe or the US, faulty catalysts can result in significant fines for the auto
manufacturer. In China, the stakeholders as well as the emissions measurement
mechanisms are not clear. We think truck manufacturers will try to avoid additional
investments in emissions control, should such an opportunity arise.
We also have certain concerns about the short-term profitability of the HDD
catalyst market. Future changes in HDD legislation have prompted all the major
players to increase capacity and we think that, in the next two years, the market will
be unable to absorb all the capacity additions.
Metal recycling
We think that there are fundamental changes taking place in the recycling industry
which will lead to a reduction in refining charges and precious metal yields for the
leading player, Umicore. The company has developed a unique technological
process which allows it to recover 20 precious and non-ferrous metals from
various sources of secondary feedstock. Umicore’s metal extraction rates are much
higher than those of its competitors, especially in cases where metal concentration
in the feedstock is low.
So far, Umicore has been able to “cherry-pick” its feedstock in order to optimise
the input metal mix and increase the metal yield of the output. However, we think
that the availability of various platinum group metal (PGM) containing feedstocks
will be severely reduced in the medium term.
E-scrap is one of the most important feedstocks for metal recycling, as it has the
highest concentration of precious metals per tonne of scrap. The market –
mistakenly, in our view – expects very strong growth in the availability of this type
of feedstock. Based on our analysis, we expect the growth in e-scrap availability to
be considerably lower than the market forecasts. The majority of the materials
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which are available and profitable to recycle are already being recycled (legally or
illegally). Radical changes in legislation and changes in product design are required
for further growth of the addressable market. On the other hand, capacity growth
in e-scrap recycling is considerably outpacing the growth in scrap availability.
According to our estimates, global e-scrap recycling capacity currently exceeds
400,000 tonnes, whereas the available e-scrap will only reach 300,000 tonnes by
2015.
We also think that the concentration of PGMs in industrial residues will decrease
over time.
Concentrates which metal smelters use as feedstock contain precious and minor
metals. In the past, base metal smelters used to outsource the treatment of their
PGM-containing production slimes to the likes of Umicore. However, the recent
decline in their main revenue streams (treatment charges, free metal sales and byproduct sales) has forced them to look for incremental sources of revenue. A
number of base metal refiners have made investments in recycling facilities. For
instance, Aurubis has a long-term contract with Umicore which is coming to an
end in 2013; Aurubis has decided not to renew it. Based on our calculations, the
loss of this contract could result in the loss of 10% of Umicore’s gold feedstock.
Nyrstar is another company which intends to end its contract with Umicore in
2015-16.
Recycling is a very capital-intensive business. We think that fixed costs represent
up to 75% of total cash costs in recycling (excluding the cost of the metal, which is
a pass-through). As a result, a recycler has to operate the smelter 24/7, even if the
input mix is not optimal. As the metal mix deteriorates, the recycler begins to treat
fewer precious metals and more base metals (lead, copper and zinc). As a result,
revenues decline significantly, whereas costs remain broadly unchanged or even
increase, as the recycler has to process higher volumes in order to reach the same
precious metal yields.
We expect that the profitability and returns of Umicore – the leading player in the
recycling industry – will fall in the medium term.
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Chemicals
Porter’s five forces analysis
Catalysis
The bargaining power of suppliers is limited. In precious-metals-based catalysts,
metals represent a considerable portion of the catalyst price. However, precious
metal costs are always a pass-through in the catalysts industry, so price fluctuations
do not have an effect on catalyst producers’ profits. On the other hand, catalyst
producers represent a major share of precious metals demand, so they have certain
bargaining power with their suppliers. The cost of the substrate is also a passthrough, so similar relationships exist.
The bargaining power of customers is relatively low in the process catalyst
industry and relatively high in the automotive catalyst industry. Process catalysts
reduce the costs of the processes for which they are used. They are often critical to
the production process and provide a competitive advantage to the technology
owner. As a result, the bargaining power of customers in the process catalyst
industry is not strong. Constant innovation and a high level of technological
expertise allow catalyst producers to charge a premium for their products.
In the automotive catalyst industry, customers’ bargaining power is greater.
Though catalysts are necessary to comply with strict environmental legislation, the
technology is relatively mature and in the absence of legislative changes it is hard
for the catalyst producers to come up with new solutions. The global automotive
industry is highly consolidated and catalyst producers often work with the same
client in different regions. The scale of cooperation gives additional bargaining
power to the customers.
Competitive rivalry is lower in the process catalyst industry and higher in the
automotive catalyst industry.
In the process catalyst industry, producers tend to specialise in certain types of
technology, which limits competition. In the automotive catalyst industry, all three
leading players have a high level of technical expertise. However, as the technology
is relatively mature, they have to compete vigorously with each other.
The risk of substitution is low in both process and automotive catalysts.
Catalysts are a critical part of the processes in which they participate.
The threat of new entrants is moderate in both industries. As demand for
catalysts is very much technology-driven, new, disruptive technology is required in
order to break through into the market.
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Recycling
The bargaining power of suppliers is limited, but increasing. In the majority of
cases in the recycling industry, suppliers are also clients. The recycler obtains metal
scrap from the client and returns extracted metal. Treatment charges are the key
revenue stream for the recycler. In the past, the structure of the treatment charge
allowed the recyclers to capture a large proportion of the underlying metal value.
However, as recycling technology matures, more players are entering the market,
with the suppliers themselves investing in metal treatment facilities. We think that
these changes will affect the structure of treatment charges and reduce the value of
the metal captured by the supplier.
The bargaining power of customers. See point above.
Competitive rivalry is increasing due to fundamental changes in the industry. We
expect scrap availability to decline in the medium term. Recyclers will have to
compete with their own suppliers for available feedstock material.
The risk of substitution is low. Metals can be either mined or recycled. Recycling
feedstock has much higher metal concentrations than ore does. Recycling is
therefore a much more cost-efficient method of metal production than mining.
The threat of new entrants is increasing. Scrap suppliers (mostly base metal
refiners) are becoming increasingly involved in metal recycling, as they are reluctant
to share a significant portion of the value of the recovered metal with the recycler.
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Catalysts
Catalysts are the “workhorses” of chemical transformations. Approximately 8590% of the products of the chemicals industry and 20% of all industrial products
are made via a catalytic process.
A catalyst accelerates a chemical reaction. Every catalytic reaction is a sequence of
elementary steps in which reactant molecules bind to the catalyst, where they react,
after which the product detaches from the catalyst, liberating the latter for the next
cycle.
Catalysts are required in:
 petroleum refining (which consists almost entirely of catalytic processes);
 the production of bulk and fine chemicals in all branches of the chemicals
industry (for instance, rubber, plastics, methanol etc);
 the prevention of pollution by avoiding the formation of waste;
 the abatement of pollution in end-of-pipe solutions (automotive and industrial
exhausts); and
 the production of pharmaceuticals.
A catalyst offers an alternative, energy-efficient mechanism to the non-catalytic
reaction, thus enabling processes to be carried out under industrially-feasible
conditions (in terms of pressure and temperature, for example). The chemicals
industry would not exist without catalysts: they can help substantially decrease
costs or develop new, unique product propositions, providing a competitive
advantage to a company which owns certain catalytic technology.
Catalysts come in a multitude of forms, varying from atoms and molecules to large
structures such as zeolites or enzymes. In addition, they may be employed in
various surroundings: in liquids, in gases or on the surface of solids.
Catalytic reaction
Source: Concepts of Modern Catalysis and Kinetics (second edition); I Chorkendorff, JW Niemantsverdriet
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Approximately 85-90% of the
products of the chemicals industry and
20% of all industrial products are
made via a catalytic process
Chemicals
Catalysts: an integral part of chemicals production
Catalysts accelerate reactions and thus enable industrially-important reactions to be
carried out efficiently under conditions that are attainable practically. Very often,
catalytic routes can be designed such that raw materials are used efficiently and
waste production is minimised. Consequently, the chemicals industry is largely
based upon catalysis: roughly 85-90% of all products are made via catalytic
processes and this percentage is increasing steadily.
In developed countries, demand growth is driven mostly by legislative changes,
while economic growth is the major source in emerging and developing countries.
While emissions standards and environmental norms are becoming stricter in
developed countries, growth in vehicle production and fuel consumption as well as
growth in chemicals production are the key drivers in emerging markets.
Catalysts reduce the costs of the
processes for which they are used. They
are often critical to the production
process and provide a competitive
advantage to the technology owner
The table below describes the main types of catalyst and the companies which
specialise in their production.
Key process catalyst types
Reaction
Catalysts
Company
W.R. Grace, BASF, Albemarle, Criterion, SudChemie, JGC catalysts
W.R. Grace Albermarle, Criterion, BASF
(Engelhard), Chevron Phillips, Criterion, NikkiUniversal, Axens
Catalytic cracking of crude oil (FCC)
Zeolites
Hydrotreating the crude oil
Co-Mo, Ni-Mo, Ni-W
Polymerization of olefins
Cr, TiClx/MgCl1, Ziegler
catalysts
Albemarle, W.R. Grace, LyondellBasell, Air
Products, BASF, Dow, ExxonMobil, Evonik,
N.E. Chemcat, Nippon shokubai, Sud Chemie
Ethylene epoxidation to etylene oxide
Ammonia, Hydrogen, syngas and Methanol
production
Hydrogenation of vegetable oils, oleochemicals
and oxoalcohols
Sulfuric acid
Ag
Nippon Shokubai
Pt-Rh, Fe, Cu-ZnO, Ni
JMAT, Criterion, BASF, Sud chemie
Ni
JMAT, BASF
V
Oxidation of CO & hydrocarbons (car exhaust)
Pt, Pd
Reduction of Nox (in exhaust)
Coal to liquids, Gas to liquids
Hydrogenation and oxidation
Silicon curing
Pharmaceuticals
Rh, vanadium oxide
Fischer-Tropsch
Ni, Pt, Pd, Cu
Pt
Chiral catalysts (Pd, Cu, Ni)
Petroleum desulfurization
Ni, Co-Mo, Ni-Mo
Nippon Shokubai
JMAT, BASF, Umicore, Catalar, N.E. Chemcat,
Nippon Shokubai
JMAT, BASF, Umicore, Catalar
Albermarle, BASF, JMAT, Criterion
Johnson Matthey, BASF, Evonik, Sud Chemie
BASF, W.R. Grace
JMAT, N.E. Chemcat, BASF
Nikki-Universal, Sud-chemie, Albermarle,
Axens, Criterion
Source: Company data, Berenberg research
According to SRI International, the value of the mobile emissions catalysts market,
including metals, is $16.9bn and the value of the process catalysts market is $13bn.
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Global catalysts market
Refinery ,
23%
Process ,
43%
Chemical
Processing
, 44%
Mobile
Emissions
, 57%
Polymerization
, 33%
Source: Berenberg estimates, SRI International, BASF
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Chemicals
Process catalysts
Catalysts for refineries represent approximately 23% of process catalysts, with
catalytic cracking the largest segment within refining, followed by hydrotreating,
reforming and hydrocracking.
Polymerisation catalysts represent 33% of the total market for process catalysts.
Major market sub-segments include polyethylene, polypropylene, polyethylene
terephthalate, polyvinyl chloride and polystyrene. Polyolefin catalysts are the largest
category, accounting for a 60% share of the sub-segment.
The chemicals processing segment represents 44% of the process catalysts market
and includes organic synthesis, oxidation/ammoxidation, hydrogen/ammonia/
methanol synthesis and hydrogenation/dehydrogenation. The markets for most of
these chemicals have faced slow growth in the last five years. However, growth in
the market for catalysts (ex-metals) has been 1.5-2x higher than that of the
underlying chemicals due to the following trends:
Refining catalysts have the largest
share by volume, but the smallest
by value. Chemical catalysts are
highest in value
The market for chemical catalysts
has grown 1.5-2x faster than the
underlying chemicals markets
 the need to adapt to new feedstocks (for instance, renewable fuels require a
different type of catalyst);
 the use of higher-performing catalysts to achieve higher process yields – as well
as to prolong catalyst life – favourably affects product mix;
 gas-to-liquids and coal-to-liquids;
 the development and commercialisation of chiral catalysts for selective
hydrogenation to produce fine chemicals/pharmaceuticals for aroma and
agrochemicals;
 changes in legislation: stricter environmental requirements resulting in higher
volumes of catalysts; and
 a reduction in the quantity of high-value metals in the catalyst without
sacrificing process yields.
We mentioned various players in the process catalysts market in the table above.
There are several business models.
 Captive manufacturers: as catalysts are critical for the production process, their
technology is often highly proprietary in nature. The captive manufacture of
catalysts is dominated by large chemicals manufacturers and petroleum refiners
that possess both the sophisticated technology and the capital needed to
finance expensive catalyst and process development programmes. Companies
may also contract with catalyst manufacturers to produce the catalysts they need
under secrecy agreements (for example, Exxon, BASF, Chevron, Albemarle
etc).
 Dedicated catalyst manufacturers, specialised in certain product groups (for
example, Criterion).
 Companies with divisions specialised in the manufacture of certain types of
catalyst (for example, Johnson Matthey, Süd-Chemie).
As catalysts are critical for the
production process, their technology
is often proprietary in nature
The process catalysts segment is growing substantially faster than the underlying
industries due to constant innovation, which helps client companies save money
and allows catalyst producers to charge a premium for their products. R&D can
range from 4% of sales for a company producing general-purpose catalysts to 10%
of sales for a company which is highly specialised.
As innovation is one of the key
growth drivers in the process
catalysts industry, R&D can
reach 10% of the producer’s sales
Technology-based M&A and technical alliances with client industries are quite
common.
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The major players in the refinery catalysts business are global companies. Refinery
catalysts are characterised by high volume but lower added-value. Customer loyalty
is relatively low and competition among the various players is stiff.
In chemical catalysts, the level of specialisation and customer loyalty is higher as
changing catalyst supplier is a lengthy and expensive process, which involves
extensive testing. Adoption of the new products is normally driven by the
improvement in process performance and not by price competition. Adoption is
heavily dependent on the supplier’s reputation, depth of expertise and customer
relationship. Catalyst companies usually do not reimburse their customers for the
losses associated with off-spec products if the catalyst does not perform according
to its specification. As potential losses for the customer can be considerable,
reliability is one of the key factors during the choice of supplier and technological
barriers to entry are high in the industry.
One of the key differences between automotive and process catalysts is the greater
predictability of earnings in the case of process catalyst suppliers. Automotive
catalysts are placed into the exhaust pipe of the vehicle at the moment of vehicle
production and serve throughout the entire life of the vehicle. Process catalysts
should be replaced regularly. For instance, Johnson Matthey states that the lifetime
of the catalysts in its methanol, ammonia and hydrogen business is three years,
after which replacement is required. As no incremental R&D costs are required for
the replacement catalysts, replacement revenues are extremely important in terms
of the overall profitability of process catalyst producers. They also provide good
visibility on future earnings.
As off-spec products resulting from
faulty catalysts can cause
substantial financial losses for the
client, the technological barriers to
entry in the industry are high
Automotive catalysts are not
replaced during the lifetime of the
vehicles. Process catalysts should be
replaced regularly, which gives much
better visibility to catalyst producers
Process catalysts at Johnson Matthey
Johnson Matthey’s process catalysts business comprises various types of chemical
catalysts. It includes base metal catalysts such as nickel, copper and cobalt for the
production of syngas, ammonia, hydrogen, methanol, formaldehyde, oleo
chemicals, oxo-alcohols, gas-to-liquids, coal-to-liquids and additives for refining. It
also includes Davy Process Technology, which provides licences and know-how
for the use of advanced process technologies related to the manufacture of oil and
gas and petrochemicals.
In its Fine Chemicals division, Johnson Matthey manufactures base and precious
metal catalysts for the fine chemicals and pharmaceuticals industries.
Johnson Matthey does not have direct exposure to high-volume but low-value
refinery and hydrotreating catalysts, but concentrates instead on the higher-value,
higher-margin field of process catalysts – catalysts for chemical processes. Not only
do chemical catalysts often command a higher premium, but their markets have
also demonstrated consistently high growth rates.
Johnson Matthey is not in the mainstream refinery catalysts business (such as fluid
catalytic cracking – FCC – and hydroprocessing), but it has a leading position in
the supply of hydrogen catalysts. Hydrogen is used by the refiners to remove
sulphur and improve the quality of fuels. According to our estimates, Johnson
Matthey commands a 35-40% market share in hydrogen catalysts (key competitors
include Süd-Chemie, BASF and Chinese companies which sometimes satisfy local
needs).
In November 2010, Johnson Matthey bought Intercat, a supplier of specialty
additives to petroleum refining, further increasing its exposure to the petroleum
refining industry. Johnson Matthey is also a major supplier of catalysts for the
removal of impurities such as benzene from refinery streams, environmental
catalysts for the destruction of volatile organic compounds and the removal of
14
Johnson Matthey makes catalysts
for the production of syngas,
ammonia, hydrogen and methanol
Chemicals
organic impurities from caustic streams.
Johnson Matthey has a market share in catalysts for ammonia production of
around 30% and in catalysts for methanol production of around 45%. Süd-Chemie
is among its main competitors in these areas.
Recently, Johnson Matthey further increased its exposure to the methanol chain by
acquiring Formox. The latter is a leading global provider of catalysts, plant designs
and licences for the manufacture of formaldehyde. Currently, around 32% of the
methanol produced globally is consumed in the production of formaldehyde. The
main use of formaldehyde is as a component of resins, which are used in wood
adhesives for plywood, particleboard and other reconstituted or engineered wood
products. Formaldehyde is also used as a raw material for plastics, elastomers,
paints, foams, polyurethane and automotive products. Formox developed a range
of metal-oxide-based catalysts for the production of formaldehyde from methanol
as well as licensing the technology.
Davy Process Technology increased its sales from £44m in 2009 to £100m in
2012. It won a consistently increasing number of contracts for methanol, oxoalcohols, syngas and specialty chemicals plants, especially in China. The business is
now seeing large chemicals and coal companies placing repeat orders for new
plants.
Davy Process Technology growth
Source: Johnson Matthey Annual Report 2011-12
Johnson Matthey’s battery technologies business was formed after the acquisition
of Axeon in 2012 and specialises in the design, development and manufacture of
integrated battery systems. The business is focused on developing advanced
technologies and materials to meet the requirements of high-performance battery
applications, such as automotive, e-bikes and power tools.
As we stated above, growth in the chemical catalysts market is 1.5-2x higher than
the growth in the underlying chemicals industries. In order to understand the
growth outlook for Johnson Matthey’s Process Technologies division, we therefore
look at various customer industries.
15
We expect the growth of Johnson
Matthey’s
process
catalysts
business to be 1.5-2x higher than
the growth of the underlying
industries
Chemicals
Refining industry
Refinery catalyst production was traditionally a growth business, but in recent years
the market has reached maturity in developed countries. Taking into account the
wider macroeconomic climate, refinery infrastructure investment continues to face
severe challenges in developed regions. Major growth is occurring in developing
countries, especially in Asia and the Middle East. Among Asian countries, China is
the largest consumer of catalysts, with high growth rates.
Currently, there is refining overcapacity in Europe and North America. In its
Statistical Review of World Energy, BP confirmed that in 2010 production in nonOECD countries overtook that in OECD countries for the first time. China
accounts for 85-90% of global refining capacity growth. PetroChina states that,
while at present a net importer of crude oil, China is determined to become selfsufficient in refining. By 2015, Chinese oil companies aim to boost domestic
capacity by 25% to 15mbpd. Growth in India is also expected to remain very
strong, albeit the initial base is much smaller. At the 20th World Petroleum
Congress, the Indian minister for petroleum and natural gas announced that his
country would increase investment in refinery infrastructure. Current refinery
capacity in India is 193m mta (metric tonnes annually); by 2014 the target is to raise
this to 240m mta. The Indian government plans to reach domestic self-sufficiency
by 2020. Brazilian consumption of petroleum products has more than doubled
from 1998 to 2009, but refinery capacity stayed flat; Brazil is actively looking at
enhancing downstream investment. Additionally, producers in Qatar and Saudi
Arabia are targeting not only their respective local markets, but also Southeast
Asian ones (for example, the Dow project in Saudi Arabia).
Global refinery capacity growth
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
14%
12%
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
global growth
OECD growth
Non-OECD growth
Source: BP Statistical Review of World Energy 2013
In the last 10 years, global refinery capacity growth averaged 1% per year, with no
overall growth in OECD countries and 2% growth in non-OECD countries. We
expect global growth to slow in the next five years, as OECD countries will
continue to struggle with overcapacity and cheaper alternative sources will take
market share from oil (biofuels, natural gas liquids, liquids derived from gas and
coal).
Hydrogen consumption growth
We expect hydrogen demand to grow at a much higher rate than refining capacity
– 6-8% per year as demand increases, particularly in Asia. According to SRI
16
Refinery infrastructure investments
continue to face severe challenges in
developed jurisdictions. The major
growth is occurring in developing
countries, especially Asia and the
Middle East
China accounts for 85-90% of
global refining capacity growth
Chemicals
International, China represents around 23% of global hydrogen consumption and
we expect this will reach 30% by 2015.
Key drivers of growth in hydrogen consumption include:
 tighter limits on the sulphur content in fuel;
 the development of gas- and coal-to-liquids technologies; and
 the use of methanol as a fuel.
Worldwide environmental regulations now mandate the production of cleaner
fuels. Consequently, refiners are experiencing severe pressure from market forces
that demand a change in the product mix, aside from quality (eg the production of
low-sulphur fuel). On the regulatory side, stringent product specifications limit
sulphur content and determine gasoline and diesel composition. Major
technological challenges to refining include the achievement of “zero” or heavilyreduced sulphur content in all types of fuel in almost all countries around the
world.
As the global refining industry moves towards cleaner fuels, refiners find
themselves being squeezed in terms of hydrogen availability and octane
requirements. Gasoline desulphurisation technology has thus advanced to limit
hydrogen consumption.
On the diesel side of the clean fuels challenge, a significant increase in hydrogen
consumption is forecast to obtain ultra-low-sulphur diesel (ULSD) from straightrun and cracked stocks containing refractory sulphur species.
Catalytic reforming is the technology of choice for the production of high-octane
gasoline and is usually the main source of refinery hydrogen. Catalytic reforming
and isomerisation continue to grow because of their role in removing lead from
gasoline in the developing world. Hydroprocessing is probably growing the fastest,
in response to the requirement for lower sulphur levels in gasoline and diesel.
Johnson Matthey is one of the leaders in hydrogen catalysts for hydroprocessing,
so we expect strong growth in this area to continue.
Johnson Matthey is one of the
leaders in hydrogen catalysts for
hydroprocessing
Gas-to-liquids and coal gasification projects all require extremely large quantities of
hydrogen and will boost the size of the market considerably in the next five years.
A surge in hydrogen consumption is also expected as a result of growth in the
manufacture of methanol. Substantial consumption of methanol as a direct fuel (ie
as motor gasoline) is expected in countries such as China, Russia, South Africa,
Venezuela and several Middle Eastern countries.
The main growth in hydrogen consumption is expected to come from China for
two reasons: the country is experiencing the strongest growth in auto production
as well as changes in environmental legislation.
17
The main growth in hydrogen
consumption is expected to come
from China for two reasons –
highest growth in auto production
and changes in environmental
legislation
Chemicals
China diesel fuel quality roadmap
Stage
Standard
Maximum sulphur
level (ppm)
Date Standard
Issued
Date standard
Implemented
-
GB 252-2000
2000
27 Oct 2000
1 Jan 2002
-
GB/T 19147-2003
500 (voluntary)
23 May 2003
1 Oct 2003
China III
GB 19147-2009
350
12 Jun 2009
Phased-in 1 Jan
2010-1 Jul 2011
China IV
GB 19147-2013
50
7 Feb 2013
Phased-in by 31
Dec 2014
China V
TBD
10
Before 1 Jun 2013
Phased-in by 31
Dec 2017
Source: The International Council on Clean Transportation
China was supposed to implement the China IV (Phase IV) fuel standard in
January 2010; however, this was delayed until 2014. China has set a deadline for the
Phase IV standard for gasoline to be adopted nationwide by January 2013, and that
for diesel to be adopted by the end of 2014. Delays in the implementation of
emissions legislation are not unique to China. The other three BRIC countries
(Brazil, Russia and India) have all seen similar delays. The reason for the delay in
each case is a recurring theme: the lack of low-sulphur fuel. The successful
implementation of advanced diesel after-treatment technologies relies on the
availability of low-sulphur diesel. It was originally agreed that 350ppm-sulphur
diesel should be made available nationwide in 2010. However, the implementation
of low-sulphur fuel was delayed until summer 2011. Yet even now, after almost
four years, we are not sure it is available nationwide.
China was supposed to implement
the China IV fuel standard in
January 2010; however, this was
delayed until 2014 because of the
lack of low-sulphur fuel
The main issue lies in the costs associated with upgrading diesel refineries and the
distribution of this type of diesel. Chinese diesel prices are regulated by the
government and refiners were not certain that they would be able to recover the
incremental costs. The additional cost is estimated at CNY150-250/mt ($2440/mt) compared with Phase III gasoline, with the construction cost of a gasoline
hydrogenation unit estimated at around CNY200m-300m.
However, as the transition deadline was finally approved in 2012, refineries were
given a year to transition to the new legislation. Recently, Sinopec’s chairman, Fu
Chengyu, said that the company would complete the upgrade of desulphurisation
facilities at its refineries by the end of 2013, and start producing gasoline and diesel
that meet the national Phase IV emissions standard from 2014.
Johnson Matthey has a very strong presence in Asia and good relationships with
major industrial gas companies that supply hydrogen to petroleum refineries, so in
our view it should experience very strong growth in hydrogen catalysts in the next
three years.
We expect the use of hydrogen catalysts to grow at a faster rate than
hydrogen consumption – 10-12% per year for the next three years.
We expect the use of hydrogen
catalysts to grow at a faster rate
than hydrogen consumption – 1012% per year for the next three
years
Ammonia consumption growth
Johnson Matthey is one of the leading producers of the catalysts for ammonia
production, along with Süd-Chemie. We are slightly less optimistic about
developments in the market for ammonia, but still assume average annual growth
of 5-6% for the catalysts.
According to Yara, global ammonia production grew at an average annual rate of
2.6% in 2001-11.
18
Johnson Matthey is one of the
leading producers of the catalysts
for ammonia production along
with Süd-Chemie
Chemicals
Global ammonia production growth
Million tons
Total production
180
160
140
120
100
80
60
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Yara Fertiliser Industry Handbook, December 2012
We expect this trend to continue; however, we expect ammonia capacity additions
to outpace supply and production growth. Capacity is expected to increase in
China and in areas where the availability and cost of natural gas is lower, such as
the Middle East, North Africa and North America. In 2013-15, the International
Fertiliser Association expects global capacity ex-China to grow in line with demand
(ie by around 3% per year); however, Chinese capacity is expected to grow by 8%
per year. Beyond 2015, various North American capacities should come onstream;
almost 8m tonnes pa of nitrogen capacity is expected to start up in 2015-18.
However, rising construction costs can cause delays to these projects – Agrium
recently postponed its $3bn greenfield nitrogen project and Yara postponed its
capacity upgrade in Belle Plaine, Canada.
We expect global capacity growth in ammonia to reach 3.5% per year in the next
five years and the production of ammonia catalysts to grow at 5-6%.
We expect global capacity growth
in ammonia to reach 3.5% in the
next five years and ammonia
catalysts to grow at 5-6%
Methanol consumption growth
Süd-Chemie is one of Johnson Matthey’s key competitors in methanol catalysts. It
not only manufactures catalysts for methanol production, but also has the also
technology for converting methanol to propylene.
Methanol is a versatile liquid chemical produced primarily from natural gas (in
China, from coal) and used as a chemical feedstock in the manufacture of a wide
range of consumer and industrial products such as building materials, foams, resins
and plastics. The fastest-growing markets for methanol are in the energy sector,
which today represents one-third of methanol demand.
Methanol is used to produce methyl tertiary-butyl ether (MTBE), a gasoline
component, and there are growing markets for using methanol in olefins
production and energy applications such as direct blending into transportation
fuels, dimethyl ether (DME) and biodiesel.
Demand for methanol is driven primarily by levels of industrial production, energy
prices and the strength of the global economy.
Methanex expects methanol demand to grow at a 7.6% CAGR during 2012-16,
driven mainly by energy applications.
19
Demand for methanol is driven
primarily by levels of industrial
production, energy prices and the
strength of the global economy
Chemicals
Uses and growth of methanol
Source: Methanex Investor Presentation, May 2013
China has now become the world’s leading consumer of methanol and should
account for 80% of demand growth through at least 2016. China’s rapid increase in
consumption is attributable to its expanding industrial markets, as well as soaring
gasoline demand. Traditional, chemical derivative-based methanol demand in
China has seen robust growth over the past decade on the back of China’s strong
economic expansion, particularly in the industrial and construction sectors.
However, future methanol consumption growth in China will likely be driven by
the adoption of methanol as an alternative transportation fuel, among other
emerging energy applications.
China has now become the world’s
leading consumer of methanol and
should account for 80% of demand
growth through at least 2016
Methanol usage as a fuel
Source: Methanex Investor Presentation, May 2013
We expect the market for methanol catalysts to grow at 10-11% per year in the
next five years. Johnson Matthey commands a 45% market share and is well
positioned to capture this growth with Apico catalysts and technology.
20
We expect the market for
methanol catalysts to grow at 1011% per year over the next five
years
Chemicals
GTL, MTO, CTL etc
Gas-to-liquids (GTL) and coal-to-liquids (CTL) processing is an emerging area for
catalysts. The growing requirements for ULSD fuel and the not-insignificant
investment required by refiners to meet the new fuel specifications in Europe and
elsewhere have pushed GTL technology to the forefront of development efforts.
One key advantage of GTL processes is that they provide clean fuels. Companies
such as Chevron, ExxonMobil, Sasol, Shell, Albemarle, BASF, Süd-Chemie and
Johnson Matthey (via Davy Process Technology) are active in liquid fuel synthesis.
One key advantage of GTL
processes is that they provide clean
fuels
China is short of natural gas. As part of the country’s effort to reduce its
dependence on crude oil and utilise cheaper feedstock costs, there are several coalbased projects under development in China. The majority of capacity expansion
plans in petrochemicals announced beyond 2015 are China’s coal-to-olefins
(CTO), methanol-to-olefins (MTO) and US-gas-based cracker projects.
The majority of capacity
expansion plans in petrochemicals
announced beyond 2015 are
China’s CTO, MTO and USgas-based cracker projects
However, we do expect certain difficulties in the development of these projects.
Recent cost inflation has contributed to the cancellation or postponement of
certain gas-based projects in North America; in China, MTO projects face multiple
hurdles, such as lack of infrastructure, water consumption and high carbon
emissions.
Johnson Matthey expects double-digit annual growth in these types of project in
the next five years, but we are more cautious due to the challenges mentioned
above – we think the growth will reach 7-8% per year.
Johnson Matthey is strongly positioned in the sector. Davy Process Technology
(which Johnson Matthey acquired from Yukos for $71m in 2006 and which now
has sales of $150m) provides licences and know-how to operate advanced process
technologies related to oil and gas, MTO and CTL.
21
We think growth in GTL, MTO
and CTL projects will reach 78% per year in the next five years
Chemicals
Automotive catalysts
Emissions control catalysts represent c43% of the global catalysts market. We
focus on emissions control catalysts for mobile sources, as stationary catalysts do
not represent a large part of Johnson Matthey’s or Umicore’s business.
Emissions control catalysts represent
c43% of the global catalysts market
Technology
Emissions control catalysts for mobile sources are based on PGMs that convert
vapour emissions into carbon dioxide, nitrogen and water. The catalyst can
simultaneously oxidise carbon monoxide and hydrocarbons to carbon dioxide and
water while reducing nitrogen oxides to nitrogen.
Emissions control catalysts for
mobile sources are based on PGMs
that convert vapour emissions into
carbon dioxide, nitrogen and water
Automotive catalysts typically consist of a coating of PGMs on a substrate. The
earlier oxidation catalysts used only platinum and palladium, but the newer threeway catalysts use various combinations of platinum, palladium and rhodium.
As an automotive catalyst serves throughout the life of the vehicle, its internal
surface area is very large. In an average catalytic converter, the internal surface area
of the substrate is equal to the size of a typical office and the internal area of the
catalyst is equal to the size of three football fields.
During the manufacture of the catalytic convertor, ceramic monoliths are first
treated with a wash that consists of alumina with additions of rare earth oxides to
increase their surface area. The monoliths are subsequently coated with PGMs.
For an average catalytic converter,
the internal surface area of substrate
is equal to the size of typical office
and internal area of the catalyst is
equal to the size of three football
fields
Structure and production process of automotive catalysts
Source: Johnson Matthey
The properties of automotive catalysts include the following.
 Engine size and catalyst volume/weight are fairly proportional. Engine sizes,
however, cover a wide range – from about 0.5 to six litres for passenger cars, to
three to 18 litres for trucks and buses. An internal combustion engine,
regardless of whether gasoline- or diesel-fuelled, requires a catalyst volume of
about the same size as the engine.
 Four-cylinder engines are equipped with one or two bricks, while large engines
utilise more bricks.
 Fuel specifications and emissions standards vary from region to region and may
require different catalysts for the same auto platform.
 Catalyst design, volume and precious metal content differ according to car
manufacturer, region of application, engine type and year of production.
22
Catalyst design, volume and precious
metal content vary according to car
manufacturer, region of application,
engine type and year of production
Chemicals
Key emissions categories
Carbon dioxide (CO2): an inevitable product of burning a fuel which contains
carbon (as all petroleum products do). CO2 does not pollute the air we breathe, but
is a main contributor to global warming and therefore has to be reduced.
Carbon monoxide (CO): produced when a carbon-based fuel is burned
incompletely. In high concentrations it is poisonous and has to be controlled. It
can be reduced by more efficient combustion in the engine (so that CO2 is
produced instead of CO) and further reduced by oxidising after combustion, in a
catalytic converter.
Hydrocarbons (HC): also known as volatile organic compounds (VOCs), these
are really unburned fuel. They can be problematic for individuals with breathing
difficulties and can contribute to photochemical smog in certain climatic
conditions. They can be reduced by more efficient combustion in the engine and
further reduced by oxidising after combustion, in a catalytic converter.
Oxides of nitrogen (NOx): produced when air (which is mainly a mixture of
nitrogen and oxygen) is heated, as it is in an engine. NOx is a contributor to both
photochemical smog and acid rain and can be an irritant to the lungs. Unlike CO
and HC, it cannot be removed by oxidation. The opposite process – the removal
of oxygen (known as reduction) – is necessary to convert it back to nitrogen and
oxygen.
Particulate matter (PM): very small particles, mostly of unburned carbon.
Main chemical pathways catalysed by an after-treatment system
NO, NO2
N2
CO
CO2
Hydrocarbons
CO2, H2O
Particulate matter
CO2
(mainly carbon)
Source: Umicore
Why do diesel and gasoline automotive catalysts differ?
Gasoline
The amounts of air and fuel burnt in a gasoline engine are usually in chemical
balance, there being no excess of either.
Under these conditions, and at the quite high temperatures (350-750°C) of the
gasoline exhaust gas, platinum and/or palladium oxidise the pollutants CO and
HC, while rhodium catalyses the reduction of NOx (nitric oxide and nitrogen
dioxide) to nitrogen.
Automotive companies therefore use catalysts containing platinum and rhodium,
palladium and rhodium, or a mixture of all three to meet current gasoline vehicle
emissions regulations. These catalytic converters are known as three-way
catalysts because they efficiently and simultaneously convert the three pollutants
to harmless gases.
23
Gasoline cars use platinum-,
palladium- and rhodium-based
three-way catalysts
Chemicals
Three-way catalyst
Source: Umicore
Diesel
By contrast, a diesel engine always operates with a large excess of air (the air-to-fuel
ratio is 30:1) and has excess oxygen in its exhaust. An additional complication
comes from the operating conditions of diesel engines, which result in low exhaust
gas temperatures (120-350°C). Standard three-way catalysts cannot reduce NOx in
such a system. Also, the large quantities of particulates emitted by diesel engines
can foul existing gasoline-fuelled automobile catalysts, rendering them useless for
reducing the levels of other components.
A diesel engine operates with a
large excess of air and a low
exhaust
gas
temperature.
Standard three-way catalysts
cannot be used in diesel engines
Only platinum- and palladium-based catalysts are able to deliver the required
performance under these operating conditions. The low temperature of diesel
engine exhaust gas also means diesel oxidation catalysts may have to contain higher
loadings of metal than their gasoline equivalents to achieve the necessary
conversions of HC and CO.
Catalytic technologies for diesel engines
A diesel oxidation catalyst (DOC) is the key technology for diesel engines. It is
used to oxidise HC and CO in the exhaust stream to CO2 and water. All new diesel
engines mounted in passenger cars, light-duty and heavy-duty trucks and buses in
Europe and North America are now equipped with DOCs.
Improved engine control and combustion engineering can substantially reduce the
formation of PM and reduce NOx emissions. These include the use of very highpressure fuel pumps in sophisticated direct injection systems, which precisely
control the volume of fuel injected into the cylinder and produce a finely-atomised
spray. The delivery of fuel at very high pressure leads to a lower average
combustion temperature that moderates the formation of NOx. To remove the
remaining NOx from the exhaust, manufacturers utilise selective catalytic
reduction (SCR).
24
A diesel oxidation catalyst is the
key technology for diesel engines
Chemicals
SCR
SCR was originally introduced in stationary power plants, but it is now fitted to
most new heavy-duty (ie truck and bus) diesel engines in Europe and the US. In an
SCR system, urea (for example, AdBlue, a trademark used by Yara) is sprayed from
a separate tank into the exhaust stream ahead of the SCR catalyst. The nature of
the diesel combustion process results in the formation of PM, or “soot”. The
diesel particulate emissions problem is being addressed by the use of diesel
particulate filters (DPFs).
SCR was originally introduced in
stationary power plants, but it is
now fitted to most new heavy-duty
diesel engines in Europe and in
the US
DPF
The diesel particulate emissions
problem is being addressed by the
use of DPF
Source: Turbopacs
Wall flow filters are the most common type of DPF. In these filters, PM is
removed from the exhaust by using a honeycomb structure similar to an emissions
catalyst substrate but with the channels blocked at alternate ends. The exhaust gas
is thus forced to flow through the walls between the channels and the PM is
deposited on the walls. Such filters are made of ceramic (cordierite, silicon carbide
or aluminium titanate) materials. Diesel partial-flow filters normally use a metallic
substrate. The metallic partial-flow filter uses a special perforated metal foil
substrate with a metal “fleece” layer, so that the exhaust gas flow is diverted into
adjacent channels and the particles are temporarily retained in the fleece before
being burnt by a continuous reaction with the nitrogen dioxide (NO2) generated by
an oxidation catalyst located upstream in the exhaust.
A catalysed diesel particulate filter (CDPF) or catalysed soot filter (CSF) may
also be used. Traditional DPF systems consist of a filter material positioned in the
exhaust designed to collect solid and liquid PM emissions while allowing the
exhaust gases to pass through the ceramic walls. CDPFs are designed not only to
25
CDPFs are designed not only to
achieve collection efficiencies of
90% or greater in terms of mass,
but also to burn off the collected
particulate matter into carbon
dioxide and water
Chemicals
achieve collection efficiencies of 90% or greater in terms of mass, but also to burn
off the collected particulate matter into carbon dioxide and water.
CDPF
Johnson Matthey was the first to introduce and patent the CRT – continuously
regenerating trap. It is now the most widely used DPF in the world. It involves
the oxidation of nitric oxide (NO), which is already present in the exhaust gas, to
NO2 over a platinum-based catalyst. The NO2 produced is a much more powerful
oxidant than oxygen, and it starts to burn PM at temperatures as low as 250°C (the
technology has already gone off-patent). It was a very successful product and
allowed Johnson Matthey to gain considerable market share in diesel vehicle
catalysts (both in light- and heavy-duty).
CRT
CCRT is catalysed CRT. The oxidation catalyst removes CO and HC and oxidises
some of the NO in the exhaust gases to NO2. This NO2 then reacts with the PM
trapped in the filter, producing NO and CO2. Some of the NO is then re-oxidised
to NO2 in the filter, then reacts with more trapped PM. This enables the system to
regenerate in applications with very low exhaust gas temperatures or low NOx:PM
ratios in the exhaust gases.
26
Chemicals
CCRT
Fuel properties
The quality of the fuel used can assist or degrade the performance of emissions
control systems. Sulphur in gasoline (or petrol) and diesel fuel has a major negative
impact on catalyst performance and in diesel also contributes to the mass of PM.
Sulphur competes strongly against pollutants for space on the catalyst surface and
thus limits the efficiency of catalyst systems to convert pollutants at any sulphur
concentration. Sulphur is a naturally-occurring component of crude oil and is
found in both gasoline and diesel. When these fuels are burned, sulphur is emitted
as sulphur dioxide (SO2) or sulphate PM. SO2 has been recognised for decades as a
major cause of the acid rain and air pollution that affect urban and industrial areas.
More recently, it has been recognised that CO2 emissions contribute to the
formation of secondary inorganic aerosol gases, fine particles that are harmful to
human health.
The quality of the fuel used can
assist or degrade the performance
of emissions control systems
Increasingly stringent controls on vehicle emissions led petroleum refiners to
produce fuels which meet both reformulated gasoline and low-sulphur fuel
mandates. These fuels, in combination with emissions control catalysts and engine
developments, have enabled the transportation industry to manufacture products
that meet government emissions targets.
Increasingly stringent controls on
vehicle emissions led petroleum
refiners to produce fuels which meet
both reformulated gasoline and
low-sulphur fuel mandates
Global legislation
Air pollution can cause a number of health problems, so various countries have
taken policy actions in order to reduce it.
Regulatory authorities in the EU, US and Japan have been under pressure from
engine and fuel manufacturers to harmonise worldwide emissions standards, in
order to streamline engine development and emission-type approval/certification
for the different markets. European standards for emissions control represent the
most popular set of standards and are followed by many countries in various parts
of the world. The majority of emerging economies are adopting the latest set of
Euro emissions and fuel standards, while some smaller nations still comply with an
older set of regulations.
27
European standards for emissions
control represent the most popular
set of standards and are followed
by many countries in various parts
of the world
Chemicals
Global emissions legislation
Source: Umicore
LDV legislation
In most regions, standards apply to all vehicles, regardless of the fuel they use.
Gasoline, diesel or alternative-fuel vehicles must therefore all meet the same
emissions standards. These standards are defined in grams of regulated emission
per mile or kilometre driven. Thus, for similar vehicles with different-sized engines,
the vehicle with the larger engine must use more advanced and expensive
emissions control technology than the vehicle with the smaller engine, in order to
meet the emissions standard.
US
In general, the US has the most advanced regulation in the area of emissions
control.
In LDVs, US legislators pay more attention to NOx emissions control than CO2.
The chart below shows that US requirements allow for 220 grams of CO2 per
kilometre (g/km) and European requirements are close to 120g/km. On the other
hand, European NOx emissions standards are more relaxed (the US EPA Tier 2
NOx limit is 44mg/km). This is caused by the need to control NOx emissions
without sacrificing the comparatively low fuel consumption of diesel engines.
Global CO2 emissions norms
Source: The International Council on Clean Transportation
28
In general, the US has the most
advanced regulation in the area of
emissions control
Chemicals
Europe
Europe is the only region (except India) where the share of diesel as a fuel is high
(it varies between 49% and 54%).
Since the Euro II stage, EU regulations have introduced different emissions limits
for diesel and gasoline vehicles. Diesel engines must conform to more stringent
CO standards but are allowed higher NOx levels. Gasoline vehicles had been
exempt from PM standards through the Euro IV stage.
Europe is the only region (except
India) where the share of diesel as
a fuel is high (it varies between
49% and 54%)
Euro V introduced PM mass emissions limits for gasoline cars (equal to that of
diesel) and a 25% reduction in NOx emissions limits from 80mg/km to 60mg/km.
The Euro V PM emissions standards require the use of particulate filters on all
diesel cars (the use of filters on Euro IV cars was mostly voluntary).
The Euro VI standards, which will come into effect in 2014, will further tighten
the NOx standards for diesel cars and light commercial vehicles by about 55%
relative to the Euro V limits.
Japan
All passenger cars and light-duty trucks produced in Japan are equipped with threeway catalysts. New standards came into force in 2009 that added the regulation of
PM for gasoline-powered vehicles and further reduced NOx and PM levels for
diesel-powered vehicles.
China
Phase III of China’s emissions regulation was introduced in 2007; the requirements
are similar to the Euro III legislation. China was supposed to implement the Phase
IV (similar to Euro IV) fuel standard in January 2010; however, this was delayed
until 2014. China set a January 2013 deadline for the Phase IV standard for
gasoline to be adopted nationwide, and that for diesel by the end of 2014. The
reason for the delay is the lack of low-sulphur fuel. The successful implementation
of advanced diesel after-treatment technologies relies on the availability of lowsulphur diesel. It was originally agreed that 350ppm-sulphur diesel should be made
available nationwide in 2010.
The table below shows the current standards and prospective changes in legislation
for LDVs in various regions.
29
China set a deadline for the Phase
IV (similar to Euro IV) standard
for gasoline to be adopted
nationwide by January 2013
Chemicals
Summary of the fuel emissions standards for LDV
LDV (g/km)
Europe gasoline
Europe gasoline
Europe diesel
Europe diesel
Japan gasoline
Japan diesel
China gasoline
China diesel
US gasoline
Time
frame
Now
2014
Now
2014
Now
Now
2014
2014
Now
CO
HC
NOx
1
1
0.5
0.5
1.92
0.84
1
0.63
2.8
0.1
0.1
0.06
0.06
0.18
0.08
0.08
0.2
0.08
0.33
0.07
0.08
0.032
0.1
0.06
0.14
HC&NOx
PM
0.23
0.17
0.005
0.005
0.005
0.005
0.007
0.01
0.04
0.01
Source: Delphi Worldwide Emissions Standards, 2012-13, Berenberg research
LDV emissions standards timeline
HDD legislation
Currently, pollution measurement systems vary between countries; hence the units
of measurement are different, which makes it difficult to reconcile the
requirements on a global basis. The other particularity of this market is that most
HDD vehicles worldwide are powered by diesel engines.
US
In the US, the federal regulations do not require that the entire HDD vehicle be
certified as conforming to emissions standards. The regulations instead call for the
engine to meet the emissions standards. The engine systems, including emission
controls, are tested under prescribed engine dynamometer cycles. As a result, the
standards are expressed in terms of grams per brake horsepower-hour (g/bhp-hr).
30
Most HDD vehicles globally are
powered by diesel engines
Chemicals
The US has the most progressive standards in HDD with the strictest
requirements regarding HC and NOx emissions as well as levels of PM in the
exhaust.
In August 2011, the Environmental Protection Agency (EPA) announced the
Heavy-Duty National Program to reduce greenhouse gas emissions – primarily
CO2 – and establish fuel consumption standards for medium- and heavy-duty
vehicles.
The US has the most progressive
standards in HDD with the
strictest requirements regarding
HC and NOx emissions as well
as levels of PM in the exhaust
Europe
Europe also addressed seriously the problem of pollution from HDD. European
governments use grams per kilowatt-hour as a unit for emissions control
measurements.
Over time, a series of standards has been developed. Euro III limits imposed in
2000 were met with the then-current generation of diesel engines, but Euro IV
limits, mainly with respect to NOx and PM, required the adoption of catalytic
control.
The Euro IV standard has been applied since 2005; Euro V has been mandatory
from 2008. Euro VI emissions standards, comparable in stringency to the US 2010
standards, become effective from 2013 (new-type approvals) and 2014 (all
registrations). To meet the stricter Euro IV and V regulations, vehicle
manufacturers have employed after-treatment technologies such as SCR or exhaust
gas recirculation (EGR). The majority of manufacturers in Europe have chosen to
use SCR, as this method also allows improved fuel consumption. Euro V was the
main reason for starting to use DPFs.
Under Euro VI, heavy-duty vehicles will have to be equipped with DPFs to meet
not only particulate mass but also particle number limits.
Japan
In 1997, the Japanese government set new guidelines that require a drastic
reduction in the emission of NOx and particulates from diesel-powered vehicles.
New standards came into force in 2009 and further reduced NOx and PM levels
for diesel-powered vehicles. Japan uses grams per kilometre as a unit for emissions
control measurements.
According to the Euro VI
standard all heavy-duty vehicles
will have to be equipped with
DPFs
China
Phase IV (similar to Euro IV) is now coming into force and should gradually be
implemented by January 2014. China uses grams per kilometre as a unit for
emissions control measurements.
Non-road vehicle legislation
North America, Europe and Japan have also established standards that apply to
non-road vehicles, locomotive and marine engines. These standards are grouped
in tiers according to year of manufacture and engine power.
The table below shows current standards and prospective changes in legislation for
HDD and non-road vehicles in different regions.
31
North America, Europe and
Japan have also established
standards that apply to non-road
vehicles, locomotive and marine
engines
Chemicals
Summary of fuel emissions standards for HDD
HDD
Europe
Europe
Japan
China
US
Time
frame
Now
2014
Now
2014
Now
CO
HC
NOx
1.5
1.5
2.95
1.5
1.55
0.46
0.13
0.23
0.46
0.13
2
0.4
0.9
3.5
0.2
HC&NOx
PM
Units
0.14
0.02
0.01
0.013
0.02
0.01
(gr/KWH)
(gr/KWH)
gr/km
gr/km
gr/bhp-hr
Source: Berenberg research
HDD and non-road emissions standards timeline
Value components of the catalyst
The price components of a catalytic converter are shown below.
Price components of a catalytic converter
Substrate, 20%
PGM, 50%
Chemicals,
20%
Handling, 10%
PGM costs and the costs of the substrate are a pass-through for the catalyst
producer. The chemicals portion is where the added value lies; it is the actual
catalytic technology, which represents the main part of the catalyst producer’s
revenue stream.
32
PGM costs and the costs of the
substrate are a pass-through for
the catalyst producer
Chemicals
Automotive catalysts do not increase the productivity of the process as process
catalysts do; however, they are nevertheless critical for auto manufacturers. A
catalyst is not a major cost factor, but even slight deficiencies in catalyst
performance can cause serious damage to a company’s business. Non-compliance
with environmental legislation, caused by the faulty catalyst, can result in
substantial financial losses for an auto manufacturer. This is what allows catalyst
companies to sustain their operating margin, which is among the highest in the
automotive industry.
A catalyst is not a major cost
factor, but even slight deficiencies
in catalyst performance can cause
serious damage to an auto
company’s business
Operating margins in the auto industry
Sub-sector
Auto manufacturers
Tyres
Trunks
Diversified
Catalysts
Average operating margin
4.50%
10%
8%
4.50%
10%
Source: Berenberg research. Diversified includes Lear, Visteon, Johnson Controls, Magna
International
Monetary value of the catalyst depends on underlying technology
An internal combustion engine – regardless of whether gasoline- or diesel-fuelled –
requires a catalyst volume of roughly the same size as the engine. This means that
the monetary value of the catalyst also depends heavily on engine volume. Not
only does the volume of PGMs required for the production of the catalyst increase
with engine volume, but so does the amount that catalyst companies charge for
their services (as normally the complexity of the catalyst also increases with engine
volume).
Diesel catalysts require much more sophisticated technology; hence the value of
the catalyst for diesel engines is higher than that for gasoline engines. According to
Johnson Matthey, a diesel vehicle currently represents 5x the catalyst value of
an equivalent gasoline vehicle.
LDVs (independent of legislation and region) require three-way catalysts.
A diesel engine requires different technology depending on the country’s
regulation. The chart below illustrates the various technologies used in HDD
vehicles.
33
A diesel vehicle currently
represents 5x the catalyst value of
an equivalent gasoline vehicle
Chemicals
HDD on-/non-road catalyst systems
Source: Umicore
Euro III limits in 2000 were met with the then-current generation of diesel engines
but Euro IV limits, mainly with respect to NOx and PM, required the adoption of
catalytic control.
A three-way catalyst converts NOx, HC and CO in gasoline applications and
contains platinum, palladium and rhodium. Rhodium is as a rule indispensable,
while platinum and palladium can be mutually substituted. This substitution effect
has led to a considerable increase in the use of palladium in the automotive
applications (as palladium is less expensive than platinum). Light-vehicle engine
volume varies from 0.7 to four litres, whereas a heavy-duty engine varies from
three to eight litres. As a result of the smaller volume and less-favourable product
mix, as well as the maturity of the technology, LDV catalysts are the least
profitable category for catalyst companies. However, changes in legislation still
affect the value of catalyst – for instance, with Euro VI adoption in 2014 we expect
the value of gasoline catalysts to increase by c15-20%.
Platinum continues to be the metal of choice for diesel applications because of its
higher activity in oxidation reactions under lean conditions.
A DOC oxidises CO and HC into CO2 and H2O; it contains platinum and
palladium, although the ratio can vary depending on application.
SCR, which was introduced with Euro V legislation, converts NOX into nitrogen in
diesel engines with the help of NH3; it does not require PGMs (ie is PGM-free).
Euro V adoption also required a DPF, which traps PM in diesel engines. DPF
contains platinum and palladium; the ratio can vary, depending on application.
CDPFs are more complex and require higher PGM content. They contain
palladium and platinum. We think that Euro VI legislation will increase the value
of the diesel catalyst market in Europe by 2-2.5x.
The relative monetary value of the different types of catalysts is shown in the chart
below (CRT is a DPF, patented by Johnson Matthey; CCRT is a CDPF).
34
LDV catalysts are a less
profitable category for the catalyst
companies than HDD catalysts
Platinum continues to be the
metal of choice for diesel
applications because of its higher
activity in oxidation reactions
under lean conditions
We think that Euro VI
legislation will increase the value of
diesel catalyst market in Europe
by 2-2.5x
Chemicals
Catalytic technologies for diesel and their value
Catalyst pricing
The technological component is very high in automotive catalysts. The catalyst is
not a major cost factor for the auto producer, but even slight deficiencies in
catalyst performance can cause serious damage to a company’s business. Noncompliance with environmental legislation, caused by a faulty catalyst, can result in
substantial financial losses. Faulty catalysts can also negatively affect fuel efficiency
and the functioning of the whole power train.
This gives certain pricing power to the catalyst producers. New catalysts are
normally introduced with changes in legislation and producers are able to charge
premiums for their products. With time, technology becomes obsolete and
competition increases, which pushes the price down.
Catalyst pricing
Catalyst companies therefore need continuous changes in environmental legislation
in order to maintain their pricing power.
35
Catalyst
companies
need
continuous
changes
in
environmental legislation in order
to maintain their pricing power
Chemicals
Precious and rare-earth metals
As precious metals represent around 50% of the catalyst price and the value of the
catalytic technology represents only 20%, automotive catalyst producers are not
exposed to precious metal price volatility.
The catalyst market is very
mature in developed countries and
market shares are well defined
Precious metal costs are a pass-through for automotive catalyst producers. Very
often, the price of the catalyst is quoted as a certain value plus the value of PGMs
at the date of sale. All the automotive catalyst producers hedge 100% of their PGM
exposure. They do charge a small handling fee, which is linked to the value of
PGMs, but this is insignificant.
Precious metal costs are a passthrough for the automotive catalyst
producers
All auto manufacturers have the ability to source precious metals directly from the
suppliers. In the US, most auto manufacturers work under consignment
conditions. They own the precious metals used in catalyst production and the
automotive catalyst producer does not even take the PGMs onto its balance sheet.
In the US, most auto
manufacturers
work
under
consignment conditions. They own
the precious metals used in
catalyst production and the
automotive catalyst producer does
not even take the PGMs onto its
balance sheet
In Europe and Asia, automotive catalyst companies do have to hold inventories of
PGMs but they are 100% hedged.
With rare-earth metals, until recently the situation was different. Cerium oxide is
used in three-way gasoline catalysts, chiefly for oxygen storage. As with the
majority of rare-earth metals, China is the dominant supplier. In 2010-11, quotas
imposed by the Chinese government on exports of rare-earth metals resulted in
significant increases in their prices.
As automotive catalyst companies did not have any pass-through agreements with
their customers at the time, their margins were hit. In 2010/11, Johnson Matthey’s
Environmental Technology division EBIT was negatively affected by £5m (3% of
operating profit) and in H1 2011/12 by another £15m (16% of operating profit).
However, since then, not only have the prices of rare-earth metals collapsed, but
automotive catalyst manufacturers have also negotiated price surcharges with their
customers, so any future increases should no longer affect their business.
Rare-earth metals are now also a
pass-through for the catalyst
companies
Light-duty catalysts market
Catalysts are normally supplied directly to auto manufacturers, so for automotive
catalyst producers, relationships with auto producers are essential. Typically, auto
manufacturers select two or three automotive catalyst suppliers per platform.
Platform definitions and concepts differ slightly in each auto maker, but in general,
they tend to refer to the car body and major parts excluding the superstructure.
Platforms allow OEMs to release new models into the market by making modest
design changes and innovations to existing platforms, and this helps lower the cost
of developing new models.
Catalysts are normally supplied
directly to auto producers, so for
automotive catalyst companies,
relationships with auto producers
are essential
However, due to the variation in legislation in different countries, there can be
different catalyst suppliers even within the same platform.
Auto companies start tendering new platforms two or three years before their
commercial launch. The catalyst is a critical part of the power train as it controls
emissions, but it is also technologically complex. Automotive catalyst companies
spend 5-6% of their sales value on R&D every year.
The catalysts market is very mature in developed countries and market shares are
well defined. Changes in market share are only possible if legislation changes or if
one of the players comes up with disruptive technology (for instance, a reduction
in PGM content in the catalyst).
36
Automotive catalyst companies
spend 5-6% of their sales value on
R&D every year
Chemicals
In developing countries, the auto market itself is less consolidated and growth is
much faster; hence the dynamics for automotive catalysts are very different.
Legislation in developing countries tends to lag that in developed countries, and as
a result the catalyst value per vehicle is lower in the former.
Globally, there are three leading automotive catalyst companies, each with
approximately a 30% market share (Johnson Matthey, Umicore and BASF). Toyota
has its own automotive catalyst company, called Catalar. Catalar supplies 75-80%
of all Toyota’s automotive catalyst needs, but also works with Fuji, Suzuki, General
Motors and Daihatsu.
Globally there are three leading
automotive catalyst companies
(Johnson Matthey, Umicore and
BASF); each has approximately
a 30% market share
In 2012, Asia represented c50% of global automotive production, Europe 23% and
North America 18%.
Global automotive production
Global auto production 2012 (units)
South america, South Asia, 3%
5%
Europe, 23%
North america,
18%
Middle East/
Africa, 2%
Greater China,
22%
Japan/Korea,
26%
Source: IHS
As emissions legislation in many Asian countries is behind that in western ones,
Asia represents a smaller percentage of the automotive catalysts market relative to
its share of auto production. For instance, China represented 22% of global auto
production in 2012, but only 15% of automotive catalysts production. Europe is by
far the most important region for LDV automotive catalysts, as 50-53% of the
LDV fleet in Europe is powered by diesel. A diesel vehicle represents 5x the
catalyst value of an equivalent gasoline vehicle.
Global automotive production
Global catalysts market 2012 (value excl metals)
Other, 9%
Latin America,
6%
North America,
23%
China, 15%
Europe, 27%
Japan/Korea,
20%
Source: Berenberg research, Company data
37
Europe is by far the most
important region for LDV
automotive catalysts, as 50-53%
of the LDV fleet in Europe is
powered by diesel
Chemicals
We estimate the global LDV catalysts market was valued at around $4.3bn in 2012
(excluding the value of precious metals). As there are no considerable legislative
changes in LDV worldwide until 2015, we expect average annual market growth to
be 5-5.5%, still higher than global auto production growth. Euro VI in Europe is
mostly relevant for HDD, as LDV diesel cars are already required by Euro V to
have DPFs. The maturity of the market in developed countries and the slowdown
in legislative changes (as emissions control in the regions is already at a very high
level) could lead to an erosion of catalyst producers’ pricing power.
We estimate the global LDV
catalysts market was valued at
around $4.3bn in 2012. As there
are no considerable legislative
changes until 2015 in LDV, we
expect average annual market
growth to be 5-5.5% in the
medium term
Though the LDV automotive catalysts market is almost evenly split between key
players, geographically their presence varies. Relationships with auto manufacturers
are key for gaining and maintaining market share. Different car producers will have
different requirements. For instance, US producers such as General Motors and
Ford are cost-conscious and the reduction of PGM content in the engine is key for
them; Toyota on the other hand is less concerned about PGM content, but
requires high levels of R&D from the producer.
We looked at key auto manufacturers in order to analyse their preferred suppliers
in different regions.
North America
The US auto manufacturing industry went through turbulent times, which resulted
in higher pricing pressure on the catalysts industry. We think that in the early 2000s
there was overcapacity in automotive catalyst production in the US, which also
contributed to some price erosion. We estimate that the margins LDV catalyst
producers are able to generate in the US are lower than those in Europe (even
excluding the diesel effect).
According to our estimates, North America represents 18% of global car
production and 22% of the global automotive catalysts market. The North
American market shares of the leading auto manufacturers are shown in the chart
below.
According to our estimates, North
America represents 18% of global
car production and 22% of the
global automotive catalysts market
Automotive production in North America
North American car production 2012
Others, 25%
Renault, 8.5%
GM, 20.9%
Ford, 18.4%
Toyota, 11.5%
Fiat, 15.4%
Source: IHS
Umicore and BASF are the leading automotive catalyst producers in North
America, with Johnson Matthey having a somewhat smaller market share.
In 2007, Umicore acquired the automotive catalyst business of Delphi Corporation
(formerly part of General Motors). As a result of this deal, according to our
estimates, Umicore has 55% of the North American supply of LDV automotive
catalysts for General Motors (and around 50% worldwide). The rest is supplied
mostly by BASF.
In 2006, BASF acquired Engelhard Corporation, a leading automotive catalyst
38
Umicore and BASF are the
leading
automotive
catalyst
producers in North America, with
Johnson Matthey having a
somewhat smaller market share
Chemicals
producer in North America. BASF is a leading supplier of Ford, with at least a
50% market share globally. The rest is supplied by Johnson Matthey and Umicore.
Fiat mostly uses BASF and Johnson Matthey catalysts. Johnson Matthey also has a
very strong relationship with Renault and BASF with Nissan.
Toyota uses Catalar for the majority of its catalyst needs globally (75-80%);
however, it also uses some Johnson Matthey catalysts in North America.
Overall, Umicore and BASF have higher market shares with local manufacturers
(General Motors, Ford) and Johnson Matthey satisfies the needs of European
producers in North America.
Johnson Matthey has a lower market share in small engines in North America,
which is why the recent consumer shift towards smaller engines negatively affected
its sales in the region (for Umicore, the opposite is true).
Europe
According to our estimates, Europe represents 23% of global car production and
27% of the global automotive catalysts market.
Europe is the most lucrative market for LDV catalysts producers. 50-55% of the
cars in the region are powered with diesel, which is associated with a 5x higher
catalyst value.
Fluctuations in the proportion of diesel-powered cars are one of the key factors for
catalysts companies’ profitability in the region (along with car production). The
European market shares of the leading auto manufacturers are shown in the chart
below.
According to our estimates,
Europe represents 23% of global
car production and 27% of the
global automotive catalyst market
Fluctuations in the proportion of
diesel-powered cars are one of the
key factors for catalysts companies’
profitability in the region
Automotive production in Europe
European car production 2012
Others, 20%
VW, 23.8%
BMW , 7.0%
Renault/Nissan,
12.9%
Daimler , 7.1%
Fiat, 7.1%
PSA , 10.4%
Ford, 10.0%
Source: IHS
Volkswagen dominates
Peugeot/Citroen.
the
market,
followed
by
Renault/Nissan
and
We think that Johnson Matthey has a higher market share in Europe than the other
two players as it is a leading producer of both diesel and gasoline catalysts for
Volkswagen. Johnson Matthey also has very strong relationships with Renault,
Peugeot and Fiat. We think that Johnson Matthey has around a 55-60% share in
the European LDV catalyst market (c63% of Johnson Matthey’s Emission Control
Technologies sales come from Europe).
We think Johnson Matthey has a
larger market share in Europe
than the other two players, as it is
a leading producer of both diesel
and gasoline catalysts for
Volkswagen
We think that Umicore has around a 30% share of the European LDV catalysts
market. According to our information, it is the leading supplier of diesel catalysts
for BMW and Daimler. It is also a secondary supplier to Peugeot and Renault. As
Umicore has exposure to better selling platforms, it was less affected than its
We estimate Johnson Matthey’s
share of the European LDV
market to be around 45-50% and
Umicore’s around 30%. BASF has
a somewhat smaller presence in
Europe
39
Chemicals
competitors by the decline in European car production.
BASF is the number three in Europe; we estimate its market share to be around
15%. It is the leading supplier to Nissan and Ford and secondary supplier to
Renault, BMW and Daimler. It also has higher exposure to gasoline cars.
As there is no major LDV legislation in Europe until 2015, we expect automotive
catalyst consumption growth to track auto production. We think that the current
decline in European auto manufacturing has created the risk of overcapacity in
LDV catalysts.
Japan/South Korea
According to our estimates, Japan/South Korea represent 26% of global car
production and 20% of the global automotive catalysts market. Toyota sources its
needs mostly from Catalar, 75% of which belongs to Toyota; hence the market
available for other companies is somewhat limited as Toyota has a 30% market
share of auto production in the region. Catalar also works with Suzuki, Fuji, Isuzu,
Daihatsu and even General Motors.
According to our estimates,
Japan/South Korea represent
26% of global car production and
20% of the global automotive
catalyst market
The Japanese/South Korean market shares of the leading auto manufacturers are
shown in the chart below.
Catalar (75% of which belongs to
Toyota) and NE Chemcat (a
50/50 joint venture between
BASF and Sumitomo) control the
majority of the Japanese LDV
market
Automotive production in Japan/South Korea
Japan/Korea car production 2012
Others , 20%
Toyota, 30.6%
Suzuki, 7.4%
Honda, 7.4%
Renault/Nissan ,
8.9%
Hyundai, 24.8%
Source: IHS
NE Chemcat is another player which is very active in the market. It is a 50/50 joint
venture between Sumitomo Metal Mining and BASF. Founded in 1964, it has a
long history in the market and is a leading supplier of Nissan and Honda. Together
with Catalar, NE Chemcat controls the majority of the Japanese market.
Umicore has a joint venture with Nippon Shokubai in Japan. It has strong
relationships with Mitsubishi and Nissan and serves as a secondary supplier for
Toyota and Honda.
Johnson Matthey has a weaker presence in Japan and South Korea. It is a
secondary supplier to Toyota, Honda and other producers. Similarly to the US, it
has lower exposure to small-engined cars.
In South Korea, BASF and Umicore have leading positions. BASF has a joint
venture with Heesung Group. Umicore also has a joint venture with a local
partner. It is a leading supplier of Hyundai and General Motors.
China
According to our estimates, China represents 22% of global car production and 15%
of the global automotive catalysts market. Chinese environmental legislation is well
40
In South Korea, BASF and
Umicore have leading positions
Chemicals
behind that in the developed world, which explains the smaller size of the automotive
catalysts market. The implementation of Phase IV regulation (similar to Euro IV) was
delayed for three years and is supposed to come into force at the beginning of next
year. Europe will be implementing Euro VI within the same timeframe.
According to our estimates, China
represents 22% of global car
production and 15% of the global
automotive catalysts market
As current environmental legislation does not require sophisticated catalytic
technology, not only global but also local players are present in China’s catalyst
market. The catalyst value per vehicle is also considerably lower than in developed
countries.
The Chinese auto market is much more fragmented than the market in other
countries. Leading suppliers have only a 42% market share collectively.
Automotive production in China
Chinese car production 2012
GM, 15.3%
VW, 14.1%
Others, 57.0%
Hyundai, 7.3%
Toyota, 5.6%
Source: IHS
We think that market shares of the leading catalyst companies (BASF, Johnson
Matthey and Umicore) in the country are more or less equal. All of them have local
production facilities. Initially, catalyst companies penetrated the market via their
global auto partners, but they now also serve local customers. For instance,
Johnson Matthey states that 50% of its Chinese clients are local companies.
South America
According to our estimates, South America represents roughly 5% of both the auto
production and catalysts markets.
Automotive production in South America
South America car production 2012
Others, 20%
VW, 21.2%
Ford, 8.2%
Renault, 10.8%
Fiat, 21.1%
GM, 19.7%
Source: IHS
European auto manufacturers dominate the South American market. Johnson
Matthey is by far the leading automotive catalyst producer in South America, as it
41
We think that the market shares
of leading catalyst companies in
the country are more or less equal
Chemicals
is the main supplier of Volkswagen, Fiat and Renault. Umicore is the number two
as it supplies General Motors, while BASF is the number three.
Johnson Matthey is by far the
leading
automotive
catalyst
producer in South America
Diesel fuel in Europe is at risk
Europe is the most lucrative market for LDV catalyst producers. Diesel-powered
vehicles, which represent c50% of the total European LDV fleet, are the key
reason for the primacy of the European market. Diesel-powered vehicles represent
5x the catalyst value of a comparable gasoline-powered vehicle. The prevalence of
diesel as a fuel for LDV cars is a uniquely European phenomenon and is explained
by the preferential tax treatment of diesel versus gasoline. India also has a large
LDV fleet of diesel vehicles, but as environmental regulations there are largely
non-existent, this market is not relevant for catalyst producers at the moment.
The share of diesel vehicles in the European fleet has varied over time.
Diesel as percentage of total LDV in Western Europe
In periods of economic downturn, the proportion of diesel-powered cars seems to
fall. This is explained mainly by the technical properties of diesel. With diesel
engines, fuel efficiency is much more limited for smaller engine sizes and short
journeys. During downturns, the engine mix moves towards smaller sizes, so the
share of diesel cars decreases.
Now, however, there is the risk of a more permanent reduction in the diesel fleet
in Europe. A litre of diesel contains more energy and more carbon than a litre of
gasoline; hence it is taxed at a higher rate than gasoline in most regions. For
instance, in the US, the diesel fuel tax is 25% higher than that of gasoline. In
Europe, fuel is taxed on the basis of volume, and diesel is cheaper than petrol in
nearly all EU states, with Britain a notable exception. On the other hand, there is a
shortage of diesel production facilities. Fuel suppliers often have to import diesel
and export surplus gasoline, sometimes at a loss. Diesel is the most expensive fuel
to refine, but the cheapest to consume in Europe.
In April 2011, the European Commission presented its proposal to overhaul the
outdated rules on the taxation of energy products in the EU. The new rules aim to
restructure the way energy products are taxed to remove current imbalances and
take into account both their CO2 emissions and energy content. The main impact
for all member states will be that they will have to end the current distortive tax
treatment of petrol and diesel. Since a litre of diesel contains more energy and
more carbon than a litre of gasoline, minimum tax rates per litre of diesel should
eventually be higher than for gasoline. Most member states will be able to satisfy
42
Europe is the most lucrative
market for LDV catalyst
producers due to the high
penetration of diesel-powered cars
Chemicals
the new requirements either through an increase in diesel rates or a reduction in
petrol rates.
The proposed tax rates are reflected in the table below.
New tax rates for transport fuel
Current rate
01 Jan 13
01 Jan 15
01 Jan 18
Petrol (euro per 1000 litres)
359
359
359
359
Diesel (euro per 1000 litres)
330
359
382
412
Kerosene (euro per 1000 litres)
330
350
370
386
LPG (euro per 1000 kg)
125
125
311
501
Natural gas (euro per GJ)
2.6
2.6
6.6
10.8
Source: European Commission / Taxation and Customs Union
As the table shows, if the new rates are approved, the diesel tax will increase by
80% and diesel will become more expensive than gasoline. The German
automotive industry association believes that if the new tax rates are approved,
sales of diesel cars could more than halve. This is a serious risk for both Umicore
and Johnson Matthey, as in the event of this they could lose a major portion of
their European earnings in LDV catalysts.
An increase in the diesel tax could
cause a considerable decline in
European sales of diesel-powered
passenger cars. We think
European LDV sales could more
than halve as a result
HDD catalyst market
Great expectations
Less than a decade ago, the HDD catalyst market did not exist at all, but it is now
Johnson Matthey forecasts the HDD catalyst market to reach $2.1bn in 2015 and
$3bn by 2020.
HDD catalyst market forecast by Johnson Matthey
CAGR 2012 – 2020: 17.3%
3500
Sales ex pms ($m)
3000
2500
2000
1500
1000
500
0
2005
2007
2009
North America
China
2011
2013
Western Europe
India
Brazil
2015
2017
Eastern Europe
2019
Japan and Korea
Non-road, 130 – 560 kW
2021
Russia
Non-road, <56 kW
We are more cautious than the company. We share Johnson Matthey’s view on
short-term prospects (2013-15) but see slower growth thereafter. The company
itself has downgraded its forecasts several times. Initially, it expected the HDD
catalyst market to reach $3bn by the end of 2014; now, Johnson Matthey expects
that it will reach this level only by 2020. Obviously, the 2008/09 financial crisis
43
We think the development of the
HDD catalyst market will be
below current forecasts
Chemicals
hurt commercial vehicle production growth severely, but we also see various
obstacles to greater penetration of HDD catalysts.
The short-term growth of the HDD catalyst market will be driven by the
introduction of the Euro VI standard in Europe and Phase IV in China. Both are
expected to come into force at the beginning of 2014. Based on our analysis, we
expect the European HDD market to double due to this change in legislation.
We see the development of the Chinese market as more problematic. China was
supposed to implement the Phase IV fuel standard in January 2010, but this was
delayed until 2014. The lack of low-sulphur fuel was the main reason for the delay.
Oil refiners were reluctant to invest in desulphurisation facilities. Diesel prices in
China are regulated by the government and refineries were uncertain of whether
they would be able to recover the investment costs. Finally, in 2012, the refiners
announced that the investment had been completed, but it is still not clear whether
low-sulphur fuel is available throughout the country and the implementation of
HDD regulation is not possible without this type of fuel.
Short-term growth of the HDD
market will be driven by the
introduction of the Euro VI
standard in Europe and Phase IV
in China
We expect the European HDD
catalyst market to double due to
the change in legislation
We are more sceptical on Chinese
market development
Phase IV does not require sophisticated technology, so the catalyst value per
vehicle will be much less than it is in developed countries. Its implementation will
also attract local competitors to the market, so the catalyst majors’ market share
will be smaller in China than it is in the developed world.
Lastly, it is not clear how the change in legislation will be enforced in China. In
Europe or the US, faulty catalysts can result in significant fines for the auto
manufacturer. In China the stakeholders as well as the emissions measurement
mechanisms are not clear. We think truck manufacturers will try to avoid additional
investments in emissions control, should such an opportunity arise.
We also have certain concerns about the short-term profitability of the HDD
catalyst market. Future changes in HDD legislation have prompted all the major
players to increase capacity and we think that, in the next two years, the market will
be unable to absorb all the capacity additions.
Commercial vehicles market dynamics
The passenger and commercial vehicles markets have different demand drivers.
For passenger cars, the key drivers are population growth and general economic
indicators such as consumer confidence, unemployment etc. Corporate investment
activity is also important, as vehicles are leased or bought by corporates for their
employees, but this is only one of a few factors.
Demand for passenger cars is
driven by general economic
indicators, commercial vehicle
demand is driven mostly by
corporate investment activity
Trucks are a much more discretionary product; hence demand fluctuations are
more pronounced. Declines in GDP lead to a fall in the transportation of goods,
and surplus trucks are temporarily decommissioned. When demand rises again,
companies reactivate these trucks before buying new ones, leading to a time lag
between a rise in GDP and growth in demand for trucks.
The commercial vehicles market
has more pronounced de-/restocking cycles
The market is driven mostly by corporate investment activity. The financial crisis
severely affected truck demand, especially in developed countries. Many fleet
customers (including logistics/transportation providers and construction firms)
cancelled existing orders. Though in 2010 most commercial vehicle markets
revived following the decline in sales, truck manufacturers continue to suffer a
number of difficulties. Increasingly stringent environmental regulations, the high
price of fuel and largely saturated markets are contributing to shrinking commercial
vehicles production in developed countries.
Emerging markets are also prone to cycles in commercial vehicle markets, but the
overall growth trend is positive.
44
Chemicals
It’s all about China
The regional split of the passenger and commercial vehicles markets is very
different. In passenger vehicles, developed regions (Europe, North America and
Japan) still represent almost 70% of the market.
Global auto production
Global auto production 2012 (units)
South Asia, 3%
South America,
5%
Europe, 23%
North america,
18%
Middle East/
Africa, 2%
Greater China,
22%
Japan/Korea,
26%
Source: IHS
In commercial vehicles, emerging markets – and particularly China – are of much
greater importance. The balance of power in the market has changed decisively
over the past five years. In 2006, Western Europe accounted for about 10% of all
commercial vehicle sales worldwide. In 2012, its share had fallen to around 6%.
The fall was even greater in North America, where the share of worldwide
commercial vehicle registrations fell from about 50% in 2006 to around 34% in
2012. On the other hand, China represented some 20% in 2006 but has now
reached almost 37%.
Development of commercial vehicles market
Global commercial vehicle production 2006
Global commercial vehicle production 2012
Asia, 29.2%
Asia, 45.0%
RoW, 3.5%
RoW, 4.1%
South America,
4.3%
South America,
6.3%
Europe, 14.6%
Europe, 11.0%
North America,
48.6%
North America,
33.6%
Source: KPMG
In large trucks (>14 tonnes) China already accounts for 46% of global demand.
45
In large trucks (>14 tonnes),
China already accounts for 46%
of global demand
Chemicals
World’s largest truck markets (2011)
World's largest truck markets > 14 tons
Other, 6%
China, 46%
South America
8%
India, 12%
Europe, 17%
North America,
11%
We expect that the market shares of Western Europe and North America will
continue to decline relative to sharply-rising demand in emerging markets.
A tough environment for developed-world truck OEMs
Truck OEMs in established markets are under increasing pressure. A steady stream
of ever-stricter new environmental legislation is gradually coming into force. This
means higher costs for truck manufacturers; material costs and fuel prices have
been on the rise as well. Against a strong economic backdrop, these factors added
a burden that could be absorbed to some extent. However, when economic growth
slowed, it became impossible to offset ever-increasing costs with increasing
revenues. Truck OEMs were forced to cut costs aggressively.
In developed markets, truck
manufacturers are under constant
pressure
from
tightening
environmental regulations and
rising costs
Another factor is that trucks are becoming increasingly interchangeable – and thus
commoditised. When this occurs, product differentiation becomes increasingly
difficult. Increased price pressure led to consolidation in the market. With the
formation of a large commercial vehicle group under VW’s roof (MAN, Scania,
VW CV), we see further consolidation in developed markets as unlikely.
Increased commoditisation of the truck market in developing countries and a spike
in demand for cheaper trucks helped emerging-market OEMs (which are
historically strong in the low-cost segment) gain market share at the expense of
western producers. From 2006 to 2010, the domestic production volumes of China
and India consistently exceeded domestic sales volumes.
In today’s market, a considerable proportion of trucks are already sold by
manufacturers from emerging markets, such as Dongfeng Motor, FAW and
CNHTC (all China) and Tata Motors (India).
46
Increased commoditisation of the
truck market in developing
countries allowed local companies
to gain market share at the
expense of western producers
Chemicals
International players in heavy commercial vehicles (>6 tonnes) in 2010
Worldwide
Units sold ('000s)
Market share worldwide (%)
Dongfeng
10.3%
300.1
Daimler Trucks
9.7%
280.7
FAW
9.5%
6.9%
274.3
CNHTC
199.9
TATA Motors
6.7%
194.9
Volvo Global Trucks
4.3%
3.9%
3.8%
125.8
Torch
113.2
BIAC
109.4
MAN (VW)
3.6%
103.8
Ashok Leyland
80
2.8%
Paccar
79.1
Toyota
77.4
2.7%
2.7%
2.6%
Navistar
76.6
Isuzu
2.5%
2.2%
2.2%
71.5
Ford
64.8
Ajhui Jianghuai
62.8
Iveco (Fiat)
1.8%
51.9
Scania (VW)
1.7%
48.6
0
50
100
150
200
250
300
350
Source: Roland Berger
Increasing globalisation of the truck industry also brings a new risk for established
developed-world OEMs. A number of manufacturers from emerging countries
have already entered, or are on the verge of entering, more mature markets such as
Russia.
Commercial vehicles market in
emerging countries is still very
fragmented
For truck OEMs, western markets are consolidated but emerging ones are still
highly fragmented. For instance, in China there are more than 18 companies which
produce medium-sized trucks (>6 tonnes).
Western OEMs are reacting to these market trends. Acquisitions and joint ventures
between established manufacturers and emerging-market OEMs are increasing.
The largest of these was announced in 2012. AB Volvo acquired 45% of Dongfeng
Motor Group and became the largest heavy-duty truck manufacturer in the world.
Developed countries: from truck market to catalysts market
The automotive catalysts market is driven by environmental legislation, which until
now has been more advanced in developed countries than in emerging regions.
The only HDD markets of meaningful size at present are Europe and North
America. The situation should change significantly from 2014, when China finally
introduces Euro IV legislation (called Phase IV).
Johnson Matthey estimates the HDD catalysts market to be worth c$1bn currently.
The company started to invest in HDD catalysts technology well before the first
regulations came into force. Johnson Matthey is the undisputed leader in the HDD
catalysts market and commands a market share of c65-68%. BASF has gained
market share over time; we estimate its share to be 20-25%. Umicore has the
smallest presence in the HDD catalysts market with c3% market share.
The following charts show the market shares of the leading truck producers in
developed regions.
47
The only HDD markets of
meaningful size at present are
Europe and North America
Johnson Matthey estimates the
HDD catalyst market to be
c$1bn currently
Chemicals
Truck OEMs’ market shares in the developed world
Truck OEM market shares North America (2010)
Truck OEM market shares Western Europe (2010)
0%
5%
10%
15%
20%
0%
25%
others
others
Scania (VW)
Volvo (incl Renault and MAC)
Iveco (Fiat)
Ford
Paccar
5%
10%
15%
20%
25%
30%
Paccar
MAN
Navistar
Volvo (incl Renault and MAC)
Daimler trucks
Daimler trucks
Source: KPMG
According to our data, Johnson Matthey has a long history of being been the
preferred supplier of Daimler and Volvo Global Trucks. BASF has very strong
relationships with MAN and Iveco. Umicore works with Paccar.
As the truck market in the developed world is mature, it is possible to gain market
share only if there is a legislative change or disruptive technology is introduced into
the market. All three companies alluded to new contract gains ahead of Euro VI
implementation.
not only particulate mass but also particle number limits. In the US, a similar
standard was already implemented in 2010 and the HDD catalysts market doubled
in value as a result.
Based on truck production data from IHS and Johnson Matthey sales data, as well
as our assumptions on the latter’s market share, we have calculated the HDD
catalyst value per vehicle.
HDD catalyst value per vehicle Europe and US
HDD production
NA
% change
Europe
% change
2010
301
2011
456.8
2012
448.9
2013
444
2014
467
2015
481
2016
495
2017
510
27.7%
360
51.8%
419
-1.7%
370.9
-1%
370.9
0%
5%
382.0
3%
3%
393.5
3%
3%
405.3
3%
3%
417.5
3%
Sales
NA
% change
194
295
297
302.94
312
318
328
338
52.1%
0.7%
2%
3%
2%
3%
3%
0.92
70%
0.95
70%
0.97
70%
1.03
65%
1.10
60%
1.10
60%
1.10
60%
per unit
market share
0.92
70%
Europe
% change
91
111
105
109.2
245.7
258.0
258.0
266.0
N.A.
22.0%
-5.4%
4%
125%
5%
0%
3%
per unit
market share
0.36
70%
0.38
70%
0.40
70%
0.42
70%
0.99
65%
1.09
60%
1.06
60%
1.06
60%
136
146
273
309
309
318
market size
Source: Berenberg estimates, Johnson Matthey
According to our analysis, the catalyst value per car in Europe is now 2.3x lower
48
Chemicals
than it is in the US. The difference is explained mainly by different regulations,
though it is also affected by the average engine size in the region.
We think that, with Euro VI legislation, the HDD catalyst value per vehicle will
increase by 2-2.3x in the next two years.
Further growth in the HDD catalysts market is limited in both North America and
Europe. Legislative changes are the main trigger for an increase in catalyst value: in
the absence of radical legislative changes, catalytic technology becomes
commoditised and catalyst companies’ pricing power weakens. As mature markets
have already reached very tight levels of emissions control, we expect catalyst
market growth to slow in the medium term.
Another risk factor for the catalyst companies is the technical abilities of the truck
manufacturers. The dynamics vary between passenger and truck markets. In
passenger vehicles, due to the lower price per unit, sophisticated engine technology
does not make much sense. Potential cost savings achieved cannot compensate for
the costs associated with the development of the technology. In truck markets,
these investments can bring high pay-offs. For instance, Scania is working on a fuel
injection system which will allow for a reduction in the required catalyst volume.
We think that as catalyst technology matures, auto manufacturers’ pressure on
catalyst producers will increase.
Shorter-term, we think that the market is misinterpreting the way current truck
supply/demand dynamics translate to the catalysts market.
All the major European truck companies mentioned an improvement in order
intake at the Q1 2013 results, albeit from the very low levels seen in Q4 2012.
According to the GE European SME Capex Barometer from Q1 2013, which
includes data from more than 2,250 small and medium enterprises (SMEs), capital
investment will increase in most large Western European economies. SMEs
represent the lion’s share of truck buyers in Europe; hence overall market
expectations regarding European truck production are positive.
Investment intentions of European SMEs in the next 12 months (€bn)
Source: GE Capital European SME Capex Barometer
The improvement in truck market supply/demand dynamics has triggered higher
expectations for catalyst sales. We think these expectations are premature.
The Euro VI standard comes into force in January 2014. Truck companies have
49
We think that, with Euro VI
legislation, the HDD catalyst
value per vehicle in Europe will
grow 2-2.3x in the next two years
Further HDD catalysts growth in
both North America and Europe
is limited
We think that as catalyst
technology
matures,
auto
manufacturers’ pressure on catalyst
producers will increase
Chemicals
already announced that they expect these legislative changes to increase their costs
by c€10,000 per truck. They intend to pass the majority of the price increase
through to their customers (the average price per truck is expected to rise from
c€100,000 currently to €110,000 after Euro VI is in place). Euro VI not only
increases the initial selling price, but also negatively affects the total cost of
ownership over the entire lifecycle of the vehicle, as the truck’s fuel efficiency
decreases due to the complicated design of the emissions control system.
It therefore makes sense that truck buyers will pull forward purchases ahead of
such an increase. According to various estimates, up to 10% of annual truck
demand can be affected by pre-buying. This might be good news for truck
manufacturers, but for catalyst companies the effect is actually the opposite. The
pre-buying of Euro V trucks means a lower catalyst value per vehicle. We therefore
do not expect a major increase in the catalyst value per truck in Europe in 2013.
We think pre-buying of Euro V
trucks will limit the growth
potential of HDD catalysts this
year
China: from truck market to catalysts market
The Chinese passenger car market is also fragmented; however, international
producers have more than 50% market share.
In the Chinese passenger car market,
international producers have c50%
market share. In the Chinese
commercial vehicle market, local
producers control 80%
Chinese passenger car production
Source: IHS
In trucks, domestic OEMs control c80% of the market; in India, Tata has 60%
market share.
Emerging-market OEMs’ market shares
Truck OEM market shares China (2010)
Truck OEM market shares India (2010)
0%
10%
20%
30%
40%
50%
60%
0%
70%
Asia motor works
Baic
Others
Torch
Swaraj Mazda
CNHTC
Eicher Motors
FAW
Ashok Leyland
Donfeng
Tata Motors
others
Source: KPMG
50
5%
10%
15%
20%
25%
30%
35%
Chemicals
We see the dominance of local suppliers in emerging markets as one of the key
obstacles to international automotive catalyst players achieving greater penetration
in these regions. Johnson Matthey, BASF and Umicore entered the Chinese and
Indian passenger car markets together with their international auto customers – the
likes of General Motors, Volkswagen etc. After establishing initial positions in
these markets, they were able to gain local customers as well. For instance, Johnson
Matthey’s clients in China are now 50% international and 50% local companies.
Barriers to entry in HDD catalysts are much higher, as international truck
companies have more limited presence in emerging markets.
A second complication is that Euro IV does not require highly sophisticated
catalytic technology. Local catalyst producers will actively compete with
international players and we expect price considerations to be of the utmost
importance. We expect the overall profitability of the HDD catalyst market in
emerging markets to be considerably lower than profitability in developed regions.
A third complication is that the Chinese truck market is extremely pricecompetitive. The average price of a truck in China is 3x lower than in developed
markets. We think this will put incremental pricing pressure on catalyst producers.
For catalyst producers in emerging
markets, the barriers to entry are
much higher in commercial
vehicles/trucks than they are in
passenger cars
The average price of a truck in
China is 3x lower than in
developed markets
The table below summarises our view on the development of the HDD catalyst
market relative to Johnson Matthey’s expectations.
HDD market forecast
Market size (USD m)
Berenberg estimates
NA
2013
2014
2015
2016
2017
649.2
720.1
795.7
819.5
844.1
10.9%
10.5%
3.0%
3.0%
441.0
501.6
501.6
516.7
88.5%
13.8%
0.0%
3.0%
238.1
288.7
326.6
366.7
% change
Europe
234.0
% change
Asia
196.6
% change
21.1%
21.2%
13.1%
12.3%
Brazil
37.5
45.0
49.5
54.5
59.9
Non-road global
75.0
225.0
300.0
330.0
346.5
2032
2134
JMAT expectations
HDD market
JMAT estimates
Market shares
JMAT market share
BASF market share
Umicore
total internationals
2020
500.0
1192
1669
1935
2100.0
66%
25%
3%
94%
60%
25%
5%
90%
56%
25%
7%
88%
2550
3000.0
55%
23%
7%
85%
54%
23%
7%
84%
54%
20%
7%
81%
We are below Johnson Matthey’s HDD market forecasts for both 2015 and 2020.
We also have some concerns about the short-term profitability of HDD catalyst
markets.
Future changes in HDD legislation have prompted all the major players to increase
HDD catalyst capacity.
Johnson Matthey intends to double its capacity at its Macedonian plant (flexible
LDV and HDD capacity). It is also adding HDD capacity at its plant in Royston,
UK. Umicore is adding capacity in China, Germany and India. BASF is doubling
51
We are below Johnson Matthey’s
HDD market forecasts for both
2015 and 2020
Chemicals
its HDD capacity in Japan. Automotive catalyst production is quite flexible and the
majority of the costs (up to 75%) are variable; however, in 2008-09, when Johnson
Matthey commissioned its HDD capacity ahead of legislative changes in Europe
and the US, the division was loss-making.
We think that automotive catalyst producers are overestimating the development
potential of the market, which could negatively affect their margins in 2013-16.
52
Chemicals
Recycling
Which metals are being recycled?
Metals are infinitely recyclable in principle, but in practice, recycling is often
inefficient or even non-existent because of limits imposed by social norms,
product design, recycling technologies and the thermodynamics of separation.
How is the world faring at recycling the diverse mix of elements in modern
products? The chart below shows estimates of global end-of-life (EOL) recycling
rates for 60 metals and metalloids.
EOL recycling for 60 metals
Source: Metal Recycling, International Resource Panel
 Base metals (iron, copper, zinc) have recovery rates above 50%.
 The majority of the elements are seldom recycled.
The top 10 metals that are currently being recovered are:
1. lead (main use: batteries);
2. gold (main uses: jewellery, electronics);
3. silver (main uses: electronics, industrial applications (catalysts, batteries,
glass/mirrors), jewellery);
4. aluminium (main uses: in construction and transportation);
5. tin (main uses: cans and solders);
6. copper (main uses: conducting electricity and heat);
7. chromium (main use: stainless steels);
8. nickel (main uses: stainless steels and super-alloys);
53
The majority of metals are seldom
recycled
Chemicals
9. niobium (main uses: high-strength/low-alloy steels and super-alloys); and
10. manganese (main use: steel).
The main reason for such a low rate of recovery of many elements is the lack of
technology to recover them on an economically-viable basis. Most of these
elements are used in increasingly small quantities for very precise technological
purposes; for example, thin-film solar cells or computer chips. In those
applications, often involving highly co-mingled specialty metals, recovery can be so
technologically and economically challenging that the attempt is seldom made. As
an example, a mobile phone can contain more than 40 elements, including base
metals such as copper and tin, special metals such as cobalt, indium and antimony,
and precious and platinum-group metals including silver, gold, palladium, tungsten
and yttrium.
The main reason for such a low rate
of recovery of many elements is the
lack of technology to recover those
elements on an economically-viable
basis
Urban mine
For the scope of this report, we will limit our research to the recycling of PGMs
and some minor metals (such as ruthenium, platinum, tellurium, gallium, etc) as
those are key metals for Johnson Matthey’s and Umicore’s recycling divisions.
PGMs play a key role in modern society, as they are of specific importance for
clean technologies and other high-tech equipment. Important applications beyond
the well-known areas of chemical process catalysis and automotive emissions
control include information technology (IT), consumer electronics and sustainable
energy production such as photovoltaics (PV) and fuel cells, among others.
85% of mankind’s cumulative
PGM mine production (more
than 7,000 tonnes) has taken
place from 1980 onwards
Important application areas for PGMs
Application area
Catalysts
Electronics
Fuel cells
Glass, ceramics and pigments
Medical/dental
Pharmaceuticals
Platinum group metal
Platinum
Palladium
Rhodium
Iridium
Ruthenium




















Photovoltaic
Super-alloys
Source: Recycling the Platinum Group Metals: A European Perspective
There has been a considerable acceleration in PGM demand in the past 30 years.
85% of mankind’s cumulative PGM mine production (more than 7,000 tonnes)
took place from 1980 onwards.
54



Chemicals
Mine production since 1980/since 1900
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
% mined in 1900-1980
% mined in 1980-2010
Re Ga In Ru Pd Rh Ir REE Si Pt Ta Li Se Ni Co Ge Cu Bi Ag Au
Source: Umicore
The driving forces behind the booming use of PGMs are their extraordinary and
sometimes exclusive properties, which make them essential components in a broad
range of applications.
Competition between applications leads to increased pressure on supply. The
global annual production of PGMs would fit into a small room. However, due to
their low concentration, one needs to extract on average one tonne of ore to
obtain 10 grams of precious metal. Due to resource depletion, the costs of mining
(including energy and water) are constantly increasing
Global production of precious metals
The global production of PGMs
would fit into a small room.
However, due to their low
concentration, one needs to extract
on average one tonne of ore to
obtain 10 grams of precious metal
Source: Oko-Institut eV
One way to ensure adequate supply is to increase the exploration and extraction of
geological deposits of PGMs. More than 85% of global mine production of PGMs
is concentrated in Africa and Russia, where various difficulties severely limit
production. The supply of minor metals (indium, bismuth, selenium, tellurium,
rhodium, ruthenium, iridium) depends on the mining of major metals (nickel,
copper, zinc, lead, platinum), and the growth in demand for minor metals is higher
than that for major ones, which creates a supply/demand mismatch. There are no
sustainable substitutes, as the minor metals are from the same metal family.
55
More than 85% of global mine
production of PGMs is
concentrated in Africa and Russia
Chemicals
Structural scarcity of minor metals
The average concentration of
precious metals in ores from
primary mining is approximately
10g/tonne, whereas “urban
mining” can offer substantially
higher yields
Source: Umicore
The recycling of EOL materials can be a much richer source than the primary
mining of ores. The average concentration of precious metals in ores from primary
mining is approximately 10g/tonne, whereas “urban mining” can offer
substantially higher yields. For instance, the concentration of gold in PC circuitboards is 200-250g/t, in cell phones 300-350g/t and in automotive catalysts
2,000g/t. The recycling potential is easier to realise than substitution as a lot of
high-tech application are based on specific material properties.
The chart below shows key consumer industries for platinum, palladium and
rhodium.
PGMs: key consumer industries
Platinum
Other, 5%
Other,
14%
Chemicals
, 9%
Jewellery,
25%
Rhodium
Palladium
Chemicals
, 3%
Dental, 11%
autocatalysts,
52%
Autocatalysts,
48%
Electronics,
18%
Jewellery, 18%
The potential of “urban mining” is high. For instance, automotive catalysts
represent the major portion of PGM consumption and we are now mainly
recycling automotive catalysts produced at the end of 1990s. However, since that
time the consumption of PGMs per car has increased considerably.
56
Others ,
7%
Autocatalysts,
90%
Chemicals
Global consumption of PGMs in automotive catalyst production
350
Global
 pgm/t a-1
Rh
300
250
200
150
 1980 - 2010
Rh 420 t – 64 t
Pd 2200 t – 285 t
Pd 1900 t – 381 t
Pd
 4530 t – 730 t
100
50
Pt
0
1980
1984
1988
1992
1996
2000
2004
2008
Source: Umicore
Some applications of critical metals are so new that relevant mass flows of postconsumer materials will not reach the waste management sector until a few years’
time. A good example of such a field is PVs. Depending on solar cell type, indium,
tellurium, gallium or germanium are used in increasing amounts in PVs.
Recycling challenges
Recycling levels of metals vary depending on application. For example, the
platinum/palladium recovery rate in industrial applications (for instance, oil
refinery catalysts) is close to 90%; in automotive applications it is 50-55% and in
electronic applications only 5-10%.
PGM-lifecycle efficiency
Source: Oko-institut eV
What are the reasons for the difference in recovery rates? The basic assumption of
recycling is that the value of the recovered (and other) material has to pay for all
collection, dismantling, sorting and other recycling activities. Currently, there are a
number of challenges which prevent recycling from being economically and
57
The platinum/palladium recovery
rate in industrial applications (for
instance, oil refinery catalysts) is
close to 90%; in automotive
applications it is 50-55% and in
electronic applications only 5-10%
Chemicals
technically viable.
 Technical recyclability. If each product were made from a single substance,
recycling would be relatively simple and its interactions linear, up and down the
“recycling chain”. However, the reality is that most metals enter the
metallurgical process in the form of alloys. The degree to which metals can be
separated thus affects the economics of recycling. Some metals can be
reprocessed into their elemental form, but many will be reprocessed in alloy
form. The reason for this lies in often-similar thermodynamics, making the
separation of individual metals either very energy-intensive or impossible.
Element radar
Source: Challenges in Metal Recycling; Barbara K Reck and TE Graedel
 Accessibility of relevant components. An under-floor automotive catalyst or
a PC motherboard is easily accessible for dismantling, whereas a circuit-board
used in car electronics usually is not. Changes in product design are required in
order to optimise disassembling opportunities.
58
Chemicals
 Economic viability. In some cases, the recovery of the precious metal is not
economically viable unless it is paid for externally or subsidised. It depends on
product design, the concentration of the metal in the product and the
complexity of the metallurgical process to separate the PGM from the metal
alloy. For instance, a dismantled PC motherboard has a positive net value, but
an ultra-thin PGM-coated PC hard disk has a negative net value.
 Collection mechanisms. Collection mechanisms remain one of the key
reasons for the low level of metal recycling. For instance, the majority of old
PCs or mobile phones still end up being stored in households or discarded into
the waste bin for landfill or municipal incineration due to the lack of a clear
recycling value chain.
 The professionalism of the stakeholders is also very important. Collection
efficiencies are related to social and governmental factors, but separation and
sorting efficiencies relate to recycling technology. For instance, it is very
important that precious-metal-containing circuit-boards are removed from the
scrap pile prior to shredding, otherwise they lose almost 60% of their value.
State-of-the-art pre-processing facilities are often still optimised for mass
recovery, at the expense of the recovery of precious and special metals. On the
other hand, small, local pre-processors are often more labour-intensive and
smaller in size, which makes them less competitive. Targeted disassembly prior
to shredding could substantially increase the recovery of precious metals from
electronic wastes.
 Accessibility of the recycling chain. Many countries do not have the proper
infrastructure for recycling at EOL; this can result in precious metals being lost
to the recycling chain.
 Lack of legislative support. The US has not ratified the Basel Convention.
The Basel Convention prohibits the export of hazardous waste from the EU to
non-OECD countries for recovery, since these countries usually do not have
proper and sufficient treatment capacity. Most consumer electronics fall into
the hazardous waste category. However, the lack of legislative support for
recycling in the US leads to the largest proportion of electronic scrap being
exported to Asia, where it is used in “backyard” recycling. The latter is highly
polluting and harmful for human health; however, it is characterised by lower
costs (due to lower labour costs and zero investment in environmental
protection). As a result, illegal scrap dealers can offer better prices to metal
collectors. There are no PGM recycling facilities in the US due to the lack of
supply.
 The weakest link controls the performance of the system (for instance,
30% x 90% x 60% x 95% = 15%). Currently, the collection and dismantling
steps are among the weakest in the chain, and as they occur at the beginning of
the process, overall system efficiency is low. This is the case despite the strong
technical abilities of metal refiners, which conclude the recycling chain.
The weakest link controls the
performance of the system.
Currently, the collection and
dismantling steps are among the
weakest in the chain and as they
occur at the beginning of the
process, overall system efficiency is
low
Open versus closed loops in recycling
A high PGM recycling ratio is normally achieved when closed (direct) loops exist.
For instance, in the case of industrial catalysts, direct relationships exist along the
lifecycle of the product (manufacturer  industrial user  PGM refiner). There is
no change of PGM ownership after initial delivery to the end-user, all the material
flows are transparent and the PGM content of the product is known throughout
the entire cycle.
59
A high PGM recycling ratio is
normally achieved when closed
loops exist
Chemicals
Direct recycling loops
Product manufacturing
PGMprecursor
Product use in process
PGM-product
Charge
Use
(regineration)
Product recycling
Discharge
PGMrefining
Conditi
oning
PGM’s
E.g. Oil-refining catalysts, chemical catalysts, glass-equipment
In open, indirect recycling, the flows are much more complex and are
accompanied by losses at almost every step, which leads to much lower recycling
yields. PGM ownership changes several times during the lifecycle of the product,
there is often a lack of economic incentive for the owner of the EOL product to
recycle it, the stakeholders involved in the process are not clearly identified,
handling is often not fully professional (“grey” and “black” channels occur) and
the PGM content of the product changes through the cycle. In certain instances,
the dilution of the PGM in the end-product occurs to such an extent that recycling
in not inherently economically viable (for example, in the case of electronics).
Indirect recycling loops
Cat. converter
PGMcomponent
Assembly
PGMprecursor
Car
End-product
User 1
Production scrap
Final user n
Change of PGM
component
Return point/
Collection
PGMrefining
Car dismantler
Decanning
Conditioning
Component
collection
Dismantling
(possibly multistep)
(possibly multistep)
No removal of
PGM component
Losses / System outflows (component / PGM’s)
E.g. car catalysts, PGM in electronics, (dental)
Manufacturing
Use
Recycling-Logistics
Physical recycling/ Refining
The majority of recycling still occurs in an open-ended system, which seriously
harms process efficiency.
60
Losses / System outflows for
product
Coated monolith
Chemicals
Recycling value chain
We now look at the key waste streams and the differences in their value chains.
The chart below illustrates the value chain for the recycling of automotive
catalysts. However, the key participants are similar in most waste streams
(industrial catalysts, automotive catalysts, electronic waste etc).
PGM flow for EOL automotive catalysts in Germany
Source: Oko-Institut eV
As a rule, the recycling value chain includes collectors, pre-processors and refiners.
Physical recovery is limited to a few specialists worldwide, but at the beginning of
the chain the number of players is much higher. For instance, there are only 10
recyclers of automotive catalysts worldwide, but more than 10,000 collectors.
Virgin materials processing is generally large in scale, using processes underwritten
by historically low energy prices. In contrast, recycling is often local, more labourintensive and smaller in scale. In such a situation, the monetary returns are often
not sufficient to justify the purchase of modern “sense and sort” technologies, and
much otherwise recoverable material is lost.
61
Physical recovery is limited to a
few specialists worldwide, but at
the beginning of the chain the
number of players is much higher
Chemicals
Example of the recycling of electronic waste
Source: Umicore
Industrial applications (such as catalysts used in fine chemicals production or
petrochemical processing and PGM equipment used in the glass industry) have the
highest recovery rates (90%). In this case, recycling is solely market-driven and is
an integral part of the product lifecycle. This is an example of a closed-loop
system, with one of the shortest chains, where the recycler is often also the original
producer of the catalyst.
Industrial applications have the
highest recovery rate (90%)
Automotive applications have a recovery rate of 50-55%. Recycling is affected
by legislation, but the dominant driver is still economic. Technical recyclability
does not present a problem. The main problem is collection, as in this case the
catalyst is part of another finished product – a car. Many old cars are exported to
countries outside the OECD, which lack an appropriate recycling chain.
Electronic applications have the lowest recovery rate of 5-10%. As the
economic viability of recycling is questionable for many metals, legislation plays a
key role in determining electronic recycling. Extensive manual disassembly of
discarded electronics is typically not economically feasible in industrialised
countries but may be advantageous in emerging economies such as India and
China. This creates an economic incentive to export electronic waste to those
countries; however, as they lack recycling capabilities, the level of losses is very
high. Better enforcement of trans-boundary waste shipments is required to prevent
illegal recycling. The value chain is least transparent in the case of electronic waste
recycling, which results in large quantities of EOL products being stored by
consumers or disposed of through municipal waste collection. In electronic
applications, legislation (and not the economics of recycling) is the key driver;
hence PGM recyclers cannot improve the situation.
Electronic applications have the
lowest recovery rate (5-10%)
Waste electrical and electronic equipment (WEEE)
The consumption of industrial and
automotive catalysts is driven
mostly by GDP trends, while
electronic waste is growing at a
much higher rate than average
GDP growth
What is WEEE?
The consumption of industrial and automotive catalysts is driven mostly by GDP
trends, while electronic waste is growing at a much higher rate than average GDP
growth. WEEE is one of the most promising recycling sources, as it demonstrates
62
Chemicals
the highest growth among the waste categories and contains many metals which
are experiencing rising demand. According to the Environmental Impact Assessment
Review, 20m-50m tonnes of electronic waste (e-waste) are generated globally each
year.
Electronic scrap (e-scrap) is a complex mix of:






precious metals (Ag, Au, Pd);
base and special metals (Cu, Al, Ni, Sn, Zn, Fe);
potentially hazardous metals (Hg, Be, Pb, Cd, As);
halogens (Br, F, Cl);
plastics and other organics; and
glass, ceramics.
Modern electronic equipment can contain more than 60 elements. There is a high
risk of environmental damage if e-scrap is landfilled or if it is not treated in an
environmentally sound way. E-scrap is the most complex source of recycling. For
instance, circuit-boards contain most toxic and most valuable metals. About 70%
of the heavy metals (mercury and cadmium) in US landfills come from e-waste and
40% of lead in landfills comes from electrical and electronic equipment.
What is e-waste?
Source: EMPA Swiss Federal Laboratories for
Materials
In e-scrap, plastics and steel dominate by weight, but for the most part precious
metals dominate by economic and ecological value.
63
Modern electronic equipment can
contain more than 60 elements
Chemicals
Composition of e-scrap (weight)
Source: Umicore
Composition of e-scrap (value)
Source: Umicore
E-waste is one of the fastest-growing waste streams today; it is growing at 3x the
rate of municipal waste globally. This is largely due to the increasing market
penetration of electronic products in developing countries, the development of
replacement markets in developed countries and a generally high product
obsolescence rate, together with a decrease in prices.
E-waste is one of the fastestgrowing waste streams today; it is
growing at 3x the rate of
municipal waste globally
Legislation
E-waste is very much a subject dealt with by individual countries, even though the
movement of e-waste blurs national boundaries. In order to address the transborder issue, the United Nations (UN) introduced the Basel Convention on the
Control of Trans-Boundary Movements of Hazardous Wastes and their Disposal.
So far, 134 countries have recognised this convention. Australia, Canada, New
Zealand and the US are yet to ratify it. Nevertheless, ratification of the Basel
Convention has not necessarily led to policy or legislative responses.
In the absence of strong legislative practices, voluntary actions appear to guide
waste-management – both at global and national levels.
64
In the absence of strong legislative
practices, voluntary actions appear
to guide waste-management – both
at global and national levels
Chemicals
Recycling value chain worldwide
Source: Green Week, Brussels 2011
However, even where a policy mechanism exists, such as in the European Union,
implementation is weak. The WEEE directive became European law in February
2003. The WEEE directive sets collection, recycling and recovery targets for all
types of electrical goods, with a minimum rate of 4kg per head of population per
annum. The ROHs (restriction of hazardous substances) directive set restrictions
on European manufacturers as to the material content of new electronic
equipment placed in the market. After nine years, the directive still could not
achieve its aims; hence the legislation was amended again. The change concerns
the method of calculating the collection rates. Starting from 2012, there is a
transitional period of seven years, during which measurement will be changed
from kilograms per head to 45% of the weight of electrical and electronics
products entering the market. The overall aim is for the EU to recycle at least 85%
of electrical and electronics waste equipment by 2016.
Why are recycling rates so low?
Palladium recycling rates vary widely according to application – 80-90% of
palladium from industrial applications is being recycled, 50-55% from automotive
applications and only 5-10% from electronic applications. The recycling rate from
electronic applications is this low for almost all metals.
Despite the legislation, a maximum of 40% of European e-scrap is being recycled;
in countries where e-scrap collection and recycling is voluntary, the percentage of
recycled material is much lower. For instance, in the US, it is estimated to
represent 10-13% of the total e-waste generated. Within the EU, collection rates
vary greatly.
65
Despite the legislation, a maximum
of 40% of European e-scrap is being
recycled; in the US, recycling is
estimated to represent 10-13% of
the total e-waste generated
Chemicals
WEEE collection rate, 2010
Source: Eurostat
According to Eurostat data, despite the growth of electronic components’ share in
WEEE, the recycling rate of electronic equipment has been falling since 2005.
According to Eurostat data, despite
the growth of electronic components’
share in WEEE, the recycling rate
of electronic equipment has been
falling since 2005
Eurostat WEEE statistics
33%
28%
3000
'000 t
33%
31%
34%
38%
1500
40%
30%
2000
20%
1000
10%
81.7%
100.0%
74.6% 74.8% 74.2%
70.4%
80.0%
61.5%
1000
'000 t
4000
40.0%
500
20.0%
0
0
2008
0.0%
2005
0%
2005
2006
2007
Total WEEE
% share of waste
60.0%
2009
2010
IT + cons. equip.
2006 2007 2008 2009 2010
Collected IT + cons. equip.
Recycled IT + cons. equip.
% recycled
Source: Eurostat
In our view, the key reason for this is illegal trade. It is estimated that between
66
It is estimated that between 50%
and 80% of e-waste collected for
recycling in developed countries
each year is being exported
Chemicals
50% and 80% of e-waste collected for recycling in developed countries each year is
being exported1. Even within the EU, there are many indications that a substantial
portion of Europe’s e-waste is exported to areas such as West Africa and Asia,
disguised as used goods. China receives the highest proportion of all e-waste –
about 70% and rising. Common Asian destinations for e-waste include China, Sri
Lanka, Thailand and Vietnam. Exporters of e-waste to China can avoid detection
by routing container ships through Hong Kong, Taipei or the Philippines.
Export of e-waste
Source: The global impact of e-waste; International Labour Office
WEEE value chain
E-scrap value chain
Source: Green Week, Brussels, May 2011
Collection systems include producer/retailer take-back systems and municipal
collection systems. Since WEEE/e-waste is hazardous in nature, it is collected,
sorted, stored and transported under controlled conditions. The business sector
was the earliest user of electronic equipment; today it accounts for a sizeable
proportion of total installed IT equipment. Dismantlers/recyclers pick up these
items via auction or other standard business practices. Most households do not
directly sell obsolete WEEE into the scrap market. Preferred practice is to
undertake an exchange with the retailer when purchasing a new computer, or pass
it to relatives or friends. In the event of the former, it is the retailer’s responsibility
to dispose of the computer.
Scrap dealers/traders accumulate industrial quantities of e-scrap, securing it from
various sources. They then decide which items ought to be dismantled and which
retained for resale. In developed countries, the recycling operations may be
1
The global impact of e-waste, International Labour Office
67
China receives the highest
proportion of all e-waste – about
70% and rising
Chemicals
combined with dismantling operations in integrated facilities. In developing
countries, the chain is much more fragmented.
After segregation, further pre-treatment is needed – for example, small-scale
smelting, acid bath or open roasting. Larger scrap dealers like SIMS Metals or
Multimetco have this capability; others have to outsource.
Refining is the final stage of the process where metal separation takes place.
Key problems in e-scrap recycling

Refining is the final stage of the
process, where metal separation
takes place
Competition with low-cost “informal” recycling. 50-80% of global e-waste
is being exported to Asia or northern Africa. As labour costs are low in
developing countries, informal and formal recyclers apply labour-intensive preprocessing technologies, such as manual dismantling, as the primary treatment
to separate the heterogeneous materials and components. A comparative study
of pre-processing scenarios revealed that material recovery efficiency improves
along with the depth of manual dismantling.2
Purely mechanical treatment options (as typically applied in western countries
with high labour costs) lead to major losses of precious metals; in particular, in
dust and ferrous fractions. For instance, circuit-boards, cell phones and other
small, high-grade devices are highly complex with respect to precious metals
distribution; precious-metals-containing parts are closely interlinked and
precious metals are highly disseminated. Shredding (a mechanical approach,
used by western countries) cannot really liberate the different materials. Sorting
of these shredded parts by traditional separation techniques (magnetic etc) can
lead to substantial losses of precious metals (palladium and silver, especially, are
lost as dust). The pre-treatment of computer boards and circuit-boards from
mobile phones should be carried out manually. The more complex/interlinked
the material, the less selective are the mechanical processes and the higher the
losses by co-separation.
Informal recycling has lower yields at the metallurgical stage; however, it has
higher collection rates. Hence, informal recycling can not only be a lower-cost
process, but can also have similar yields to formal recycling. Producercollection schemes have the financial resources (from fees added to the
purchase price of new goods) to outbid the illegal sector, but choose not to do
so because this does not align with their economic incentives. Informal
recycling can be stopped only if international legislation governing the
worldwide movement of e-scrap is changed – and we think this is very difficult
to achieve, as many countries are struggling with the legislation even at the local
level.
Insights from a decade of development cooperation in e-waste management, Mathias Schluep, Esther
Müller, Lorenz M. Hilty, Daniel Ott, Rolf Widmer, Heinz Böni
2
68
Informal recycling has lower yields
at the metallurgical stage; however,
it has higher collection rates.
Informal recycling can not only be
a lower-cost process, but can also
have similar yields to formal
recycling
Chemicals
Recycling efficiency
Source: United nations environment programme

Collection efficiency. Better recycling will result from having an
infrastructure that supports cooperation between different stakeholders in the
recycling chain. One of the key issues for developed countries is the lack of
incentives at the collecting level, which prevents the whole system from
operating efficiently. In the developed world, only producers or third parties
acting on their behalf need to fulfil collection requirements. Producers have no
control over the waste to which they do not have access and have no
enforcement powers, so it is unrealistic to make them responsible for meeting
those targets. In Europe, for instance, consumers pay for collection and
recycling. In developing countries, the waste collectors usually pay consumers
for their obsolete appliances. As the economic incentive is much stronger in
developing countries, the collection rate in informal recycling is as a rule
higher. Not only producers, but also recyclers, waste collectors, local
authorities and dealers should be subject to some legal obligations in order for
the system to function properly, and so far there are no legislative initiatives to
change the situation.

High volumes, but small concentration of metals per unit. High volumes
of e-waste are being generated worldwide due to the rapid obsolescence of
gadgets and high demand for new technology in the developed world and
higher penetration of electronics in the developing world.
Value and volume in the electronics industry
Cu, 13%
Ni, 1.50%
Pb, 0.60%
Sn, 1%
Zn, 1.10%
Precious metals,
0.40%
Organics,
41%
Others, 41%
Source: Gartner
69
Chemicals
The metal value in one mobile phone is c€1. 100 tonnes of mobile phones contain
only 4.1kg of precious metals. Very often, the relatively small weight of precious
metal per unit makes recycling uneconomic. This leads to a low level of recycling
of small and high-grade devices.
Mobile phones recycling rate in various countries
Source: Gartner
 Economic incentive. Many of the world’s existing recycling policies have
grown out of environmental policies and are often still under the control of
environmental ministries. This sometimes obscures the fact that recycling is
primarily an economic activity. In general, there is not enough value in most ewaste to cover the costs of managing it. This is why legislation plays a more
dominant role than in the case of recycling industrial or automotive catalysts.
 Imperfections of legislation. Current WEEE legislation in the EU and Japan
focuses on mass recovery, which favours steel, base metals, plastics or glass
used in large quantities, whereas precious and specialty metals, found in small
electrical and electronic equipment, are often not recovered. As the targets do
not consider metallurgical steps, the high legal recycling targets assume a
recycling quality that in reality is not obtained. For instance, the EU’s End of
Life Vehicles directive requires an 85% recycling rate. If smelting and refining
are included, real recycling rates will be much lower, especially for precious and
specialty metals.
 Poor design and complexity. E-waste imposes many challenges on the
recycling industry, as it contains many different materials that are mixed,
bolted, screwed, snapped, glued or soldered together. Hence, responsible
recycling requires intensive labour and/or sophisticated and costly technologies
that safely separate materials.
 Law enforcement. Only one-third of WEEE generated in the EU is officially
reported as being treated in line with the WEEE directive. Part of the waste is
collected but unreported and treated without appropriate environmental care or
shipped illegally to treatment sites outside Europe. Better accountability of
stakeholders is required.
Addressable e-scrap market for precious metals recyclers
Key players in the industry have given their assessment of e-scrap availability for
precious metals refiners, as shown below.
70
The metal value in one mobile
phone is c€1; 100 tonnes of mobile
phones contain only 4.1kg of
precious metals. This leads to a low
level of recycling of small and highgrade devices
Chemicals
Availability of computer scrap, tonnes per annum
Source: Umicore, Boliden
Both Umicore and Boliden estimate the e-scrap market will reach 250,000-300,000
tonnes per year by 2016. Note that by “global addressable market” we imply
mostly Europe and Japan, as other regions do not have the appropriate legislation
to ensure formal e-scrap recycling (for instance, the US recycles only 10-13% of escrap). We estimate that other regions will remain closed to formal recycling as
long as:
Both Umicore and Boliden
estimate the e-scrap market will
reach 250,000-300,000 tonnes
per year by 2016
 an economic incentive for the illegal export of e-waste exists (non-formal
recycling benefits from lower costs and sometimes higher yields); and
 there is no clear accountability among the stakeholders in the process.
Below is our analysis of the addressable market reported by the metal refiners
versus data from Eurostat.
Addressable e-scrap market
Source: Umicore, Boliden, Eurostat, Berenberg estimates
According to the metal recyclers, the addressable market represents approximately
a quarter of the recycled IT and telecoms scrap given by the Eurostat figures. This
is due to the fact that approximately 75% of e-scrap’s weight consists of ceramics,
glass and plastics, which are not treated by the metal recyclers. Umicore expects
average annual growth to be 10% until 2015.
We now examine the global capacity for e-scrap refining.
71
According to our estimates, global
e-scrap recycling capacity currently
exceeds 400,000 tonnes, whereas
available e-scrap will only reach
300,000 tonnes by 2015
Chemicals
Major smelting and refining companies that have e-scrap refining capabilities
Country
Company
Canada
Xstrata
Belgium
Umicore
Germany
Aurubis
Sweden,
Norway,
Finland
Japan
Korea
Japan
Profile
Copper smelter and refinery in Ontario and a lead smelter in New Brunswick; takes an
assortment of electronic components to recover copper and other metals. The only escrap metal refinery in North America. Increased capacity from 50kt to 100kt per year in
2010. Recycles e-scrap not only from North America, but also Europe
Smelter and refinery that can recover 20 metals from a wide range of input materials.
Has widest product offering in the metal recycling industry. Invested over €0.5bn in the
past 15 years
Copper company that refines copper containing materials from the waste management
sector, including e-scrap. In 2011 invested €62.5m to increase level of e-scrap capacity
from 75kt to 140kt tonnes per year
Company has 3 smelters and refineries in Europe that recover copper and precious
metals. A new plant was completed in 2011 that expanded e-scrap capacity from 45kt to
120kt per year (Capex $200m) and made Boliden the largest recycler in the world. Treats
Boliden
e-scrap from East Coast of North America and Europe. Started capacity on 01/06/2012
A major Japanese metal and mining company with a smelter that specialises in recovery
Dowa
of PGMs and rare earths from electronics and used autocatalysts
Specialised in producing electronic copper cathodes used in various materials. Metal
recycling is one of its 4 major business areas. In addition to copper, its facilities recover
gold, silver, selenium, platinum and palladium. Operates Recytech Korea, a subsidiary
that specialises in the recovery of copper and other metals from scrap and used
LS-Nikko Copper
electronics
Recovers 16 different metals, including precious and rare metals by a combination of
hydro and pyro metallurgical processes (similar to Umicore). Recycles auto catalysts
Nippon Mining and and electronic scrap mainly in Tokyo metropolis. Has built a recycling collection facility
Metals Group
in Taiwan
Source: Berenberg estimates, Company data
As the table above shows, a number of producers have dedicated e-scrap
treatment capacities. In North America, there is currently only one dedicated
recycler – Xstrata. Our conversations with European companies (Aurubis,
Boliden, Umicore) indicate that, despite all of them having looked at the North
American market, they do not expect any considerable growth in e-scrap
availability in the region, as current legislation indirectly incentivises the export of
WEEE to Asia. Xstrata’s capacity is more than sufficient to satisfy not only North
American recycling needs, but also to treat some of the waste from Europe.
In Europe, several copper refiners (Aurubis, Boliden) have upgraded their capacity
recently. This is due to the fact that their main business of copper recycling and
refining is facing challenging times, as costs have increased and treatment and
refining charges have fallen. As a result, copper refiners are looking for additional
revenue streams. They also want to participate in the potential growth of WEEE
recycling caused by European directives.
In Japan, the market is being served by local players which are more than able to
absorb all the available WEEE.
According to Aurubis, global copper smelting capacity is equal to approximately
4m tonnes per year. Based on our research and conversations with industry
experts, we estimate the potential incremental e-scrap treatment capacity to reach
up to 100,000 tonnes per year, as primary refiners can add up to 5% of e-scrap to
their copper stream without causing disruptions in the technological process.
72
Capacity (kt)
100
35
110
120
N/A
N/A
N/A
Chemicals
International custom smelter output (2012, primary; 000t)
Aurubis
570
Nippon Mining and Metals
480
Mitsubishi Materials
470
LS Nikko
430
Sumitomo Metal Mining
390
Jinchuan
360
Jiangxi Copper Co.
310
Sterlite Industries
300
Tongling
260
Birla Copper
260
Source: Aurubis
2015.
Based on our analysis, we think that the market is overestimating the potential
growth in e-scrap availability. The majority of the materials which are available and
profitable to recycle are already being recycled. Radical changes in legislation and
product design are required for further growth of the addressable market.
We also think that there is currently overcapacity in e-scrap treatment facilities
globally, which will lead to stronger competition among the players for the
available e-scrap and potentially a decline in treatment charges.
Metal recycling technology
As we have discussed, pre-treatment is required for metal scrap recycling.
Recycling technology is not usually the limiting factor for increasing recycling
rates. Collection, dismantling and pre-processing are crucial for value generation
and toxic control.
Value chain of metal recycling
Source: Umicore
73
Chemicals
The diagram above shows the value chain for metal recycling. The pyrometallurgy
(smelting) and hydrometallurgy (leaching) steps are normally combined for the
treatment of complex materials.
Pyrometallurgy uses thermal energy and the chemical/metallurgical properties of
substances to melt down ores or secondary materials in order to concentrate target
metals for further processing and separate non-target substances into a slag and/
or volatile phase (for instance, blast furnace or convertor).
Hydrometallurgy uses acidic or alkaline solutions, as well as pressure and
temperature and the chemical properties of substances to separate target from
non-target substances via a leachate (solution) and a leaching residue (for instance,
solvent extraction, cyanide leaching of gold, electro-winning of copper etc).
EOL products – complex materials source
Source: Umicore
Hydrometallurgy cannot provide high yields of complex-composition scrap (for
instance, WEEE). Informal recycling of PGMs in Asia and Africa is normally
based on leaching. Leaching can be used for the extraction of gold, palladium and
silver from scrap with a rich content of PGMs. It allows quick access to PGMs,
comes with low investment costs and is often available locally. However, leaching
has lower yields than pyrometallurgy, a number of elements (such as lead, tin,
nickel, antimony etc) cannot be recovered via leaching, and without necessary
precautions it is extremely harmful for human health and the environment (for
instance, HC emissions are 370x thresholds).
After pre-processing, materials are normally sent to a smelter (or treated with
leaching agents). Both primary and secondary smelters can recover PGMs from
the mixture.
The first step involves extracting metals, which are easily re-processed to their
elemental form. The remaining elements, which are represented in the form of
slag, can sometimes be extracted in subsequent steps. Elements remaining in the
metal phase cannot be separated, with the exception of copper and lead smelting,
where consecutive processing steps allow for the removal of the alloying elements
(a fact benefiting the recovery of precious metals from e-waste).
The pyrometallurgical process normally uses base metals as collectors for precious
metals and other “impurities”, such as antimony, bismuth, tin, selenium, tellurium
and indium.
74
Illegal recycling is extremely
harmful for human health and for
the environment
Chemicals
Lead/copper and complex materials containing copper and PGMs are the basic
feed to the smelter. The smelter’s role is to separate lead slag and impure copper.
Impure copper will then be sent for leaching; slimes containing PGMs are
subsequently fed to PGM concentration for further treatment. Lead bullion
(collecting silver, gold and some palladium) will be treated in the blast furnace. The
precious metals will be separated out in a leaching residue.
We think that the market misunderstands metal recycling technology – Umicore
(as well Nippon Mining) has a very wide offering of recyclable metals, but copper,
zinc and lead smelters also have the ability to recycle precious metals. This is based
on the properties of copper, lead and zinc attracting precious metals. The smelters
always have precious metals-containing slime as a result of their main production
(copper, lead or zinc) and it is their choice whether to sell the slime for further
treatment to the likes of Umicore or invest in treatment capabilities themselves.
Copper, zinc and lead smelters
also have the ability to recycle
precious metals
Umicore recycling
Source: Umicore
Recently, several copper and lead refiners (Aurubis, Boliden) have added e-scrap
recycling capacities to their main smelters. It is possible to add these capacities
without disturbing the main process – it is simply an incremental feedstock in their
main smelter. The key investments a metal refining company will make if e-scrap is
being treated are an additional furnace (RC-rotary convertor), a steam boiler for
excess heat recovery and gas-cleaning equipment, as process gases from the
recycling of electronic equipment contain hazardous substances which primary
metal concentrates do not contain.
75
Recently, several copper and lead
refiners (Aurubis, Boliden) have
added e-scrap recycling capacities
to their main smelters
Chemicals
Aurubis e-scrap process
Source: Aurubis
Normally, there are considerable synergies between electronic recycling and metal
production from concentrate, as in limited quantities e-scrap does not interrupt the
metal refining process.
In practice, one of the major limitations to metal recycling lies in the need for
metal production to pay for itself. For scarce and valuable metals, the demand and
supply volumes of various minor elements are generally too small to justify a
dedicated recycling plant for such metals in EOL goods. The processing of
recyclate streams currently occurs mostly on the back of large-scale production of
base metals with compatible thermodynamic properties; ie carrier metals such as
copper, iron, lead, lithium, nickel, rare-earths (oxides), tin, titanium and zinc.
Any metallurgical plant will only process available metal scrap on the back of its
normal operations, when economically viable to do so. The capex of metallurgical
production plants can be very high, and opex will vary. Opex includes labour costs
(markedly different in different parts of the world), energy, waste management,
water purification, emissions control, occupational health and safety, and
consumables. Technological efficiency plays a key role, and is in turn determined
by the level of available expertise and by the degree of innovation in metallurgical
and recycling technologies. Because of the high capex, smelters require sufficiently
large economies of scale in order to operate. Profitable recycling smelters run well
over 100,000 tonnes per year of diverse feed.
Feedstock streams
Feedstock streams vary in metal complexity and difficulty of treatment. Umicore
can treat the widest variety of feedstock; it also has an integrated process, which
76
Normally, there are considerable
synergies
between
electronic
recycling and metal production
from concentrate, as the use of escrap does not interrupt the metal
refining process
One of the major limitations of
metal recycling lies in the need for
metal production to pay for itself
Capex of metallurgical production
plants can be very high, and opex
will vary
Chemicals
allows for considerable synergies during the process and low lead times compared
to competitors.
Integrated metals smelting
Source: Umicore
One of the key differences between PGM miners, metal refiners and the likes of
Umicore and Johnson Matthey is that the former mostly deal with primary
feedstock (for example, PGM or copper, zinc concentrates), whereas the latter deal
with EOL products and the by-products of metal refineries (automotive catalysts,
industrial catalysts, WEEE, residues from the smelting process). For metal
refineries and PGM miners, concentrate treatment is the main source of revenues,
whereas the treatment of the residues is the secondary stream. They can opt to
invest in additional equipment in order to carry this out in-house or outsource it to
the likes of Umicore. For Umicore, these residues will be the main revenue source.
In its refining business, Johnson Matthey specialises in platinum-related metals and
has the highest exposure to this group (platinum, palladium, silver). Umicore
refines a wide variety of precious metals, based on copper, lead, zinc and nickel as
carrier metals.
77
Chemicals
Feedstock split
JMAT refining feedstocks
Others
9%
Pharma
11%
Refiners
11%
Glass
8%
Umicore refining feedstocks
Electronic
scrap
10%
JM scrap
12%
Automotive
catalysts
10%
Mines
14%
Industrial
by-products
80%
Autocat scrap
35%
Around 32% of Johnson Matthey’s feedstock in refining comes from the
customers which buy Johnson Matthey’s products (closed-loop recycling). This
includes industrial catalysts for refiners, pharmaceuticals and glass.
Johnson Matthey has higher exposure to automotive catalysts as a source of
feedstock (35% of total raw materials volume, whereas Umicore has only 10%
exposure to automotive catalysts). Umicore is able to treat e-scrap, whereas
Johnson Matthey does not have this capability. Both companies treat secondary
sources of feedstock (EOL products; residues from PGM refineries like Impala,
Amplats etc; residues from copper, zinc and nickel smelters).
Umicore has higher exposure to industrial residues, whereas Johnson Matthey has
higher exposure to EOL products.
EOL products have higher value per unit of volume, so they are an extremely
important source of feedstock.
Feedstock breakdown by volume and value
Umicore feedstocks breakdown by
volume
Umicore feedstocks breakdown by
value
End of life
products
20%
End of life
products
37%
Byproducts
63%
Byproducts
80%
Metal recycling: key revenue streams
Recycling is essentially a processing business that achieves a margin on the
feedstock treated, while to a large extent the price of the underlying metal is
effectively passed through. Both Johnson Matthey and Umicore exclude the value
associated with passed-through metal prices from their adjusted revenues.
78
Chemicals
The key revenue streams
 Treatment charge (€/£ per kg of the incoming concentrate);
 refining charge (€/£ per kg of metal credited);
 sampling and assay charge (€/£ per lot);
 the value of “free” metal (ie refined metal produced by the recycler over and
above the metal content the recycler has paid for in concentrates it purchased
from the client);
 by-products (sulphuric acid in Umicore’s case); and
 metal management.
There are two very common types of contractual relationship.
 Purchase contract. This is established when the customer does not want the
metal to be returned after refining and demands instant payment. As EOL
products have quite a long supply chain (for example, automotive catalysts,
WEEE), this type of contract is used more frequently with EOLs. The recycler
pays the metal price (normally based on an LME reference price) according to
the metal yield, determined during the assaying process, subtracting assaying,
treatment and refining charges.
 Toll manufacturing. In the case of toll manufacturing, the recycler does not
take ownership of the metal at any stage of the refining process; ownership
stays with the customer. The client has to pay assaying/refining and treatment
charges. This mode of treatment is very beneficial for the recycler, as no
working capital is required. Sometimes, when a customer does not have metal
trading capability/need for refined metal, it will sell the metal to the refiner at
the end of the process. There is also a possibility of a metal swap at the end of
process (for instance palladium for gold).
Both Johnson Matthey and Umicore have metal management capabilities, where
they provide leasing, hedging, trading and physical delivery of metals.
Key determinants of the contract
 Treatment price in €/£ (which includes assaying, treatment and refining
charges);
 metal credit in per cent – technical yield of recovery;
 metal availability in days, which determines processing time; and
 as metal loses its identity (ie ownership) when it enters the recycling stream, it is
possible for the recycler to lease it if the recycling process is finished before the
agreed time.
Contract frequency
 Spot;
 six months to two years; or
 “evergreens” (with notice period).
Many suppliers of refining services prefer “evergreen” contracts, as they have
continuous streams of residues which need to be treated.
79
Toll manufacturing is very
beneficial for the recycler, as no
working capital is required
Chemicals
Value-add of recyclers versus metal smelters
Base metal smelters (copper, zinc, lead, nickel etc) have similar pricing mechanisms
for their products; however, their profitability and ROCE are lower than those of
metal recyclers due to the lower value-add associated with base metals processing.
The table below shows five companies’ ROCE. Aurubis is the largest copper
smelter in Europe; it is not integrated into mining. Boliden is a copper and zinc
mining and smelting company (smelting represents 80% of revenues). Nyrstar was
formerly part of Umicore; it mines and refines zinc (smelting represents 77% of
revenues).
ROCE of various smelting and recycling businesses
2012
Aurubis
Boliden
Nyrstar
Umicore recycling
Johnson Matthey recycling
ROCE
27%
18%
-0.55%
88%
60%
Johnson Matthey does not report capital employed for its precious metals services
business separately, so ROCE is for the precious metals division, which includes
manufacturing business. This drags ROCE down.
It is not possible to compare the operating margin of the businesses, as metal
smelters do not exclude the value of the metal from their reported revenues.
PGM recyclers have a higher ROCE than metal smelters. This is due to several
factors.
 Treatment and refining charges in the metal smelting industry are far more
standardised and competitive than they are in the recycling industry. Treatment
charges in the smelting industry are defined by the supply/demand dynamics
between mining and smelting capacity. If smelting capacity exceeds mining
production, a greater share of the metal value goes to the miner. Conversely,
when concentrates are relatively abundant, a greater share of the value goes to
the smelter. In metal recycling, the complexity of treated material is much
higher and only a limited number of players are able to extract the metals
economically; hence a greater share of metal value goes to the recycler.
 The complexity of the input is reflected in the existence of the assaying charge,
which is determined separately for each lot in recycling. Assaying charges do
not exist in smelting.
 Smelters normally buy concentrates from miners, whereas a major part of
recycling is carried out on a tolling basis; hence working capital requirements
differ dramatically. In 2012, inventory represented 159 days of sales for
Nyrstar, 87 days of sales for Boliden and 59 days for Aurubis. We estimate that
for Johnson Matthey and Umicore, inventory in the recycling divisions is less
than a month of sales.
 The treatment charge involves a base charge, which is agreed at a reference
metal price. In both smelting and recycling, the treatment charge contains a
formula that causes the agreed price to be increased or decreased by a fixed
percentage with certain price fluctuations of the underlying metals.
 A free metal component exists in both smelting and recycling; however, in
recycling, minor metals are often being extracted which are not of interest to
80
PGM recyclers have higher
ROCE than metal smelters
Chemicals
the client. The recycler therefore does not have to pay the supplier for these
metals. The importance of the free metal component is greater in the case of
recycling.
 Often, incremental value-add is generated because the recycler is capable of
extracting metals economically, whereas competitors/customers are not able to
do so. This technological superiority allows for significant premiums in
treatment charges.
Treatment charges in recycling are determined for each individual lot and can vary
with the composition of the underlying metals in the input. Treatment charges in
smelting are mostly determined by the supply/demand balance in mining/smelting
capacities. Recycling has a higher value-added component, which translates into
higher ROCE.
Concentrates used by metal smelters as feedstock contain precious and minor
metals, such as tellurium, selenium, antimony, lead etc. When a smelter buys
concentrate from a miner, minor metals are often considered as impurities and the
miner has to pay penalties if concentrations of these metals are above certain
accepted levels. The smelter in turn should pay credits to the miner if PGM
concentrations are above defined levels.
During the smelting process, refiners are able to extract certain quantities of
precious metals; however, the residues, which have very high concentrations of
both precious and minor metals, are normally treated by the recycler. The recycler
has the technical capability to extract these metals, which the smelter lacks. In the
past, for the smelter the cost of extraction was often higher than the value of the
metals. As a result, most of the metal value is transferred to the recycler in the
form of treatment and refining charges.
Recycling has a higher value-added
component, which translates into
higher ROCE
During the smelting process,
refiners are able to extract certain
quantities of precious metals;
however, the residues, which have
very high concentrations of both
precious and minor metals, are
normally treated by the recycler
Value-added recycling
Source: Umicore
Effect of metal price fluctuations on revenues and profits
Revenue impact
Recyclers normally hedge 100% of the metal exposure within the quantities
defined by the metal credit yield in their contracts. Formally, they are exposed to
any fluctuations in price between the moment they purchase raw materials (pricein) and the moment they sell the product to the customer (price-out). At any given
time, they are likely to hold metal, either as work-in-progress or stock-on-hand,
that has been “priced-in” but not “priced-out”; companies normally refer to this
metal as “metal at risk”. Normally, all the recyclers (including Johnson Matthey
81
Recyclers normally hedge 100% of
the metal exposure within the
quantities defined by the metal
credit yield in their contracts
Chemicals
and Umicore) hedge 100% of metals at risk (no transactional exposure). The same
is true of their transactional currency exposure (as a base, dollar-denominated
LME prices are used as a reference).
In Umicore’s case, however, hedging is only possible for seven out of 20 metals, as
the market for minor metals lacks liquidity.
The treatment charge also has a metal price component. It includes a base charge,
which is agreed at a reference metal price. This charge incorporates a formula that
causes the agreed price to be increased or decreased by a fixed percentage with
certain price fluctuations of the underlying metals.
In Umicore’s case, however, hedging
is only possible for seven out of 20
metals, as the market for minor
metals lacks liquidity
Finally, the free metal component (in the event of over-recovery of the metal
relative to the quoted metal credit yield) is also subject to metal price fluctuations.
It is industry standard to hedge “metal at risk”; whether or not to hedge treatment
charges and free metal exposure is up to the individual company. For instance,
Umicore has historically engaged in “structural hedging” or “cash flow” hedging,
which is the forward-hedging of metal price exposure that derives from the impact
that metal prices have on treatment charges and on free metal recovered from
materials supplied for treatment and refining. Specifically, Umicore forwardhedges its forecast exposure to metal prices and its currency risk when metal prices
expressed in euros or exchange rates are above their historical averages and are at
levels where attractive margins could be secured. This structural hedging includes
the use of forward contracts on metals and forward contracts on currencies.
Johnson Matthey does not hedge its free metal exposure.
Effect on profits
The effect of metal price fluctuations on profits is much greater than it is on
revenues, especially in the case of more diversified feedstock streams (as Umicore
has).
Recyclers’ metal yields and profitability very much depend on the feedstock mix.
In order to achieve maximum process efficiency in recycling, a particular input mix
is required. For instance, for Umicore, residues from base metal smelting and
precious metal refining represent 80% of volumes but only 63% of value, as the
precious metal concentration in EOL products is much higher than it is in the
refining slimes.
Johnson Matthey does not hedge
its free metal exposure, while
Umicore does
The effect of metal price fluctuations
on profits is much more dramatic
than it is on revenues, especially in
the case of more diversified feedstock
streams
Recycling often involves smelting (pyrometallurgical treatment). It is essential that
a smelter runs at full capacity all the time in order to keep fixed costs per tonne as
low as possible. It takes up to a week to idle a smelter. Furthermore, the shutdown
of a smelter bears the risk of damage to the refractory material and ultimately,
halting the smelter would interrupt the subsequent refining process. We think that
fixed costs represent up to 75% of total costs in recycling (excluding the cost of
the metal, which is a pass-through). As a result, a recycler has to operate the
smelter 24/7, even if the input mix is not optimal.
We think that fixed costs
represent up to 75% of total costs
in recycling (excluding the costs of
the metal)
Recyclers hedge the majority of their metal exposure; scrap collectors normally do
not hedge at all. As a result, when metal prices fall, collectors hold onto the scrap
and wait until metal prices recover.
Recyclers hedge the majority of
their metal exposure; scrap
collectors normally do not hedge at
all
This can negatively affect recyclers’ input mix – the share of EOL products in the
mix declines and the share of industrial residues rises. As a result, the value of
metal per tonne of scrap goes down, whereas costs stay essentially unchanged, as
volumes do not fall.
As a result, metal price fluctuations have a disproportionate effect on
recyclers’ operating margins.
82
Chemicals
Traditional base metal refiners entering the recycling market
Base metal refiners always have precious-metals-containing slimes as a result of
their main production (copper, lead or zinc) and it is their choice whether to sell
the slimes for further treatment to the likes of Umicore or invest in treatment
capabilities themselves. Umicore has a unique technology which allows it to
recover metals economically, even if their concentration in the residue is small (for
instance, minor metals). We do not think that metal smelters will be able to
recover minor metals for precisely this reason, but they have the ability to recover
precious metals.
Treatment charges in the smelting industry are defined by the supply/demand
dynamics between mining and smelting capacity. If smelting capacity exceeds
mining production, a greater share of the metal value goes to the miner.
Conversely, when concentrates are relatively abundant, a greater share of the value
goes to the smelter.
For the last few years, smelting capacity in several base metals (copper, zinc, for
example) has exceeded mining capacity, which weakened the treatment charges of
the smelters. The price of by-products has also collapsed (in 2013 ytd, the NW
European sulphuric acid price has fallen by 76%). Finally, metal prices have fallen
consistently, which affects the revenues from free metal.
Base metals price dynamics
Source: Bloomberg
As a result, smelters found all three of their revenue streams (treatment charges,
free metal sales and by-product sales) under pressure, which negatively affected
their margins and returns. Companies were forced to look for alternative sources
of income.
The increase in e-waste treatment capacity by Boliden and Aurubis is one example
of such incremental revenue streams.
Another recent trend is to increase the proportion of PGM-containing residues
treated in-house instead of outsourcing them to metal recyclers such as Umicore.
Recently, Aurubis announced its intention to increase value-add by processing the
group’s internal precious-metal-bearing anode slimes in-house. Project capex to
achieve this was about €50m, with operations starting in June 2013.
In 2008, Aurubis bought Cumerio, which allowed it to increase its copper anode
production capacity to 1m tonnes annually (from 600,000 tonnes previously).
Aurubis’ Hamburg smelter had the ability to treat precious metal slimes; however,
the smelter’s capacity was limited and it could only deal with existing quantities of
residues. Cumerio had no capacity for slime treatment. As Cumerio was
historically part of Umicore, it had a long-term contract with the company.
83
Base metal smelters have seen all
three of their key revenue streams
(treatment charges, free metal sales
and by-product sales) decline in
recent years
Chemicals
However, the conditions were such that majority of the PGM value remained with
Umicore in the form of treatment charges. This contract expires at the end of
2013. According to Aurubis, it has decided not to renew the contract and will
instead increase its own capacity. Currently, Aurubis’ gold capacity is 37 tonnes per
year and its silver capacity 1,222 tonnes per year. We think that incremental
capacity in Hamburg will allow Aurubis to increase its gold production by at least
two tonnes per year.
Umicore works with 200 different suppliers, although these vary in size. The
company’s current gold output is 25 tonnes per year and the loss of two tonnes (as
a result of Aurubis opting for in-house processing) would equate to around a 10%
loss in annual production.
Nyrstar, also formerly part of Umicore, recently announced a PGM-related
capacity expansion. Nyrstar has a treatment contract with Umicore similar to that
of Aurubis. We do not have information on when the contract expires, but we
think it will broadly coincide with new capacities coming onstream.
A number of recycling projects
have been announced recently by
base metal refiners
In 2012, Nyrstar announced the transformation of the Port Pirie primary lead
smelter into an advanced polymetallic processing and recovery centre, capable of
processing a wider range of high-margin metal-bearing feed materials (including escrap and internal residues from Nyrstar’s global network of zinc smelters and
other complex waste streams containing precious and other non-ferrous metals).
The project requires a capital investment of around €350m and is expected to be
operational by early 2016.
We do not have precise data on the scale of the potential capacity increase in PGM
production, but, judging by the scale of the project, we think the feedstock loss for
Umicore will be more than 10%.
Port Pirie expansion
Source: Nyrstar
These are the two largest projects that have so far been announced, but we believe
they indicate the prevailing trend. Metal smelting companies are no longer happy
to transfer to Umicore the major portion of PGM value in the production
residues.
We think that, although they will continue to supply some slimes to Umicore
(when they cannot extract the metals economically), the concentration of PGMs in
these slimes will fall considerably and the availability of PGM-containing scrap for
recycling will be considerably reduced.
84
We expect Umicore to lose several
key industrial residues suppliers
in the next five years
Umicore SA
Chemicals
Recycling at risk
● We initiate coverage of Umicore with a Sell rating and a price target of
€26/share (22% downside to the current share price). Umicore is one
of the leading companies in the areas of recycling and automotive
catalysts. It has unique technical capabilities that allow it to recycle
various feedstock streams and recover up to 20 metals. The recent
underperformance of the stock reflects, in our view, market concerns
about the short-term performance of the largest division – Recycling
(c61% of group EBIT in 2012) – due to declining precious metal
prices. We have conducted an in-depth analysis of the recycling
industry globally and expect the competitive dynamics to deteriorate
significantly in the medium term.
● We expect a decrease in the availability of key recycling feedstocks:
electronic scrap (e-scrap) and industrial residues. Contrary to market
expectations, we do not expect e-scrap availability to increase in the
medium term. On the other hand, recent capacity additions in e-scrap
treatment have led to significant overcapacity in the market. Industrial
residues – PGM-containing slimes of base metals (copper, lead, zinc)
– were historically treated by Umicore. Recently, however, a number
of metal refiners have invested in their own capacities. For instance,
we believe the termination of the company’s supply agreement with
Aurubis might lead to around a 10% fall in Umicore’s gold output.
The other divisions will not be able to compensate for the
deterioration in Recycling.
● Umicore is targeting double-digit annual growth in its Catalysis,
Energy Materials and Recycling divisions between 2012 and 2015/20
and 15%+ group ROCE between 2012 and 2015. We assume 7.5%
annual sales growth for the Catalysis division; 7% for Energy Materials
and -1% for Recycling. We do not think Umicore will be able to reach
15% ROCE earlier than 2016. We are 8% below consensus on 2013
EPS; for 2014 we are 24% below consensus. The main difference
comes from the Recycling division, where we are 11.5% below
consensus on 2013 EBIT and 40% below on 2014 EBIT.
• Our price target of €26/share is DCF-derived. Umicore is trading on
19.1x 2014 P/E (Berenberg estimate) – a premium of around 50% to
its historical average of 12.45x – and on 10.1x 2014 EV/EBITDA
(Berenberg estimate) – a premium of around 30% to its historical
average of 8x.
Y/E 31.12., EUR m
Sales
EBITDA
EBIT
Net profit
Y/E net debt (net cash)
EPS (reported)
EPS (recurring)
CPS
DPS
Gross margin
EBITDA margin
EBIT margin
Dividend yield
ROCE
EV/sales
EV/EBITDA
EV/EBIT
P/E
Cash flow RoEV
Source: Company data, Berenberg
2011
2012
2013E
2014E
2015E
14,479
553
416
325
267
2.84
2.70
4.50
1.00
10.9%
3.8%
2.9%
2.8%
15.7%
0.3
8.2
10.9
12.6
9.8%
12,547
524
372
234
223
2.08
2.47
3.59
1.00
12.4%
4.2%
3.0%
2.4%
13.3%
0.4
9.8
13.8
15.8
8.4%
11,522
457
290
180
235
1.60
1.87
3.28
1.00
13.0%
4.0%
2.5%
2.8%
9.5%
0.4
9.7
15.3
18.0
8.5%
11,161
444
274
175
220
1.56
1.77
3.34
1.03
13.0%
4.0%
2.5%
2.9%
8.8%
0.4
10.1
16.3
19.1
8.2%
11,878
505
327
211
262
1.88
2.10
2.92
1.06
13.0%
4.2%
2.8%
2.9%
10.0%
0.4
8.9
13.7
16.1
9.2%
85
Sell (initiation)
Rating system
Absolute
Current price
Price target
EUR 33.73
EUR 26.00
11/07/2013 Brussels Close
Market cap EUR 4,048 m
Reuters
UMI.BR
Bloomberg
UMI BB
Share data
Shares outstanding (m)
Enterprise value (EUR m)
Daily trading volume
112
4,441
586,180
Performance data
High 52 weeks (EUR)
Low 52 weeks (EUR)
Relative performance to SXXP
1 month
-8.5 %
3 months
-2.1 %
12 months
-22.7 %
43
32
SX4P
-9.9 %
-3.7 %
-27.4 %
15 July 2013
Evgenia Molotova
Analyst
+44 20 3465 2664
[email protected]
Jaideep Pandya
Analyst
+44 20 3207 7890
[email protected]
John Klein
Analyst
+44 20 3207 7930
[email protected]
Umicore SA
Chemicals
Umicore: investment thesis in pictures
Umicore revenue split
Umicore EBIT split
Umicore's EBIT split by division (2012)
Umicore's revenue split by division (2012)
Catalysis, 22%
Catalysis, 36%
Recycling, 28%
Energy
Materials, 4%
Recycling, 61%
Performance
materials, 22%
Performance
materials, 13%
Energy
Materials, 15%
Source: Berenberg estimates, Umicore
ROCE development: group and Recycling
Divisional and group ROCE
Sales split by geography
Relative performance versus SXXP
2012 revenue split
SA, 3.4%
NA, 10.2%
Africa,
1.6%
Asia, 9.3%
Europe,
75.4%
Source: Berenberg estimates
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Umicore: investment thesis
We initiate coverage of Umicore with a Sell rating and a price target of €26/share.
Two-minute summary: The company is targeting double-digit growth in its
Catalysis, Energy Materials and Recycling divisions between 2012 and 2015/20 and
15%+ group ROCE between 2012 and 2015. We see these targets as unrealistic
Our annual sales growth assumption for the Catalysis division is 7.5%; in Energy
Materials 7% and in Recycling -1%. We do not think that Umicore will be able to
reach 15% ROCE earlier than 2016. Our earnings estimates for 2013 and 2014 are
considerably below consensus. Umicore’s guidance for 2013 recurring EBIT is
€300m-350m; our forecast is €290m.
Our more conservative view is driven mostly by our expectation of deteriorating
fundamentals in Umicore’s metal-recycling division. Recycling accounts for 61% of
Umicore’s EBIT; the division’s ROCE reached a record 88% in 2012, whereas the
group’s ROCE was 16.7%. Contrary to the market, we expect the availability of
high-quality metal scrap to decline in the medium term. This means that Umicore
will have to process higher volumes of scrap in order to reach the same metal
yields it has now. We expect divisional sales to fall and costs to grow, which will
lead to considerable EBIT and ROCE erosion.
Other divisions will not be able to compensate for the deterioration in Recycling.
We think the Catalysis division will demonstrate the strongest growth, but this is
already in our and consensus numbers. The Performance Materials division has
high exposure to the European construction market, which will continue to weigh
on its earnings. The Energy Materials division combines a number of cutting-edge
technologies where Umicore has leading positions. Unfortunately, the current
macroeconomic climate has rendered these business units loss-making and we do
not expect major improvements in the medium term.
We do not expect Umicore’s Capex to decline in the medium term, as it is
expanding capacity in a number of areas. We see further downside risk to our
earnings numbers. Umicore has reached the maximum processing capacity at its
recycling smelter. According to our estimates, it will require €150m-170m of capital
investment in order to further grow its recycling volumes (versus current group
capex of €250m annually). But even without such an expansion project, we expect
Umicore’s EV FCF yield to remain around the 2.5% level for the next five years,
versus the sector average of 4.5%.
Key investment point 1: Recycling EBIT and ROCE to
deteriorate
We think that in 2013, the Recycling division’s ROCE will fall to 61% and the
group’s ROCE to 12.7%.
We expect some fundamental changes in the industry which will lead to a decline
in the availability of high-quality metal scrap. By contrast, the market expects
further improvements in scrap availability in the medium term.
In the past five years, metal smelters’ revenues have come under pressure, forcing
them to seek alternative revenue streams. Companies such as Aurubis have
therefore made considerable investments in recycling capacity (of both end-of-life
– EOL – products and industrial residues).
E-scrap is one of the most profitable categories of EOL products. It has a very
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high concentration of precious and minor metals relative to other scrap feedstock.
400,000 tonnes, whereas available e-scrap will only reach 300,000 tonnes by 2015.
profitable to recycle are already being recycled (legally or illegally). Recent capacity
additions by a number of players have led to considerable overcapacity in e-scrap
treatment.
In the past, base metal smelters used to outsource the treatment of their PGMcontaining production slimes to the likes of Umicore. Now, they have the
capability to treat them in-house. For instance, Aurubis had a long-term contract
with Umicore which is coming to an end in 2013; Aurubis has decided not to
renew it. Based on our calculations, the loss of this contract could result in the loss
of 10% of Umicore’s gold output. Nyrstar is another company which intends to
end its contract in 2015-16.
A deterioration in the availability of high-PGM-containing scrap will lead to a
change in the incoming metal mix for Umicore. Until now, Umicore has been able
to “cherry-pick” its feedstock streams in order to optimise the incoming scrap mix
and maximise PGM output. We think this will become much more difficult in
future.
As the metal mix deteriorates, the recycler begins to treat fewer precious metals
and more base metals (lead, copper and zinc). As a result, revenues decline
significantly, whereas costs remain broadly unchanged or even increase, as the
recycler has to process higher volumes in order to reach the same precious metal
yields. This will have a negative impact on ROCE and EBIT.
In addition, in the short term declining PGM and minor metal prices will also have
a negative effect on the Recycling division.
Key investment point 2: Positive surprise potential in the
Catalysis division is limited
Umicore expects double-digit annual growth in its Catalysis division in the next
five years; we forecast 7.5% growth.
Growth in Catalysis is driven by legislative changes. In light-duty vehicles (LDV),
there are no major legislative changes until 2015 and we expect the sales of
Umicore’s Catalysis division to grow in line with the market at 5.5% per year. In
heavy-duty diesel (HDD), the catalyst market in Europe should double due to
Euro VI legislation coming into force in January 2014. We expect Umicore to
increase its global market share to 7% by 2015-16. Johnson Matthey dominates this
market with around a 65% share; Umicore currently has around 3%.
We think future developments in the catalyst market are already reflected in
consensus numbers and do not see much potential for positive surprise.
Key investment point 3: Cutting-edge technology, but not
commercially viable medium term
Umicore’s Performance Materials and Energy Materials divisions combined
represent 37% of group sales, but only 17% of EBIT.
In Performance Materials, the company is heavily exposed to European
construction, which negatively affects its upside potential.
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In Energy Materials, the company has a number one market position in several
cutting-edge technologies such as cathode materials for electric vehicles (EVs),
concentrated photovoltaics (CPV) and thin film. Unfortunately, the current
macroeconomic climate makes all three technologies commercially non-viable. At
present, Umicore is loss-making in thin film and CPV. We do not expect any
considerable improvement in the Energy Materials division in the short term.
Our estimates for the Performance Materials division are broadly in line with
consensus. For Energy Materials, we are 11% below consensus on 2013 EBIT and
18% below on 2014.
Berenberg versus consensus
We are 9% below consensus on 2013 EBIT and 8% below on EPS; for 2014 we
are 24% below consensus on both EBIT and EPS. The main difference comes
from the Recycling division, where we are 11.5% below consensus on 2013 EBIT
and 40% below on 2014 EBIT. We are also 7% below consensus estimates for the
2014 dividend.
Relative and absolute valuation
Our target price of €26/share is DCF-derived. The stock is trading on 18x 2013
P/E and 19.1x 2014 P/E (Berenberg estimates) versus its historical average of
12.45x. The stock is trading on 9.7x 2013 EV/EBITDA and 10.1x 2014
EV/EBITDA (Berenberg estimates) – again, at a premium to its historical average
of 8x.
Blue sky/doomsday scenario
Our blue sky scenario reflects a recovery in precious metals prices and increasing
availability of high-quality metal scrap. In this case, the company will continue to
generate CFROI substantially higher than its cost of capital even at the terminal
stage of DCF. The scenario also assumes a decrease in the capital intensity of the
business.
Under our blue sky scenario, we reach 68% ROCE for the Recycling division by
2017 (versus an average of 67% over the last five years) and group ROCE of
17.8% (versus an average of 11.5% over the last five years). In our base case
scenario, 2017 ROCE for the Recycling division is 54.3% and group ROCE is
15.6%.
Running our DCF on the data above, our price target increases from €26/share to
€35/share. This scenario implies 4% upside to the current share price.
Under our doomsday scenario, we assume a situation similar to 2009, when the
availability of precious metals scrap fell sharply and the profitability of the
Recycling division collapsed. In this case, the company’s CFROI equals its cost of
capital at the terminal stage of DCF.
Under the doomsday scenario, we reach 43.2% ROCE for the Recycling division
by 2017 (versus an average of 67% over the last five years) and group ROCE of
13.8% (versus an average of 11.5% over the last five years). In this case, based on
our DCF analysis, our price target would be €20/share, which implies 68%
downside to the current share price.
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Key risks to the investment thesis
1. Greater availability of EOL products. The average concentration of
precious metals in ores from primary mining is approximately 10g/tonne,
whereas (for instance) the concentration of gold in PC circuit-boards is 200250g/tonne and in cell phones 300-350g/tonne. Hence EOL product scrap
has a much higher concentration of PGMs than any other type of recycling
feedstock. Currently, EOL products represent only 20% of Umicore’s
feedstock volumes (e-waste accounts for half of these EOL volumes), but
almost 40% of the value of the metals treated. Should the volume of EOLs
increase, the precious metals yield of Umicore’s output will increase
substantially. Only 5-10% of the precious metals from electronic applications
are recycled legally at present. It is estimated that between 50% and 80% of ewaste collected each year for recycling in developed countries is being
exported and recycled illegally. We regard a change in this trend as unlikely.
Radical changes in international legislation and changes in product design are
required for further growth of the addressable market in e-scrap.
2. Better availability of industrial residues. In our base case scenario, we
assume that many base metal smelters increase their in-house precious metal
treatment capabilities and Umicore loses certain feedstock streams. If this
trend reverses, Umicore’s returns in the Recycling division will improve. We
regard this as unlikely, as base metal smelters have already committed to capex
programmes.
3. Strong growth in global industrial production in the short term. A strong
recovery in industrial production could result in substantial price increases for
Umicore’s key metals. This would lead to an improvement in Recycling
division and group ROCE.
4. A higher-than-expected growth rate and share of the HDD catalysts
market. A stronger performance of the HDD catalysts market than we
currently expect could lead to a positive surprise in the Catalysis division.
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Stock performance and relative valuation
Umicore has recently underperformed both the SXXP and the chemicals sector.
Stock performance
Source: Bloomberg
However, we still see downside to the share price. The stock is trading on 18x
2013 P/E and 19.1x 2014 P/E (Berenberg estimates) versus its historical average
of 12.45x. The chart below shows relative P/E development based on consensus
estimates. Our EPS estimates are 8% below consensus for 2013 and 24% below
for 2014, but even on consensus numbers the stock is trading at a premium to its
historical average P/E.
Umicore’s P/E history
Source: Bloomberg
The stock is trading on 9.7x 2013 EV/EBITDA and 10.1x 2014 EV/EBITDA
(Berenberg estimates) – again, at premium to its historical average of 8x. We are
5.5% below consensus for 2013 EBITDA and 17% below 2014 EBITDA; hence
on our numbers the stock looks expensive.
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Umicore’s EV/EBITDA history
Source: Bloomberg
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Peer group analysis
ROCE
Company
Diversified
chemicals
Akzo Nobel
Arkema SA
BASF
Clariant
Croda
DSM
Elementis
Fuchs Petrolub
Givaudan
LANXESS
Naturex
Solvay
Symrise
EV/Sales
EV/EBITDA
P/E
2013
2013
2014
2013
2014
2013
2014
8.3%
13.6%
16.9%
8.2%
32.8%
8.3%
24.9%
41.2%
12.1%
7.0%
8.8%
7.4%
15.3%
0.9x
0.9x
1.0x
1.0x
3.4x
1.1x
1.9x
1.0x
2.9x
0.7x
1.7x
1.1x
2.5x
0.8x
0.8x
1.0x
0.9x
3.1x
1.0x
1.7x
1.0x
2.7x
0.7x
1.5x
1.0x
2.3x
7.4x
5.9x
6.9x
7.4x
11.6x
8.4x
8.1x
5.3x
13.9x
7.1x
12.7x
7.3x
11.6x
6.0x
5.0x
5.9x
6.4x
10.5x
7.3x
7.0x
5.2x
13.0x
5.7x
10.8x
6.4x
10.6x
13.9x
10.4x
13.0x
13.1x
17.0x
14.1x
12.3x
18.2x
25.1x
14.2x
16.8x
14.3x
19.5x
11.2x
9.5x
11.7x
11.0x
15.5x
11.8x
11.2x
18.8x
23.0x
9.4x
14.0x
11.8x
17.9x
15.8%
1.5x
1.4x
8.7x
7.7x
15.5x
13.6x
11.1%
9.0%
2.4x
2.1x
2.3x
1.9x
9.8x
9.1x
9.2x
8.3x
18.0x
17.0x
16.2x
15.1x
Catalysts
Johnson
Matthey
14.1%
2.5x
2.2x
12.5x
11.3x
19.1x
17.6x
Umicore
9.5%
1.9x
1.9x
9.7x
10.1x
18.0x
19.1x
Average
Industrial
gases
Air Liquide
Linde
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Key investment point 1: Recycling EBIT and ROCE to
deteriorate
•
In 2012, the Recycling division represented 28% of Umicore’s revenue
(excluding precious metals) but 61% of its EBIT. The division’s ROCE reached
a record 88%, whereas group ROCE was 16.7%.
•
We expect the availability of high-quality scrap to decline considerably in the
medium term. Base metal refiners are changing their business model in search
of incremental revenue streams. They will substantially increase their e-scrap
and industrial residues treatment. A number of key customers, such as Aurubis
(c10% of Umicore’s gold output on our estimates) and Nyrstar, are
commissioning their own recycling capacities in 2013-16 and reviewing their
contracts with Umicore.
•
Reduced scrap availability means that Umicore will have to process higher
volumes of scrap in order to reach the same metal yields it has now. We
therefore expect Umicore’s revenues to decline and its costs to rise.
•
We are 11.5% below consensus on Recycling EBIT for 2013 and 40% below
consensus for 2014. The company is targeting double-digit growth in this
division in the next five years; we expect growth to be negative.
Division at a glance
Umicore’s Recycling division consists of four business units.
Precious metals refining can recover 20 precious and non-ferrous metals from a
wide range of feedstock streams, including EOL products, industrial residues and
e-scrap. It has a unique technology which allows Umicore to recover metals
economically, even when their concentration in scrap feedstock is very low. This
technology gives Umicore a considerable advantage over competitors.
Precious metals management offers a range of services to internal and external
customers, including leasing, hedging and physical delivery of metals.
Battery recycling is a unique technology which works at ultra-high temperatures
(UHT) and allows a range of valuable metals to be extracted in a clean and efficient
way. Umicore targets primarily car battery recycling, but UHT technology can also
be used for other feedstock.
Jewellery and industrial metals produces semi-finished precious-metals-based
products for jewellery and industrial applications and is a major recycler of scrap
and residues from the jewellery industry.
Five forces analysis of the recycling industry
The bargaining power of suppliers is limited, but increasing. In the majority of
cases in the recycling industry, suppliers are also clients. The recycler obtains metal
scrap from the client and returns extracted metal. Treatment charges are the key
revenue stream for the recycler. In the past, the structure of the treatment charge
allowed the recyclers to capture a large proportion of the underlying metal value.
However, as recycling technology matures, more players are entering the market,
with the suppliers themselves investing in metal treatment facilities. We think that
these changes will affect the structure of treatment charges and reduce the value of
the metal captured by the supplier.
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The bargaining power of customers: see point above.
Competitive rivalry is increasing due to fundamental changes in the industry. We
expect scrap availability to decline in the medium term. Recyclers will have to
compete with their own suppliers for available feedstock material.
The risk of substitution is low. Metals can be either mined or recycled. Recycling
feedstock has much higher metal concentrations than ore does. Recycling is
therefore a much more cost-efficient method of metal production than mining.
The threat of new entrants is increasing. Scrap suppliers (mostly base metal
refiners) are becoming increasingly involved in metal recycling, as they are reluctant
to share a significant portion of the value of the recovered metal with the recycler.
Recycling is a key driver of the company’s earnings and ROCE
In 2012, the Recycling division represented 28% of Umicore’s revenue (excluding
precious metals) but 61% of its EBIT. The division’s ROCE reached a record
88%, whereas the group’s ROCE was 16.7%.
The company is targeting a 15% ROCE between 2012 and 2015 and Recycling is
the key driver of this target. However, we think that in 2013 the division’s ROCE
will already drop to 61% and the group’s ROCE to 12.7%.
We expect competitive intensity in recycling to increase, as traditional base metal
refiners are entering the metal recycling market. We think this will have a twofold
effect on Umicore’s profitability:
1. competition in the recycling market will drive refining charges down; and
2. the availability of precious metal scrap will be reduced.
This will negatively affect the availability of scrap metal for recycling. The metal
mix is extremely important for Recycling EBIT and ROCE.
Recycling often involves smelting (pyrometallurgical treatment). It is essential that
a smelter runs at full capacity all the time in order to keep fixed costs per tonne as
low as possible. It takes up to a week to idle a smelter. Furthermore, the shutdown
of a smelter bears the risk of damage to the refractory material, and ultimately a
halt at the smelter would interrupt the subsequent refining process. We think that
fixed costs represent up to 75% of total costs in recycling (excluding the cost of
the metal, which is a pass-through). As a result, a recycler has to operate the
smelter 24/7, even if the input mix is not optimal.
As the metal mix deteriorates, the recycler begins to treat fewer precious metals
and more base metals (lead, copper and zinc). As a result, revenues decline
significantly, whereas costs remain broadly unchanged or even increase, as the
recycler has to process higher volumes in order to reach the same precious metal
yields.
We think that there are fundamental changes in the recycling industry which will
lead to a reduction in refining charges and metal yields for Umicore. This will
negatively affect ROCE and EBIT.
We expect the availability of raw materials to decline in both EOL products (such
as e-scrap) and industrial residues.
400,000 tonnes, whereas available e-scrap will only reach 300,000 tonnes by 2015.
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In the past, base metal smelters used to outsource the treatment of their PGMcontaining production slimes to the likes of Umicore. Now, they have the
capability to do this in-house. For instance, Aurubis had a long-term contract with
Umicore which is coming to an end in 2013; Aurubis has decided not to renew it.
Based on our calculations, the loss of this contract could result in the loss of 10%
of Umicore’s gold feedstock. Nyrstar is another company which intends to end its
contract in 2015-16.
Recycling EBIT and ROCE development
100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2002
2004
2006
2008
ROCE
2010
2012
2014
2016
EBIT margin
In the short term, we see three more negative factors:
1. limited capacity at Umicore’s Hoboken smelter;
2. the decline in precious metal prices; and
3. the decline in minor metal prices.
Umicore’s integrated smelter in Hoboken has refining capacity of 350,000 tonnes
per year for more than 200 different types of raw material, ranging from industrial
residues to EOL materials. The operation can efficiently recover 20 different
metals. According to Umicore, it has invested over €1bn in the Hoboken complex
throughout the facility’s existence. However, Umicore cannot increase processing
volumes further because it has already reached the smelter’s maximum capacity. In
2012, the company made some investments in upgrading sampling and assaying
capabilities, but smelting capacity remains the bottleneck.
Economies of scale are crucial in recycling, and profitable recycling smelters run
well over 100,000 tonnes per year of diverse feed. Based on recent investments
undertaken by Boliden and Aurubis, we estimate the potential capex for a similar
increase in smelting capacity at €150m-170m (versus current divisional capex of
€67m). Umicore management has not yet committed to this investment, as
competitors’ recycling capacity additions have put the investment return at risk.
Our view is that, should Umicore add another smelter now, it will further decrease
its ROCE in the medium term. We do not include incremental capex in our model,
which limits potential volume growth for the division.
Precious metal prices are very important in determining the availability of raw
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materials. Recyclers hedge the majority of their metal exposure; scrap collectors
normally do not hedge at all. As a result, when metal prices fall, collectors hold
onto the scrap and wait until metal prices recover. This can negatively affect
recyclers’ input mix – the share of EOL products in the mix declines and the share
of industrial residues rises. As a result, the value of metal per tonne of scrap goes
down, whereas costs stay essentially unchanged, as volumes do not fall.
Concentrates used by copper, zinc and lead smelters as feedstock always contain
minor metals, such as tellurium, selenium, antimony etc. When a smelter buys
accepted levels. Hence, when a smelter sells residues to the recycler, the recovery
of minor metals is not always required and the recycler obtains them free (if it is
able to extract them economically from the residues).
Minor metals are very important for the recycler as a major portion of their value is
translated into revenues. We think that minor metals represent 10-12% of
Umicore’s revenues excluding metals.
We show our divisional forecast in the table below.
Recycling division summary (€m)
Revenue streams in Recycling
Recycling is essentially a processing business that achieves a margin on the
feedstock treated, while to a large extent the price of the underlying metal is
effectively passed through. Umicore excludes the value derived from passedthrough metal prices from its adjusted revenues.
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Integrated metals smelting
Source: Umicore
The key revenue streams
 Treatment charge (€/£ per kg of the incoming concentrate);
 refining charge (€/£ per kg of metal credited);
 sampling and assay charge (€/£ per lot);
 the value of “free” metal (ie refined metal produced by the recycler over and
above the metal content the recycler has paid for in concentrates it purchased
from the client);
 by-products (sulphuric acid in Umicore’s case); and
 metal management.
Very often, metal treatment is carried out on a toll manufacturing basis. Under this
arrangement, the recycler does not take ownership of the metal at any stage of the
refining process; ownership remains with the customer and the latter has to pay
assaying/refining and treatment charges. This mode of treatment is very beneficial
for the recycler as no working capital is required.
Treatment and refining charges in the metal-smelting industry are far more
standardised and competitive than they are in the recycling industry. In metal
recycling, charges are set separately for each batch. The complexity of the input is
reflected in the existence of the assaying charge. During the assaying process, the
recycler determines a list of the metals that can be extracted from the concentrate,
the yield that it can achieve economically and the timeframe within which the
process can be completed.
The treatment charge involves a base charge, which is agreed at a reference metal
price. It also contains a formula that causes the agreed price to be increased or
decreased by a fixed percentage with certain price fluctuations of the underlying
metals.
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Although treatment charges are linked to metal prices, the complexity of the
incoming metal mix is a much more important determinant.
For many of Umicore’s competitors, the cost of extracting certain metals from the
mixture (especially when their concentration is low) exceeds the metals’ value. As a
result, Umicore’s treatment charge is structured such that most of the metals’ value
is transferred to the recycler (ie to itself) rather than to a customer.
Value-added recycling
Source: Umicore
We think that with the increase in recycling capacity, the treatment charge will be
influenced more by the supply/demand balance. A greater proportion of the metal
value will remain with the customer rather than the recycler, which should
negatively affect Umicore’s revenues in Recycling.
E-scrap is hard to find
EOL products have a higher value per unit of volume than other recycling
feedstocks (with e-waste having the highest value) and as a result are a key factor in
the recycler’s profitability. The average concentration of precious metals in ores
from primary mining is approximately 10g/tonne, whereas the concentration of
gold in PC circuit-boards (for example) is 200-250g/tonne and in in cell phones
300-350 g/tonne.
Feedstock breakdown by volume and value
Umicore feedstocks breakdown by volume
Umicore feedstocks breakdown by value
End of life
products,
20%
End of life
products,
37%
Byproducts,
63%
Byproducts,
80%
EOL products represent only 20% of Umicore’s feedstock volumes (with e-waste
accounting for half of the EOL product volume) but almost 40% of the value of
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the metals treated. This is due to the higher concentration of precious and minor
metals in EOL products. Their availability is crucial for Umicore’s profitability.
Only 5-10% of precious metals used in electronic applications are recycled. Europe
is the only region where it is compulsory for the electronic goods producer to
recycle e-scrap. Despite the legislation, a maximum of 40% of European e-scrap is
being recycled; in countries where e-scrap collection and recycling is voluntary, the
percentage of recycled material is much lower. For instance, in the US, it is
estimated to represent 10-13% of the total e-waste generated. Within the EU,
collection rates vary greatly.
According to Eurostat data, despite the growth of electronic components’ share in
WEEE, the recycling rate of electronic equipment has been falling since 2005.
Eurostat WEEE statistics
Source: Eurostat
In our view, the key reason for this is illegal trade. It is estimated that between 50%
and 80% of e-waste collected for recycling in developed countries each year is
being exported3. Even within the EU, there are many indications that a substantial
portion of Europe’s e-waste is exported to areas such as West Africa and Asia,
disguised as used goods. China receives the highest proportion of all e-waste –
about 70% and rising.
Contrary to the market, we do not expect the availability of e-waste to
improve
As labour costs are low in developing countries, informal and formal recyclers
apply labour-intensive pre-processing technologies, such as manual dismantling, as
the primary treatment to separate the heterogeneous materials and components.
Purely mechanical treatment options (as typically applied in western countries with
high labour costs) lead to major losses of precious metals; in particular, in dust and
ferrous fractions. The more complex/interlinked the material, the less selective are
the mechanical processes and the higher the losses by co-separation. Informal
recycling has lower yields at the metallurgical stage; however, it has higher
collection rates. Hence, informal recycling can not only be a lower-cost
process, but can also have similar yields to formal recycling.
3
The global impact of e-waste, International Labour Office
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Recycling efficiency
Source: United Nations Environment Programme
Due to their lower costs, informal recyclers can offer 10-15% higher prices for escrap. Producer-collection schemes have the financial resources (from fees added
to the purchase price of new goods) to outbid the illegal sector, but choose not to
do so because this does not align with their economic incentives. Informal
recycling can be stopped only if international legislation affecting the worldwide
movement of e-scrap is changed – and we think this is very difficult to achieve, as
many countries are struggling with the legislation even at the local level.
However, many of the world’s existing recycling policies have grown out of
environmental policies and are often still under the control of environmental
ministries. This sometimes obscures the fact that recycling is primarily an
economic activity.
In regions where legislation is in place, such as Europe, it is often imperfect and
lacks transparency.
Current WEEE legislation in the European Union (EU) and Japan focuses on
mass recovery, which favours steel, base metals, plastics or glass used in large
quantities, whereas precious and specialty metals, found in small electrical and
electronic equipment, are often not recovered. As the targets do not consider
metallurgical steps, the high legal recycling targets assume a recycling quality that in
reality is not obtained. For instance, the EU’s End of Life Vehicles directive
requires an 85% recycling rate. If smelting and refining are included, real recycling
rates will be much lower, especially for precious and special metals.
Legal enforcement is also very low. Only one-third of WEEE generated in the EU
is officially reported as being treated in line with the WEEE directive. Part of the
waste is collected but unreported and treated without appropriate environmental
care or shipped illegally to treatment sites outside Europe.
Key players in the industry have given their assessment of e-scrap availability, as
shown below.
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Availability of computer scrap, tonnes per annum
Source: Umicore, Boliden
Both Umicore and Boliden estimate the e-scrap market will reach 250,000300,000 tonnes per year by 2016. Note that by “global addressable market” we
imply mostly Europe and Japan, as other regions do not have the appropriate
legislation to ensure formal e-scrap recycling. Below is our analysis of the
addressable market reported by the metal refiners versus data from Eurostat.
Addressable market of e-scrap
Source: Umicore, Boliden, Eurostat, Berenberg estimates
According to the metal recyclers, the addressable market represents approximately
a quarter of the recycled IT and telecoms scrap given by the Eurostat figures. This
is due to the fact that approximately 75% of e-scrap’s weight consists of ceramics,
glass and plastics, which are not treated by the metal recyclers. Umicore expects
average annual growth to be 10% until 2015.
We now examine the global capacity for e-scrap refining.
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Major smelting and refining companies that have e-scrap refining capabilities
Country
Company
Canada
Xstrata
Belgium
Umicore
Germany
Aurubis
Sweden,
Norway,
Finland
Japan
Korea
Japan
Profile
Copper smelter and refinery in Ontario and a lead smelter in New Brunswick; takes an
assortment of electronic components to recover copper and other metals. The only escrap metal refinery in North America. Increased capacity from 50kt to 100kt per year in
2010. Recycles e-scrap not only from North America, but also Europe
Smelter and refinery that can recover 20 metals from a wide range of input materials.
Has widest product offering in the metal recycling industry. Invested over €0.5bn in the
past 15 years
Copper company that refines copper containing materials from the waste management
sector, including e-scrap. In 2011 invested €62.5m to increase level of e-scrap capacity
from 75kt to 140kt tonnes per year
Company has 3 smelters and refineries in Europe that recover copper and precious
metals. A new plant was completed in 2011 that expanded e-scrap capacity from 45kt to
120kt per year (Capex $200m) and made Boliden the largest recycler in the world. Treats
Boliden
e-scrap from East Coast of North America and Europe. Started capacity on 01/06/2012
A major Japanese metal and mining company with a smelter that specialises in recovery
Dowa
of PGMs and rare earths from electronics and used autocatalysts
Specialised in producing electronic copper cathodes used in various materials. Metal
recycling is one of its 4 major business areas. In addition to copper, its facilities recover
gold, silver, selenium, platinum and palladium. Operates Recytech Korea, a subsidiary
that specialises in the recovery of copper and other metals from scrap and used
LS-Nikko Copper
electronics
Recovers 16 different metals, including precious and rare metals by a combination of
hydro and pyro metallurgical processes (similar to Umicore). Recycles auto catalysts
Nippon Mining and and electronic scrap mainly in Tokyo metropolis. Has built a recycling collection facility
Metals Group
in Taiwan
As the table above shows, a number of producers have dedicated e-scrap treatment
capacities. In North America, there is currently only one dedicated recycler –
Xstrata. Our conversations with European companies (Aurubis, Boliden, Umicore)
indicate that, despite all of them having looked at the North American market,
they do not expect any considerable growth in e-scrap availability in the region, as
current legislation indirectly incentivises the export of WEEE to Asia. Xstrata’s
capacity is more than sufficient to satisfy not only North American recycling
needs, but also to treat some of the waste from Europe.
In Europe, several copper refiners (Aurubis, Boliden) have upgraded their capacity
recently. This is due to the fact that their main business of copper recycling and
refining is facing challenging times, as costs have increased and treatment and
refining charges have fallen. As a result, copper refiners are looking for additional
revenue streams. They also want to participate in the potential growth of WEEE
recycling driven by European directives.
In Japan, the market is being served by local players which are more than able to
absorb all the available WEEE.
According to Aurubis, global copper smelting capacity is equal to approximately
4m tonnes per year. Based on our research and conversations with industry
experts, we estimate potential incremental e-scrap treatment capacity to reach up
to 100,000 tonnes of scrap per year, as primary refiners can add up to 5% of escrap to their copper stream without causing disruptions in the technological
process.
2015.
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Capacity (kt)
100
35
110
120
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We also think that there is currently overcapacity in e-scrap treatment facilities
globally, which will lead to stronger competition among the players for the
available e-scrap and potentially a decline in treatment charges. We expect that the
share of e-scrap treated by Umicore could fall from 10% of total feedstock (in
volume) to 5%.
Availability of industrial residues is also worsening
Base metal smelters (copper, zinc, lead, nickel etc) have similar pricing mechanisms
for their products; however, their profitability and ROCE are lower than those of
metal recyclers due to the lower value-add associated with base metals processing.
The table below shows five companies’ ROCE. Aurubis is the largest copper
smelter in Europe; it is not integrated into mining. Boliden is a copper and zinc
mining and smelting company (smelting represents 80% of revenues). Nyrstar was
formerly part of Umicore; it mines and refines zinc (smelting represents 77% of
revenues).
ROCE of various smelting and recycling businesses
2012
Aurubis
Boliden
Nyrstar
Umicore recycling
Johnson Matthey recycling
ROCE
27%
18%
-0.55%
88%
60%
Johnson Matthey does not report capital employed for its precious metals services
business separately, so ROCE is for the precious metals division, which includes
manufacturing business.
PGM recyclers have considerably higher ROCE than metal smelters.
We think that the market misunderstands metal recycling technology – Umicore
(as well Nippon Mining) has a very wide offering of recyclable metals, but copper,
zinc and lead smelters also have the ability to recycle precious metals. This is based
on the properties of copper, lead and zinc attracting precious metals. Concentrates
which metal smelters use as feedstock contain precious and minor metals, such as
tellurium, selenium, antimony, lead etc.
The smelters always have precious-metals-containing slimes as a result of their
main production (copper, lead or zinc) and it is their choice whether to sell the
slimes for further treatment to the likes of Umicore or invest in treatment
capabilities themselves. Umicore has a unique technology which allows it to
recover metals economically, even if their concentration in the residue is small (for
instance, minor metals). We do not think that metal smelters will be able to recover
minor metals for precisely this reason, but they have the ability to recover precious
metals.
Treatment charges in the smelting industry are defined by the supply/demand
dynamics between mining and smelting capacity. If smelting capacity exceeds
mining production, a greater share of the metal value goes to the miner.
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Conversely, when concentrates are relatively abundant, a greater share of the value
goes to the smelter.
For the last few years, smelting capacity in several base metals (copper, zinc, for
example) has exceeded mining capacity, which weakened the treatment charges of
the smelters. The price of by-products has also collapsed (in 2013 ytd, the NW
European sulphuric acid price has fallen by 76%). Finally, metal prices have fallen
consistently, which affects the revenues from free metal.
Base metals price dynamics
Source: Bloomberg
As a result, smelters found all three of their revenue streams under pressure, which
negatively affected their margins and returns. Companies were forced to look for
alternative sources of income.
The increase in e-waste treatment capacity by Boliden and Aurubis is one example
of such incremental revenue streams.
Another recent trend is to increase the proportion of PGM-containing residues
treated in-house instead of outsourcing them to metal recyclers such as Umicore.
Recently, Aurubis announced its intention to increase value-add by processing the
group’s internal precious-metal-bearing anode slimes in-house. Project capex to
achieve this was about €50m, with operations starting in June 2013.
In 2008, Aurubis bought Cumerio, which allowed it to increase its copper anode
production capacity to 1m tonnes annually (from 600,000 tonnes previously).
Aurubis’ Hamburg smelter had the ability to treat precious metal slimes; however,
the smelter’s capacity was limited and it could only deal with existing quantities of
residues. Cumerio had no capacity for slime treatment. As Cumerio was historically
part of Umicore, it had a long-term contract with the company. However, the
conditions were such that the majority of the PGM value remained with Umicore
in the form of treatment charges. This contract expires at the end of 2013.
According to Aurubis, it has decided not to renew the contract and will instead
increase its own capacity. Currently, Aurubis’ gold capacity is 37 tonnes per year
and its silver capacity 1,222 tonnes per year. We think that incremental capacity in
Hamburg will allow Aurubis to increase its gold production by at least two tonnes
per year.
Umicore works with 200 different suppliers, although these vary in size. The
company’s current gold output is 25 tonnes per year and the loss of two tonnes (as
a result of Aurubis opting for in-house processing) would equate to around a 10%
loss in annual production.
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Nyrstar, also formerly part of Umicore, recently announced a PGM-related
capacity expansion. Nyrstar has a treatment contract with Umicore, similar to that
of Aurubis. We do not have information on when the contract expires, but we
think it will broadly coincide with new capacities coming onstream.
In 2012, Nyrstar announced the transformation of the Port Pirie primary lead
smelter into an advanced polymetallic processing and recovery centre, capable of
processing a wider range of high-margin metal-bearing feed materials (including escrap and internal residues from Nyrstar’s global network of zinc smelters and
other complex waste streams containing precious and other non-ferrous metals).
The project requires a capital investment of around €350m and is expected to be
operational by early 2016.
We do not have precise data on the scale of the potential capacity increase in PGM
production, but, judging by the scale of the project, we think the feedstock loss for
Umicore will be more than 10%.
Port Pirie expansion
Source: Nyrstar
These are the two largest projects that have so far been announced, but we believe
they indicate the prevailing trend. Metal smelting companies are no longer happy
to transfer to Umicore the major portion of PGM value in the production residues.
We think that, although they will continue to supply some slimes to Umicore
(when they cannot extract the metals economically), the concentration of PGMs in
these slimes will fall considerably and the availability of PGM-containing scrap for
recycling will be considerably reduced.
Precious and minor metals prices continue to decline
Based on metal capacity data provided by Umicore, we calculated the weighting (by
volume and value) of each metal in the mix. Gold is the most important individual
metal in Umicore’s metal basket. Minor metals in the mix include antimony,
bismuth, indium, selenium and tellurium. According to our estimates, precious and
minor metals represent around 3% of volume, but around 90% of value in
Umicore’s metal mix, with gold having the highest share of value. Base metals
(lead, copper, nickel, tin) represent almost 98% of volume, but only 10% of value.
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Umicore metal mix (including pass through metals)
Metal mix
Ag (silver)
Au (gold)
Pt (platinum)
Pd (palladium)
Sb (antimony)
Minor metals
Sn (tin)
Pb (lead)
Cu (copper)
Ni (nickel)
% of volume
0.86%
0.02%
0.01%
0.01%
1.83%
0.74%
0.61%
76.36%
18.33%
1.22%
% of value
25.42%
28.39%
21.27%
8.77%
0.69%
5.30%
0.38%
4.69%
4.32%
0.62%
Source: Berenberg estimates, Umicore company reports
Gold is very important, not only because it contributes the largest percentage by
value to Umicore’s recycling activities, but also because it is the main metal for two
other units of the Recycling division – precious metals management and jewellery
recycling.
Gold price dynamics
2100
1900
1700
1500
1300
1100
900
700
500
09/07/2008
09/07/2009
09/07/2010
09/07/2011
09/07/2012
Gold spot ($/oz)
Source: Bloomberg
In 2013, the price of gold has fallen by around 30% ytd. This has been driven
mainly by US investment markets, notably the futures and gold ETF markets. At
the end of April, 350 tonnes of gold had flowed out of ETFs, representing a fall of
12.9% ytd in holdings, and half of these outflows had occurred since the end of
March. Growing concerns among US investors over the end of quantitative easing
(QE) continue to suppress the gold market.
Over the last three years, ETFs have represented only 6.5% of global gold
demand; however, the ETF and futures markets have a direct impact on gold price
formation and on the gold spot price.
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ETF gold holdings (in tonnes) by region to end-Q1 2013
Source: World Gold Council
Consumer purchases of gold represent 72% of gold demand. The international
spot price does not immediately reflect demand in these consumer sectors, given
the complex gold supply chain. The consumer sector often perceives strong price
declines as buying opportunities and can provide some price support for gold in
the medium term.
Sources of gold demand
Source: World Gold Council
We think that QE will be scaled back in the medium term, which should negatively
affect the ETF market. As ETFs play an important role in gold price formation,
we expect gold prices to remain at the level of c$1,000/oz in 2013-15.
Minor metals are also very important for the recycler as a major portion of their
value is translated into revenues.
Concentrates used by copper, zinc and lead smelters as feedstock always contain
minor metals, such as tellurium, selenium, antimony etc. When a smelter buys
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accepted levels. Hence, when a smelter sells residues to a recycler, the recovery of
minor metals is not always required and the recycler obtains them free (if it is able
to extract them economically from the residues).
Minor metals price dynamics
Source: Datastream
Minor metals price dynamics
Source: Datastream
Key minor metals for Umicore are antimony, indium, selenium, tellurium and
germanium.
Bismuth is twice as abundant in the Earth’s crust as gold. Bismuth has
traditionally been produced mainly as a by-product of lead refining. Bismuth can
be used in cosmetics, pigments and some pharmaceuticals. As the toxicity of lead
has become more apparent, bismuth alloys (presently about a third of bismuth
production) have increasingly been used as a replacement for lead.
Antimony: in 2010, China accounted for 89% of total antimony production
worldwide. About 60% of antimony production is used in flame retardants and
20% is used in alloys for batteries.
Indium is produced mainly from residues generated during zinc ore processing
but is also found in iron, lead and copper ores. The amount of indium consumed is
largely a function of worldwide LCD production, which now accounts for 50% of
indium consumption.
Selenium is most often produced as a by-product of copper. The key commercial
uses for selenium today are in glassmaking and pigments.
Tellurium is a by-product of copper and lead production. The primary use of
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tellurium is in alloys. Applications in solar panels and as a semiconductor material
also consume a considerable proportion of tellurium production.
Germanium is recovered mostly from zinc, silver, lead and copper ores. It is used
as a semiconductor in various electronic devices.
Most of the minor metals have industrial uses, and as we do not expect a
significant pick-up in industrial production, we expect their prices to remain
subdued in the medium term.
Revenue decline triggered by falling metal prices
Both Umicore and Johnson Matthey exclude pass-through metal prices from their
reporting. However, metals have a considerable impact on both companies’
revenues.
We analysed Umicore’s key revenue streams, which are summarised in the chart
below.
Metal split in Umicore’s revenues (excluding pass-through metals)
Umicore's revenue split
Minor metals,
11.8%
Gold, 10.1%
Treatment
charge, 64.1%
Silver, 6.7%
Platinum, 5.6%
Rhodium, 0.8%
Palladium,
0.8%
We think that treatment charges represent 60-65% of Umicore’s total revenues
excluding precious metals. The treatment charge is determined on a batch-by-batch
basis and reflects the complexity of the treated materials.
In our view, despite representing around 5-7% of Umicore’s revenues including
metal prices, minor metals represent 10-12% of the company’s underlying
revenues. This is due to the fact that Umicore retains the majority of the minor
metals it extracts in the form of free metal.
We think that Umicore is able to retain 70-80% of the total value of minor metals.
In 2012, Umicore cited the decline in metal prices as one of the key reasons for the
200bp margin contraction in its Recycling division.
After minor metals (taken collectively), gold is the most important metal for
Umicore. We assume a 5% retention rate (free metal yield for precious metals).
According to our calculations, gold represents around 10% of Recycling revenues
(excluding precious metals pass-through).
In 2013 ytd, gold prices have fallen by around 30%; the prices of minor metals
have also declined by around 20%. Based on our views on the outlook for gold
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and minor metals and on our metal mix model, we expect Umicore’s revenues
excluding precious metals to be down 13% yoy in 2013 and a further 7.5% in 2014.
Profit contraction triggered by fundamentals
In previous sections of this report we concluded that base metal smelters are
changing their business model and looking for additional sources of income. As a
result, several smelters are adding metal-recycling capacity, both in smelting
residues and e-scrap treatment. We think that, although they will continue to
supply some slimes to Umicore (when they cannot extract the metals
economically), the concentration of PGMs in these slimes will fall considerably and
the availability of PGM-containing scrap for recycling will be considerably reduced.
Metal recycling is a very capital-intensive process. It is essential that a smelter runs
at full capacity all the time in order to keep fixed costs per tonne as low as
possible. It takes up to a week to idle a smelter. Furthermore, the shutdown of a
smelter bears the risk of damage to the refractory material, and ultimately a halt at
the smelter would interrupt the subsequent refining process. We think that fixed
costs represent up to 75% of total costs in recycling (excluding the cost of the
metal, which is a pass-through). As a result, a recycler has to operate the smelter
24/7, even if the input mix is not optimal.
If the share of EOL products in the mix falls and the metal concentration in
industrial residues declines, the value of metal produced per tonne of scrap also
falls.
Until now, Umicore has been able to “cherry-pick” its feedstock streams in order
to optimise the incoming scrap mix and maximise profits per tonne. In our view,
Umicore will clearly continue to have a considerable advantage over competitors,
as its unique technology allows for the extraction of a wide range of metals, even if
the metal concentration in the scrap mixture is relatively low. However, we think
that scrap availability will be greatly reduced. It will be much more difficult to
optimise the incoming scrap mix; Umicore will have to treat higher volumes of
materials in order to obtain the same quantities of precious and minor metals in
the output.
We back-calculated Umicore’s EBIT in its Recycling division, based on the
assumption that 65% of costs are fixed. In the past, variable costs increased in
periods of declining metal prices. The company had to process higher volumes of
metals in order to obtain the required precious metal yields.
Recycling EBIT model (€m)
We think scrap availability has a very strong impact on the Recycling division’s
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profits. As we expect scrap availability to deteriorate in the medium term, we
assume considerable margin contraction from 2011-12’s high levels. In 2017, we
expect an additional step-up in costs as Nyrstar’s precious metals facility is
expected to come onstream in 2016 and further reduce feedstock availability for
Umicore.
Metal prices put incremental pressure on profits in the short
term
Recyclers normally hedge 100% of the metal exposure within the quantities
defined by the metal credit yield in their contracts. Formally, they are exposed to
any fluctuations in price between the moment they purchase raw materials (pricein) and the moment they sell the product to the customer (price-out). At any given
time, they are likely to hold metal, either as work-in-progress or stock-on-hand,
that has been “priced-in” but not “priced-out”; companies normally refer to this
metal as “metal at risk”. Normally, all the recyclers (including Johnson Matthey and
Umicore) hedge 100% of metals at risk (no transactional exposure). Umicore also
hedges its free metal exposure (Johnson Matthey does not).
In Umicore’s case, however, hedging is only possible for seven out of 20 metals, as
the market for minor metals lacks liquidity.
Because of these hedging activities, metal price fluctuations have limited impact on
Umicore’s revenues (as discussed above). However, the impact on profits is much
greater. Scrap collectors normally do not hedge their metal exposure. As a result,
when metal prices fall, collectors hold onto the scrap and wait until metal prices
recover. This reduces scrap availability and has a deleterious effect on profits.
Precious metal prices have been falling since the beginning of the year; we think
this could have a negative effect on Umicore’s profits in H2 2013 and 2014.
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Key investment point 2: Positive surprise potential in the
Catalysis division is limited
•
Umicore’s Catalysis division represents 36% of the company’s sales and 22% of
EBIT.
•
Umicore is one of the global leaders in catalysis. In LDV, it has c30% market
share globally. In HDD vehicles, Johnson Matthey has a dominant position and
controls c65% of the market. We estimate Umicore’s share to be around 3%.
•
Growth in catalysis is driven by legislative changes. In LDV, there are no major
legislation changes until 2015 and we expect the sales of Umicore’s Catalysis
division to grow in line with the market at 5.5% per year. In HDD, the catalyst
market in Europe should double due to Euro VI legislation coming into force
in January 2014. We expect Umicore to increase its global market share to 7%
by 2015-16.
•
We think these figures are already reflected in consensus and do not see much
potential for positive surprise. Umicore expects double-digit annual growth in
this division in the next five years; we expect 7.5% growth.
•
Additional downside risk arises as a result of potential overcapacity in HDD
catalysts.
•
We are broadly in line with consensus on divisional 2013-14 EBIT and sales.
Umicore’s Catalysis division consists of two business units: automotive catalysts
and precious metals chemistry.
Umicore is one of the major players in the emissions control industry. It has
around a 30% share of the light-duty diesel catalysts market. The catalysts market
is very mature in developed countries and market shares are well defined. Changes
in market share are only possible if legislation changes or if one of the players
comes up with disruptive technology (for instance, a reduction in PGM content in
the catalyst). Strong technical expertise is required in order to retain and increase
market share. Umicore spends 7.5% of sales on R&D annually.
In the precious metals chemistry business unit, Umicore produces organic and
inorganic PGM-based catalysts for the fine chemicals, life science and
pharmaceuticals industries.
Developments in the automotive catalysts market
Umicore and BASF are the leading automotive catalyst producers in North
America, with Johnson Matthey having a somewhat smaller market share. In 2007,
Umicore acquired the automotive catalyst business of Delphi Corporation
(formerly part of General Motors). As a result of this deal, according to our
estimates, Umicore has 55% of the North American supply of LDV automotive
catalysts for General Motors (and around 50% worldwide). The rest is supplied
mostly by BASF.
Europe is the most lucrative market for LDV catalysts. It is the only region where
50-54% of the passenger fleet is powered by diesel. A diesel vehicle currently
represents 5x the catalyst value of an equivalent gasoline vehicle. A decline in
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diesel-powered car production could seriously damage the profitability of all
automotive catalyst producers, including Umicore.
Johnson Matthey dominates the European market as it is the main supplier of
Volkswagen, Renault, Peugeot and Fiat. We think Johnson Matthey has around a
60% share in the LDV market in Europe. We estimate that Umicore’s market
share is around 30%. It is the leading supplier of diesel catalysts for BMW and
Daimler. It is also a secondary supplier to Peugeot and Renault. As Umicore has
exposure to better selling platforms, it was less affected than its competitors by the
decline in European car production
Though Catalar (owned by Toyota) and NE Chemcat (a 50/50 joint venture
between Sumitomo Metal Mining and BASF) control the majority of the Japanese
LDV market, Umicore also has a relatively strong position. Umicore has a joint
venture with Nippon Shokubai in Japan. It has strong relationships with Mitsubishi
and Nissan and serves as a secondary supplier for Toyota and Honda.
partner. It is a leading supplier of Hyundai and General Motors.
According to our estimates, China represents 22% of global car production and 15%
of the global automotive catalysts market. Chinese environmental legislation is well
behind that in the developed world, which explains the smaller size of the automotive
catalysts market. As current environmental legislation does not require sophisticated
catalytic technology, not only global but also local players are present in China’s
catalyst market. The catalyst value per vehicle is also considerably lower than in
developed countries. We think that the market shares of leading catalyst companies
(Johnson Matthey, Umicore, BASF) in the country are more or less equal.
We estimate the global LDV catalysts market was valued at around $4.3bn in 2012
(excluding the value of precious metals). As there are no considerable legislative
changes in LDV until 2015, we expect average annual market growth to be 5-5.5%,
still higher than global auto production growth. We expect Umicore’s growth to be
in line with the market.
The HDD market is expected to grow much more rapidly. Johnson Matthey
expects the HDD market to increase from around $1bn currently to $2.1bn by the
end of 2015 and to $3bn by the end of 2020. We are slightly less optimistic and
expect the market to be worth around $2bn in 2015 and $2.5bn in 2020.
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Global HDD market
CAGR 2012 – 2020: 17.3%
3500
Sales ex pms ($m)
3000
2500
2000
1500
1000
500
0
2005
2007
2009
North America
China
2011
2013
Western Europe
India
Brazil
2015
Eastern Europe
2017
2019
Japan and Korea
2021
Russia
Non-road, <56 kW
Legislation is the driving force behind the strong growth of the HDD market.
The Euro VI standard requires all diesel cars to be equipped with a diesel
particulate filter (DPF). This legislation comes into force in January 2014.
Passenger cars are already equipped with DPFs; however, the HDD catalysts
market in Europe should double as a result of these changes in legislation.
In China, Phase IV (similar to Euro IV) is now coming to force and should
gradually be implemented by January 2014. Initially, implementation of the
standard was planned for January 2010; however, it was delayed until 2014. Delays
in the implementation of emissions legislation are not unique to China. The other
three BRIC countries (Brazil, Russia and India) have all seen similar delays. The
reason for the delay in each case is a recurring theme: the lack of low-sulphur fuel.
The main issues lie in the costs associated with upgrading diesel refineries and the
distribution of this type of diesel. Chinese diesel prices are regulated by the
government and refiners were not certain that they would be able to recover the
incremental costs. Recently, Sinopec’s chairman, Fu Chengyu, said that the
company would complete the upgrade of desulphurisation facilities at its refineries
by the end of 2013, and start producing gasoline and diesel that meet the national
Phase IV emissions standard from 2014. However, we are still not certain of the
fuel’s availability.
Phase IV does not require very sophisticated emissions control technology. We
expect not only global catalyst players but also local companies to participate in the
market. Johnson Matthey expects the Chinese HDD catalyst market to reach
$500m by 2020; we think that it will only reach $250m.
We expect the HDD market to grow at a 15% CAGR between 2012 and 2020.
Currently, Johnson Matthey has more than 65% of the global HDD market, while
Umicore only has 3%. In the medium term, we expect that Johnson Matthey’s
share will fall to around 55%, whereas Umicore’s will increase to 7%.
Future changes in HDD legislation have prompted all the major players to increase
HDD catalyst capacity.
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Johnson Matthey intends to double its capacity at its Macedonian plant (flexible
LDV and HDD capacity). It is also adding HDD capacity at its plant in Royston,
UK. Umicore is adding capacity in China, Germany and India. BASF is doubling
its HDD capacity in Japan. Automotive catalyst production is quite flexible and the
majority of the costs (up to 75%) are variable; however, in 2008-09, when Johnson
We show our divisional forecasts in the table below.
Catalysis divisional summary (€m)
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Key investment point 3: Cutting-edge technology, but
not commercially viable in the medium term
•
Umicore’s Performance Materials and Energy Materials divisions combined
represent 37% of group sales, but only 17% of EBIT.
•
In Performance Materials, the company is heavily exposed to the European
construction sector, which negatively affects its upside potential.
•
In Energy Materials, Umicore has number one market positions in a number of
cutting-edge technologies such as cathode materials for EVs, CPV and thin
film. Unfortunately, the current macroeconomic climate makes all three
technologies commercially non-viable at present. Umicore is currently lossmaking in thin film and CPV. We do not expect any considerable improvement
in the Energy Materials division in the short term.
•
consensus. For Energy Materials, we are 11% below consensus on 2013 EBIT
and 18% below on 2014.
Divisions at a glance
Performance Materials
The Performance Materials division consists of five business units. It also includes
a 40% shareholding in Element Six Abrasives – a joint venture with De Beers.
Building products produces zinc roofing, rainwater and façade systems for the
construction industry. It has high exposure to the European construction sector.
Electroplating produces precious metal and base metal electrolytes for electronic,
wear protection and decorative applications.
Platinum engineered materials manufactures platinum equipment for the
production of high-quality glass and platinum gauzes for fertiliser production, as
well as systems for the abatement of nitrous oxide (N2O).
Technical materials has exposure to a wide variety of industries. It produces
high-performance functional materials which are based primarily on the properties
of silver, special metals and their alloys. The business unit produces contact,
brazing and other specialty materials for electrical, automotive and construction
applications.
Zinc chemicals produces fine powders and oxides which are used in providing
corrosion- or UV-protection properties to paints and other materials. They are also
used for their catalytic and chemical properties in applications such as the
production of rubber and ceramics.
Energy Materials
Umicore’s Energy Materials division is split into four business units.
Cobalt and specialty materials (CSM) is a world leader in nickel chemicals. The
main markets and applications served by its products are: plating and surface
treatment, various catalytic applications, materials for rechargeable batteries, hard
metal and diamond tools, ceramics and glass.
Electro-optic materials (EOM) is a world leader in germanium products. Key
products include substrates for PVs and LEDs, materials for photonics and lenses
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and optical assemblies for night-vision applications. Umicore’s key strengths are its
ability to extract germanium from a wide range of supply feeds (including recycling
flows), its materials know-how and its focus on product performance at the level
of the application.
Rechargeable battery materials (RBM) is the global market leader in cathode
materials. Currently, it mainly produces lithium-cobalt oxide cathode materials for
electronic devices, power tools and energy storage systems. It is also working on
nickel-manganese-cobalt oxide technology for EVs.
Thin film products covers a wide range of highly-effective evaporation materials,
sputtering targets and accessories for optics, as well as accessories, wear and
decorative coatings, microelectronics and semiconductors, and large-area coatings.
consensus.
In 2012, Performance Materials represented 22% of group sales and 13% of EBIT.
We expect average top-line growth of 3.5% per year for this division. This growth
rate is below the group average (5%) due to the division’s high exposure to
Europe. Many of its products are linked to European industrial production growth.
Without an acceleration in economic growth in Europe, we see downside to our
and consensus estimates.
Various activities of the Performance Materials division are related to zinc and zinc
products, silver and special metals. The division is also involved in zinc recycling.
Building products and platinum engineering materials are the largest business units
and according to our estimates represent around 63% of divisional sales and
profits.
Platinum engineering revenues are driven by investments in high-purity glass
capacity (mostly for electronics) and the production of fertilisers. We do not expect
strong growth in either area.
In building materials, Umicore’s exposure to Europe is especially pronounced.
Umicore produces zinc and zinc-treated building products. Another business unit
– zinc chemicals – also has high European construction exposure as it sells anticorrosive paint pigments.
Energy Materials
Energy Materials is Umicore’s smallest division, representing 15% of group sales
and 4% of profits in 2012. However, according to the company’s plans, it is one of
the key sources of future growth.
Umicore expects this division to demonstrate double-digit annual growth in the
medium term. We are more conservative and expect 7% average growth in the
medium term.
In recent years, divisional capex was considerably above depreciation (2.3x), as
Umicore was expanding its capacities in rechargeable batteries (for application in
both electronics and EVs) and thin film production.
Umicore has leading positions in a number of potential growth areas: CPVs,
cathode material for rechargeable batteries and thin film technology. It began to
invest in these areas long before competitors and now has undeniable leadership
positions.
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However, we think that future development in all three areas is currently uncertain.
We do not expect any significant growth until 2015. According to our estimates,
two business units – cobalt and specialty materials and rechargeable batteries –
represent 70% of divisional sales, but 100% of profits, as electro-optic materials
and thin film products are currently loss-making.
We are 11% below consensus on 2013 EBIT and 18% below on 2014. We think
that PV-related technologies will remain unprofitable in the medium term and
rechargeable batteries and cobalt materials will not be able to fully offset this
impact.
Rechargeable batteries and electric cars
Umicore’s rechargeable batteries business unit produces cathode material for
lithium-ion batteries (LIB). Currently, it produces mainly lithium-cobalt oxide
cathode materials for electronic devices. It is also working on nickel-manganesecobalt oxide technology for EVs. Umicore was one of the first producers to invest
in a recycling facility for EV batteries. In 2011, the company inaugurated an ultrahigh temperature (UHT) pilot plant in Hoboken (capex of c€25m). This is a
unique technology which works at UHTs and allows a range of valuable metals to
be extracted in a clean and efficient way. Umicore targets mostly car battery
recycling, but UHT technology can also be used for other feedstock.
Cathode material is the key performance driver of batteries. The use of lithium-ion
batteries has increased in recent years due to their high energy, cell-voltage, good
performance and longer shelf life compared with conventional batteries. This
development boosted the growth of Umicore’s rechargeable batteries unit. Gartner
expects average annual growth of 20% in global tablet and smartphone shipments
during 2012-16, which should translate into strong growth in the production of
battery cathode materials.
Global smartphone and tablet shipments (m units)
Source: Soitec
We see the development of EVs as much more problematic. Umicore is the
supplier of choice for the majority of existing EV platforms.
Roland Berger expects EVs to capture 8-10% of the global car market by 2020
(from less than 0.5%); we think penetration will be half this level (ie 4-5%). Even
our modest assumption implies that the global EV stock will grow from 180,000 in
2012 to more than 20m by 2020 (including hybrids).
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EV stock targets
Source: International Energy Agency
According to the International Energy Agency, 38% of global EV production takes
place in the US (mostly the Chevrolet Volt), with 24% in Japan (mostly plug-in
versions of the Prius and EV Nissan Leaf), 6% in China and the rest in Europe.
The Nissan Leaf is the first mass-produced EV.
The majority of auto manufacturers have now launched their EV models.
However, we believe they use EVs mostly as a marketing tool and are not yet
making considerable investments in technological development.
Wider EV penetration is difficult to achieve, for several reasons.
1. While electric motors for road vehicles are standard products, which benefit
from mature technology, batteries are the main challenge to broad EV market
penetration due to their low energy density and high cost.
2. The development of new technologies requires considerable upfront
investment (especially in infrastructure) and government support. We expect
macroeconomic pressures on the automotive industry to remain high in the
coming years. This should negatively affect the development of the EV
market.
3. EVs have higher purchase costs than comparable non-electric vehicles.
Economic uncertainty, such as that faced in the wake of the financial crisis,
undermines consumer confidence. According to European experts, the key
EU markets for new vehicles will recover to pre-crisis levels only by 2020.
4. The political framework, which determines incentive levels, varies from
country to country and is generally inconsistent.
5. Wider EV penetration requires the development of charging infrastructure.
Currently, stakeholders and their responsibilities are not clear. For instance,
utility companies are not yet sufficiently involved, but their participation is key
to creating a stable charging system. Charging standards and technology are
also different in different countries. Plugs that work in Norway, for example,
may not work in Germany. This creates additional difficulties.
Umicore is the leading supplier of the cathode materials for EVs’ lithium-ion
batteries. Once the EV market is developed, the company is very well positioned
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to reap the benefits, in our view. However, we think that EV penetration will
remain low in the medium term.
Electro-optic materials and thin film products
Umicore is the world leader in producing germanium substrates used in CPV
technology. Originally, the technology was used to provide solar energy for
satellites. In the late 2000s, terrestrial applications of CPV started to develop.
CPV systems convert light energy into electricity in the same way that conventional
PV technology does. The difference lies in the addition of an optical system that
focuses a large area of sunlight onto each cell, which reduces energy costs and
improves manufacturability and reliability.
CPV module efficiency is twice that of a standard PV module. However, it is also
more expensive than traditional polysilicon.
Module efficiency of different technologies
Source: Soitec
The sharp decline in polysilicon prices over the past three years made terrestrial
CPV wholly uncompetitive. Sales of space solar cells also decreased due to the
reduction in the number of satellite launch programmes. Umicore’s electro-optic
materials business unit is loss-making. The company had to reduce its germanium
substrate production and the workforce at its Oklahoma site. Polysilicon prices
have started to recover, but they are far below the levels required to revive CPV
technology.
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Polysilicon price dynamics
01/07/2013
10/06/2013
20/05/2013
29/04/2013
08/04/2013
18/03/2013
25/02/2013
04/02/2013
14/01/2013
24/12/2012
03/12/2012
12/11/2012
22/10/2012
01/10/2012
10/09/2012
20/08/2012
30/07/2012
09/07/2012
24
22
20
18
16
14
12
10
BNEF survey spot polysilicon price (USD/Kg)
Source: Bloomberg
We think Umicore’s electro-optic materials business will continue to struggle in the
medium term.
Umicore’s thin film products business covers a wide range of highly-effective
evaporation materials, sputtering targets and accessories for optics, as well as
accessories, wear and decorative coatings, microelectronics and semiconductors,
and large-area coatings.
In 2011-12, the company invested €30m in expanding capacities, expecting strong
growth in the PV market, which did not materialise. Consequently, Umicore had to
discontinue production of AZO targets in Liechtenstein. Its thin film unit is also
currently loss-making and we do not expect a speedy recovery.
We show our divisional forecasts in the tables below.
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Performance Materials divisional summary (€m)
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Energy Materials divisional summary (€m)
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We are 9% below consensus on 2013 EBIT and 8% below on EPS; for 2014 we
are 24% below consensus both on EBIT and EPS. We are also 7% below
consensus estimates for the 2014 dividend.
Group estimates versus consensus (€m)
Revenue excl metal
EBITDA pre-excep inc assoc
EBIT pre-excep incl assoc
EPS (diluted)
DPS
Revenue excl metal
EBITDA pre-excep inc assoc
EBIT pre-excep incl assoc
EPS (diluted)
DPS
2013 H1
Ber est
1196
235
150
0.98
2014 Ber
est
2408
443
274
1.76
1.03
2013 cons
1226
244
163
1.05
Variance
%
-2.5%
-3.6%
-8.1%
-6.9%
2013 Ber
est
2365
457
290
1.87
1.00
2013 cons
2417.00
483.00
317.90
2.04
1.02
Variance
%
-2.2%
-5.4%
-8.8%
-8.1%
-2.0%
2014 cons
2600.00
551.80
379.00
2.44
1.11
Variance
%
-7.4%
-19.7%
-27.8%
-27.8%
-7.2%
2015 Ber
est
2607
503
325
2.09
1.06
2015 cons
2786.00
610.30
429.90
2.78
1.23
Variance
%
-6.4%
-17.7%
-24.3%
-24.8%
-13.7%
Source: Berenberg estimates, Vara
The main difference comes from the Recycling division, where we are 11.5%
below consensus on 2013 EBIT and 40% below on 2014 EBIT.
Divisional estimates versus consensus (€m)
2013
Catalysis
Energy Materials
Recycling
Corporate
Sales Ber
888.0
373.4
514.2
589.0
2
Sales
cons
877
380.3
509.9
653.4
2.1
Variance
%
1.3%
-1.8%
0.9%
-9.9%
-4.8%
EBIT Ber
85.8
14.0
48.9
195
-53.8
EBIT
cons
85.3
15.7
47.8
219.9
-50.8
Variance
%
0.6%
-11.0%
2.3%
-11.4%
5.9%
2014
Catalysis
Energy Materials
Recycling
Corporate
Sales Ber
944.9
406.4
517.8
545.0
2
Sales
cons
958.5
422.2
528.6
694.9
2.2
Variance
%
-1.4%
-3.7%
-2.0%
-21.6%
-9.1%
EBIT Ber
99.4
21.9
56.6
151
-54.6
EBIT
cons
100.1
26.6
55.7
247.8
-51.1
Variance
%
-0.7%
-17.7%
1.7%
-39.1%
6.9%
Source: Berenberg estimates, Vara
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Valuation
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Umicore: company overview
Company history
Umicore was founded at the beginning of the 19th century as a mining operation in
the then-Belgian Congo (Union Minière) and refining operations in Belgium. In
1968, the company’s assets were nationalised by the Zairian government and
Umicore had to transform its activities. In 1989, Union Minière merged Vieille
Montagne and Mechim. The company had operations in copper, lead, cobalt,
germanium, zinc and precious metals. It positioned itself increasingly as a specialty
materials company in the late 1990s, focusing on precious metals, high-margin zinc
products and advanced materials based mainly on cobalt and germanium. The
group changed its name to Umicore in 2001. In 2003, the company bought PMG
(formerly the precious metals unit of the Degussa Group). In 2007, Umicore
bought another automotive catalyst company – Delphi (formerly a division of
General Motors) – and further increased its presence in the automotive catalyst
market.
In 2005, the company spun off its copper smelting assets. As a result, a new
company, Cumerio, was listed in Brussels. In 2007, Umicore combined its zinc
refining and alloys business with that of Zinifex. The new company, Nyrstar, was
also listed in Brussels.
Today, Umicore is a global materials technology and recycling group, with more
than 14,000 employees and a turnover of €12.5bn.
Divisional summary
Umicore consists of four divisions: Catalysis, Energy Materials, Performance
Materials and Recycling.
Umicore’s divisional split in 2012
Umicore's revenue split by division (2012)
Recycling, 28%
Umicore's EBIT split by division (2012)
Catalysis, 22%
Catalysis, 36%
Energy
Materials, 4%
Recycling, 61%
Performance
materials, 22%
Energy
Materials, 15%
Source: Umicore
Umicore is present in many areas where a high level of technology and innovation
is required; for instance: precious metals recycling, cathode materials for EV
batteries and CPVs.
127
Performance
materials, 13%
Umicore SA
Chemicals
Umicore’s divisional structure
Source: Umicore
Umicore derives 75% of its sales from Europe, 9% from Asia and 10% from
North America.
2012 sales split by geography
2012 revenue split
SA, 3.4%
NA, 10.2%
Africa,
1.6%
Asia, 9.3%
Europe,
75.4%
Source: Umicore
Umicore generates the majority of its revenues from – and dedicates most of its
R&D efforts towards – clean technologies, such as emission-control catalysts,
materials for rechargeable batteries and PVs, fuel cells and recycling.
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Catalysis
Umicore’s Catalysis division consists of two business units: automotive catalysts
and precious metals chemistry.
Umicore is one of the major players in the emissions control industry. It has
around a 30% share of the light-duty diesel catalysts market. The catalysts market
is very mature in developed countries and market shares are well defined. Changes
in market share are only possible if legislation changes or if one of the players
comes up with disruptive technology (for instance, a reduction in PGM content in
the catalyst). Strong technical expertise is required in order to retain and increase
market share. Umicore spends 7.5% of sales on R&D annually.
In the precious metals chemistry business unit, Umicore produces organic and
inorganic PGM-based catalysts for the fine chemicals, life science and
Energy Materials
Umicore’s Energy Materials division is split into four business units.
Cobalt and specialty materials (CSM) is a world leader in nickel chemicals. The
main markets and applications served by its products are: plating and surface
treatment, various catalytic applications, materials for rechargeable batteries, hard
metal and diamond tools, ceramics and glass.
Electro-optic materials (EOM) is a world leader in germanium products. Key
products include substrates for PVs and LEDs, materials for photonics and lenses
and optical assemblies for night-vision applications. Umicore’s key strengths are its
ability to extract germanium from a wide range of supply feeds (including recycling
flows), its materials know-how and its focus on product performance at the level
of the application.
Rechargeable battery materials (RBM) is the global market leader in cathode
materials. Currently, it mainly produces lithium-cobalt oxide cathode materials for
electronic devices, power tools and energy storage systems. It is also working on
nickel-manganese-cobalt oxide technology for EVs.
Thin film products covers a wide range of highly-effective evaporation materials,
sputtering targets and accessories for optics, as well as accessories, wear and
decorative coatings, microelectronics and semiconductors, and large-area coatings.
The Performance Materials division consists of five business units. It also includes
a 40% shareholding in Element Six Abrasives – a joint venture with De Beers.
Building products produces zinc roofing, rainwater and façade systems for the
construction industry. It has high exposure to the European construction sector.
Electroplating produces precious metal and base metal electrolytes for electronic,
wear protection and decorative applications.
Platinum engineered materials manufactures platinum equipment for the
production of high-quality glass and platinum gauzes for fertiliser production, as
well as systems for the abatement of nitrous oxide (N2O).
Technical materials has exposure to a wide variety of industries. It produces
high-performance functional materials which are based primarily on the properties
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of silver, special metals and their alloys. The business unit produces contact,
brazing and other specialty materials for electrical, automotive and construction
applications.
Zinc chemicals produces fine powders and oxides which are used in providing
corrosion- or UV-protection properties to paints and other materials. They are also
used for their catalytic and chemical properties in applications such as the
production of rubber and ceramics.
Recycling
Umicore’s Recycling division consists of four business units.
Precious metals refining can recover 20 precious and non-ferrous metals from a
wide range of feedstock streams, including EOL products, industrial residues and
e-scrap. It has a unique technology which allows Umicore to recover metals
economically, even when their concentration in scrap feedstock is very low. This
technology gives Umicore a considerable advantage over competitors.
Precious metals management offers a range of services to internal and external
customers, including leasing, hedging and physical delivery of metals.
Battery recycling is a unique technology which works at ultra-high temperatures
(UHT) and allows a range of valuable metals to be extracted in a clean and efficient
way. Umicore targets primarily car battery recycling, but UHT technology can also
be used for other feedstock.
Jewellery and industrial metals produces semi-finished precious-metals-based
products for jewellery and industrial applications and is a major recycler of scrap
and residues from the jewellery industry.
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Financials
Profit and loss account
Source: Company data, Berenberg estimates
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Balance sheet
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Cash flow statement
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DCF
134
Johnson Matthey plc
Chemicals
Near-term expectations too high
•
We initiate coverage of Johnson Matthey with a Hold rating and a
price target of £28/share. Johnson Matthey is the leading company in
the area of automotive catalysts; it also has precious metals recycling
and production capabilities. We think that in the long term Johnson
Matthey is well positioned within the majority of the industries in
which it is present; however, in the short term we see some risks to
consensus numbers.
•
We are more cautious than the market on short- and medium-term
estimates. We are 9% below Bloomberg consensus for 2013 EPS and
12% below consensus for 2014 EPS.
•
In automotive catalysts, we think that the market is overestimating the
effect of Euro VI legislation on the catalyst value per vehicle. We also
think that the Chinese HDD catalyst market will develop more slowly
than consensus expects. Finally, short-term pre-buying of Euro V
trucks ahead of Euro VI implementation could slow the penetration
of Euro VI in 2013-14.
•
Our expectations for Johnson Matthey’s Precious Metal Products
division are also below consensus. The loss of the Anglo Platinum
distribution contract will result in a £35m loss of EBIT. In our view,
the market seems to believe that a similar contract can be signed with
another precious metals producer, which will restore divisional
profitability to the level of 2011. We view this as unrealistic. We think
the market is underestimating the short-term impact that the decline
in precious metal prices will have on the Precious Metal Products
division’s profitability.
•
Valuation: We base our target price of £28 per share on DCF
analysis. The stock is trading on 12.5x 2013 EV/EBITDA and 11.3x
2014 EV/EBITDA (Berenberg estimates) – a premium to its
historical average of 9.43x. The stock is trading on 19.1x 2013 P/E
and 17.6x 2014 P/E (Berenberg estimates) – again, a premium to its
historical average of 15.19x.
Y/E 31.03., GBP m
Sales
EBITDA
EBIT
Net profit
Y/E net debt (net cash)
EPS (reported, GBp)
EPS (recurring, GBp)
CPS
DPS (GBp)
Gross margin
EBITDA margin
EBIT margin
Dividend yield
ROCE
EV/sales
EV/EBITDA
EV/EBIT
P/E
Cash flow RoEV
Source: Company data, Berenberg
2011
2012
2013E
2014E
2015E
12,023
573
450
315
456
148.70
156.34
2.78
55.00
6.3%
4.8%
3.7%
2.6%
16.0%
0.4
9.3
11.9
13.4
8.5%
10,729
541
415
276
835
134.60
151.00
2.16
57.00
7.0%
5.0%
3.9%
2.6%
13.9%
0.5
10.5
13.7
15.1
7.7%
11,068
556
419
286
802
139.76
148.13
2.43
63.70
7.0%
5.0%
3.8%
2.5%
13.1%
0.6
12.5
16.6
19.1
6.8%
11,766
606
452
312
795
152.24
160.74
2.39
69.12
7.0%
5.1%
3.8%
2.4%
13.5%
0.6
11.3
15.2
17.6
7.0%
12,523
658
495
346
710
168.74
177.37
2.81
76.27
7.0%
5.3%
4.0%
2.7%
14.2%
0.5
10.3
13.7
16.0
7.8%
135
Hold (initiation)
Rating system
Absolute
Current price
Price target
GBp 2,833
GBp 2,800
11/07/2013 London Close
Market cap GBP 5,805 m
Reuters
JMAT.L
Bloomberg
JMAT LN
Share data
Shares outstanding (m)
Enterprise value (GBp m)
Daily trading volume
205
6,963
617,924
Performance data
High 52 weeks (GBp)
Low 52 weeks (GBp)
Relative performance to SXXP
1 month
8.6 %
3 months
19.2 %
12 months
14.2 %
2,834
2,080
SX4P
7.1 %
17.6 %
9.6 %
15 July 2013
Evgenia Molotova
Analyst
+44 20 3465 2664
[email protected]
Jaideep Pandya
Analyst
+44 20 3207 7890
[email protected]
John Klein
Analyst
+44 20 3207 7930
[email protected]
Johnson Matthey plc
Chemicals
Johnson Matthey: investment thesis in pictures
Johnson Matthey 2012 sales split
Johnson Matthey 2012 EBIT split
Precious
Metal
Products,
14.3%
Process
Technologies,
18.6%
Precious
Metal
Products,
27.2%
Process
Technologies
20.2%
Fine
Chemicals
16.8%
Fine
Chemicals
11.2%
New
Business,
1.3%
Env
Technologies,
54.6%
Env
Technologies,
35.8%
2012 divisional EBIT margin
2012 divisional ROCE (pre-tax)
50%
40%
29%
30%
35%
25%
25%
30%
25%
18%
20%
15%
44.3%
45%
35%
20%
11%
16.4%
17.5%
15.8%
15%
10%
10%
5%
5%
0%
0%
Emissions Control Process Technology
Technologies
Fine Chemicals
Emissions Control Process Technology
Technologies
Precious Metal
Products
Regional sales split
Sales by key market
Johnson Matthey regional sales split
Precious Metal
Products
Sales by key market
PGM
Services,
Other,
5%
11%
China,
10%
Rest of
Asia, 11%
North
America,
34%
Fine Chemicals
Rest of
World,
12%
LDV, 38%
Europe,
33%
HDD, 18%
136
Pharmaceutical,
13%
Petrochemical,
15%
Johnson Matthey plc
Chemicals
Johnson Matthey: investment thesis
What’s new: We initiate coverage of Johnson Matthey with a Hold rating and a
price target of £28/share.
Two-minute summary: We are below consensus for both 2013 and 2014. Over
the past five years, Johnson Matthey has demonstrated one of the strongest
average EPS growth rates in the chemicals sector (average annual rate of 13%). It
holds leading positions in a number of markets (for example, automotive,
hydrogen and methanol catalysts). We agree that in the long term Johnson Matthey
is well positioned within the majority of the industries in which it is present;
however, in the short term we see some risks to consensus numbers.
Catalysts
In automotive catalysts, we believe the market is overestimating the effect of Euro
VI legislation on the catalyst value per vehicle. We also think that the Chinese
HDD catalysts market will develop more slowly than consensus expects. Finally,
short-term pre-buying of Euro V trucks ahead of Euro VI implementation could
slow the penetration of Euro VI in 2013-14. Further risk to our numbers could
come from changes in the European fuel tax regime. Currently, diesel is taxed at a
much lower rate than gasoline. This has led to a unique situation whereby dieselpowered cars represent c50% of passenger car sales in Europe. The European
Commission has proposed changes to the tax structure which would considerably
increase the tax on diesel fuel. Should this proposal be accepted, we believe the
production of diesel-powered passenger cars in Europe will fall sharply and the
European LDV catalysts market could halve.
Precious Metal Products
Our expectations for Johnson Matthey’s Precious Metal Products (PMP) division
are below consensus. The loss of the Anglo Platinum distribution contract will
result in a £35m loss of EBIT. In our view, the market seems to believe that a
similar contract can be signed with another precious metals producer, thus
restoring divisional profitability to the 2011 level. We regard this as unrealistic. We
think the market underestimates the short-term impact the decline in precious
metal prices will have on the PMP division’s profitability.
Fine Chemicals
We are slightly below consensus for the Fine Chemicals division. Until recently
Johnson Matthey was the only government-approved importer of opiate-based
pain management substances in the UK. Recently, however, one of Johnson
Matthey’s customers received an import licence for these products, which has led
to pricing power erosion. Johnson Matthey reacted by cutting divisional costs by
£5m annually (c7% of divisional EBIT). We do not assume a radical deterioration
in the current competitive situation; however, we are more cautious than
consensus on potential growth rates.
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We are 9% below Bloomberg consensus for 2013 EPS and 12% below consensus
for 2014 EPS.
Revenue excl met
EBIT
Net profit
EPS (diluted)
DPS
13/14 Ber
2,798.7
419.3
303.5
148.1
63.7
13/14
Bloomberg
cons Variance %
443
329
163.2
64
-5.4%
-7.7%
-9.2%
-0.5%
Revenue
EBIT
Net profit
EPS (diluted)
DPS
14/15 Ber
3,108.2
451.9
329.4
160.7
69.1
Source: Berenberg estimates, Bloomberg
Relative and absolute valuation
We base our price target of £28 per share on DCF analysis. The stock has recently
outperformed both the market and the SXXP chemicals index, with the
outperformance triggered by better-than-expected FY results (announced in June)
and the pick-up in European truck producers’ order books in Q1.
1-year performance versus SX4P and SXXP
Source: Bloomberg
The stock is trading on 12.5x 2013 EV/EBITDA and 11.3x 2014 EV/EBITDA
(Berenberg estimates) – a premium to its historical average of 9.43x.
Historical EV/EBITDA multiples
Source: Datastream
138
14/15
Bloomberg
cons Variance %
485.7
369
182
71
-7.0%
-10.7%
-11.7%
-2.7%
Johnson Matthey plc
Chemicals
The stock is trading on 19.1x 2013 P/E and 17.6x 2014 P/E (Berenberg estimates)
– again, a premium to its historical average of 15.19x.
Historical P/E multiples
Source: Datastream
What will make us a buyer/seller?
As Johnson Matthey is strongly exposed to European auto production, a fasterthan-expected recovery of the European automotive industry will make us more
positive on the stock. A reversal of the decline in precious metal prices will also
help the investment case. An increase in the proportion of diesel passenger cars in
Europe will be highly beneficial for LDV catalyst sales and profits. Finally, if
Johnson Matthey finds a replacement for the Anglo Platinum distribution contract,
the PMP division’s profitability could improve significantly.
In our base case scenario, we expect a slow improvement in European auto
production. However, if production continues to deteriorate, Johnson Matthey’s
earnings will be at risk. Another delay in the implementation of Phase IV
environmental legislation in China will be highly negative for sentiment towards
the stock. A further decline in precious metals prices could also make us a seller.
Key risks
1. A change in the fuel tax structure in Europe. Europe is the most lucrative
market for LDV catalysts because of the high penetration of diesel-powered
passenger cars. Currently, diesel is taxed at a lower rate than gasoline, but a
new European Commission proposal aims to reverse this. We believe that,
should the proposal be approved, the European LDV catalysts market will
halve.
2. FX. According to Johnson Matthey management, each change of 0.01 in the
$/£ exchange rate affects EBIT by £0.2m. Further strengthening of the dollar
would negatively affect earnings.
3. A further decline in precious metal prices. According to Johnson Matthey
management, a 10% decline in the platinum price results in a £10m fall in
EBIT (£5m once the Anglo Platinum contract is phased out).
4. A deterioration of the macroeconomic backdrop in Europe would
negatively affect consumer confidence, putting additional strain on the
European auto manufacturing industry.
5. Lack of availability of low-sulphur fuel could further delay Phase IV
implementation in China.
6. Decentralisation of the European medical opiates market could
negatively affect Johnson Matthey’s margins in Fine Chemicals.
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Chemicals
Peer group analysis
ROCE
Company
Diversified
chemicals
Akzo Nobel
Arkema SA
BASF
Clariant
Croda
DSM
Elementis
Fuchs Petrolub
Givaudan
LANXESS
Naturex
Solvay
Symrise
EV/Sales
EV/EBITDA
P/E
2013
2013
2014
2013
2014
2013
2014
8.3%
13.6%
16.9%
8.2%
32.8%
8.3%
24.9%
41.2%
12.1%
7.0%
8.8%
7.4%
15.3%
0.9x
0.9x
1.0x
1.0x
3.4x
1.1x
1.9x
1.0x
2.9x
0.7x
1.7x
1.1x
2.5x
0.8x
0.8x
1.0x
0.9x
3.1x
1.0x
1.7x
1.0x
2.7x
0.7x
1.5x
1.0x
2.3x
7.4x
5.9x
6.9x
7.4x
11.6x
8.4x
8.1x
5.3x
13.9x
7.1x
12.7x
7.3x
11.6x
6.0x
5.0x
5.9x
6.4x
10.5x
7.3x
7.0x
5.2x
13.0x
5.7x
10.8x
6.4x
10.6x
13.9x
10.4x
13.0x
13.1x
17.0x
14.1x
12.3x
18.2x
25.1x
14.2x
16.8x
14.3x
19.5x
11.2x
9.5x
11.7x
11.0x
15.5x
11.8x
11.2x
18.8x
23.0x
9.4x
14.0x
11.8x
17.9x
15.8%
1.5x
1.4x
8.7x
7.7x
15.5x
13.6x
11.1%
9.0%
2.4x
2.1x
2.3x
1.9x
9.8x
9.1x
9.2x
8.3x
18.0x
17.0x
16.2x
15.1x
Catalysts
Johnson
Matthey
14.1%
2.5x
2.2x
12.5x
11.3x
19.1x
17.6x
Umicore
9.5%
1.9x
1.9x
9.7x
10.1x
18.0x
19.1x
Average
Industrial
gases
Air Liquide
Linde
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Johnson Matthey plc
Chemicals
Catalysts
•
In 2012, Johnson Matthey’s Emissions Control Technology division
(automotive catalysts) represented 55% of group sales and 36% of EBIT. Its
Process Technologies division represented 18% of group sales and 20% of
profits.
•
Our estimates for the automotive catalysts market are below consensus. We
believe consensus is overestimating the increase in catalyst value per vehicle
that will result from the introduction of Euro VI. We believe the development
of China’s HDD catalysts market will be slower than consensus expects.
Finally, we think pre-buying of Euro V trucks might slow the penetration of
high-value Euro VI trucks.
The ECT division manufactures automotive and process catalysts. Johnson
Matthey has c32% global market share in LDV catalysts and c65% in HDD. In
process catalysts, it produces catalysts for stationary sources. The Process
Technologies division includes base metal catalysts such as nickel, copper and
cobalt for the production of syngas, ammonia, hydrogen, methanol, formaldehyde,
oleo chemicals, oxo-alcohols, GTL, CTL and additives for refining. It also includes
Davy Process Technology, which provides licences and know-how for the use of
advanced process technologies related to the manufacture of oil and gas and
petrochemicals. The company also manufactures base and precious metal catalysts
for the fine chemicals and pharmaceuticals industries, as well as catalysts and
components for emerging fuel cell markets.
Investment summary
In the process catalyst industry, producers tend to specialise in certain types of
technology, which limits competition. In the automotive catalyst industry, all three
leading players (Johnson Matthey, Umicore and BASF) have a high level of
technical expertise. However, as the technology is relatively mature, they have to
compete vigorously with each other. This is why margins in process catalysts are
higher than in automotive catalysts.
In the medium term, we expect Johnson Matthey’s process catalyst sales to grow at
c8% annually (a similar level to average growth excluding acquisitions in the past
five years).
However, we are below consensus for automotive catalyst growth. We think that
the market tends to overestimate both the short- and medium-term growth of the
HDD catalysts market.
We think the market is overestimating the growth in the HDD catalysts industry
associated with Euro VI implementation. We compared the current catalyst value
per truck in the US (where emissions regulation similar to Euro VI has been in
place since 2010) with the current catalyst value per truck in Europe. Based on our
analysis, the average catalyst value per truck should increase by 2-2.5x as a result of
Euro VI implementation.
In the short term, pre-buying of cheaper Euro V trucks ahead of the introduction
of Euro VI in January 2014 could, in our view, account for up to 10% of
European truck demand this year. The market seems to view pre-buying as a
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Johnson Matthey plc
Chemicals
positive event. However, we expect the catalyst value per truck to increase by 22.5x with Euro VI implementation. The pre-buying of Euro V trucks will pull
demand away from high-value catalysts to lower-value ones, and thus be negative
for catalyst producers.
Longer-term, we think the potential growth of the Chinese HDD catalysts market
is being overestimated. The implementation of Phase IV (similar to Euro IV) in
China is one of the key drivers of growth in the HDD catalysts market in the next
five years. Johnson Matthey forecasts China’s HDD catalysts market to reach
c$500m by 2020. We think it will reach $250m.
Johnson Matthey, BASF and Umicore entered the Chinese and Indian passenger
car markets together with their international auto customers – the likes of General
Motors, Volkswagen etc. Barriers to entry in HDD catalysts are much higher, as
international truck companies have more limited presence in emerging markets.
importance. We expect the overall profitability of the catalyst market in emerging
regions to be considerably lower than profitability in developed regions.
Further risk to our numbers could come from changes in the European fuel tax
regime. Currently, diesel is taxed at a much lower rate than gasoline. This has led to
a unique situation whereby diesel-powered cars represent c50% of passenger car
sales in Europe. The European Commission has proposed changing the regime in
a way that considerably increases the tax on diesel fuel. Should this proposal be
accepted, we believe the production of diesel-powered cars in Europe will fall
sharply and the European LDV catalyst market could halve.
Emissions Control Technology
LDV market
In 2012, Johnson Matthey’s Emissions Control Technology (ECT) division
represented 55% of group sales, but only 36% of EBIT. ECT has the lowest EBIT
margin of all divisions (excluding the loss-making new products and eliminations).
Johnson Matthey is one of the three leading players in LDV catalysts (Umicore and
BASF are the other two); each company has c30% market share. In HDD
catalysts, Johnson Matthey is the clear market leader, commanding a share of c6568%. BASF has gained market share over time; we estimate its share of the HDD
catalyst market at 20-25%. Umicore has the smallest presence in the HDD
catalysts market with c3% market share.
Growth in automotive catalysts (both HDD and LDV) is driven mostly by
legislative changes. Developed countries have more stringent environment
standards and the automotive catalysts market there is quite mature. In most
developing countries, environmental standards are five to seven years behind those
in Europe or North America.
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Chemicals
Market shares of catalyst producers in LDV and HDD markets
LDV catalysts market
HDD catalysts market
Others,
6%
Umicore,
31%
BASF,
23%
Johnson
Matthey,
32%
BASF,
31%
Umicore,
3%
others, 6%
Johnson
Matthey,
68%
In LDV catalysts, Johnson Matthey derives 58% of its sales from Europe, 22%
from Asia and 19% from North America. As there are no significant legislative
changes in LDV until 2015, we expect average annual market growth to be 5-5.5%,
still higher than global auto production growth.
According our estimates, Europe represents c30% of the global automotive
catalysts market and Johnson Matthey has around 60% market share in the region.
Johnson Matthey is a leading producer of both gasoline and diesel catalysts for
Volkswagen, Renault, Peugeot and Fiat, which together account for more than
50% of the automotive market in Europe.
European LDV market
Johnson Matthey's European sales
split
European car production 2012
Fiat, 7.1%
Europe,
58%
Asia, 23%
Daimler,
7.1%
Ford,
10.0%
PSA,
10.4%
North
America,
19%
Renault,
12.9%
Europe is the most lucrative market for LDV catalyst producers. 50-55% of cars in
the region are diesel-powered. A diesel vehicle represents 5x the catalyst value of
an equivalent gasoline vehicle. However, in the past two years the profitability of
the European LDV catalysts market was limited by two factors.
1. Overcapacity in automotive catalysts. In 2011, Johnson Matthey closed a
manufacturing facility in Belgium in order to reduce overcapacity in the
European automotive catalysts business. Since then, automotive production in
Europe has fallen by around 10% and we think there is still overcapacity in the
system, which negatively affects the margins of catalyst producers in the
region.
2. A reduction in the proportion of diesel vehicles. In periods of economic
downturn, the proportion of diesel-powered cars seems to fall. This is
explained mainly by the technical properties of diesel. With diesel engines, fuel
143
BMW,
7.0%
Others,
20.0%
VW,
23.8%
Johnson Matthey plc
Chemicals
efficiency is minimal for smaller engine sizes and short journeys. During
downturns, the engine mix moves towards smaller sizes, so the share of diesel
cars decreases.
Diesel as a percentage of total LDV engines in Western Europe
56%
Diesel as % of total LDVs in Western Europe
54%
52%
50%
48%
46%
2007
2008
2009
2010
2011
Diesel as % of total in Western Europe
2012
The impact of Euro VI on LDV catalysts is much lower than on HDD; we
estimate it at around 15-20%. The majority of auto manufacturers in Europe have
already installed CCRT in their diesel-powered passenger vehicles with Euro V
implementation, so we do not expect that Euro VI will have a significant
incremental effect on the catalyst value per vehicle.
The US auto manufacturing industry went through turbulent times, which resulted
in higher pricing pressure on the catalysts industry. We think that in the early 2000s
there was overcapacity in automotive catalyst production in the US, which also
contributed to some price erosion. We estimate that the margins LDV catalyst
producers are able to generate in the US are lower than those in Europe (even
excluding the diesel effect). Umicore and BASF are the leading producers in North
America, with Johnson Matthey having a somewhat smaller market share.
Due to its higher European exposure, Johnson Matthey has higher profitability in
LDV catalysts than its peers. Overall, Umicore and BASF have higher market
shares with local manufacturers (General Motors, Ford) and Johnson Matthey
satisfies the needs of European producers in North America.
Johnson Matthey has a lower market share in small engines in North America,
which is why the recent consumer shift towards smaller engines negatively affected
the company’s sales in the region.
Johnson Matthey came to Asia somewhat later than its competitors and has a
lower market share with local producers, though it has been winning market share
continuously over the past three years.
The Japanese market is dominated by Catalar (75% owned by Toyota) and NE
Chemcat (a 50/50 joint venture between Sumitomo Metal Mining and BASF.
Umicore has a joint venture with Nippon Shokubai in Japan. It has strong
relationships with Mitsubishi and Nissan and serves as a secondary supplier for
Toyota and Honda.
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partner. It is a leading supplier of Hyundai and General Motors. Johnson Matthey
has a weaker presence in Japan and South Korea. It is a secondary supplier to
Toyota, Honda and other producers. Similarly to the US, it has lower exposure to
small-engined cars.
South America is a somewhat smaller market and represents 5% of global catalyst
production. European auto manufacturers dominate the South American market.
Johnson Matthey is by far the leading automotive catalyst producer in the region,
as it is the main supplier of Volkswagen, Fiat and Renault. Umicore is the number
two as it supplies General Motors, while BASF is the number three.
According to our estimates, China represents 22% of global car production and
15% of the global automotive catalysts market. Chinese environmental legislations
are well behind those in the developed world, which explains the smaller size of
the automotive catalysts market.
We think that the market shares of the leading catalyst companies (BASF, Johnson
Matthey and Umicore) in the country are more or less equal. All of them have local
production facilities. Initially, catalyst companies penetrated the market via their
global auto partners, but they now also serve local customers. For instance,
Johnson Matthey states that 50% of its Chinese clients are local companies.
As Johnson Matthey has higher exposure to the European LDV catalysts markets
than its competitors and Europe is the most profitable region, we think that
Johnson Matthey has the highest profitability in LDV catalysts (relative to its
peers).
We think that European auto production is approaching its trough and expect
some recovery in 2013, although a more pronounced recovery will take some time.
We are therefore more cautious on LDV catalyst growth for Johnson Matthey than
for its competitors. We expect the average annual growth rate in the next five years
to reach 4.5% (versus average growth in the LDV catalyst industry of 5.5%).
Potential fuel tax changes in Europe will also affect Johnson Matthey more than
other players. If the proposed new tax structure is approved, we expect Johnson
Matthey’s sales in European LDV catalysts to more than halve.
The prevalence of diesel as a fuel for LDV cars in Europe is unique to that region
and is explained by the preferential tax treatment of diesel versus gasoline. India
also has a large LDV fleet of diesel vehicles, but as environmental regulations there
are largely non-existent, this market is not relevant for catalyst producers at the
moment.
In Europe, fuel is taxed on the basis of volume and diesel is cheaper than petrol in
nearly all EU states, with Britain a notable exception. On the other hand, there is a
shortage of diesel production facilities. Fuel suppliers often have to import diesel
and export surplus gasoline, sometimes at a loss. Diesel is the most expensive fuel
to refine, but the cheapest to consume in Europe.
In April 2011, the European Commission presented its proposal to overhaul the
outdated rules on the taxation of energy products in the EU. The new rules aim to
restructure the way energy products are taxed to remove current imbalances and
take into account both their CO2 emissions and energy content. Since a litre of
diesel contains more energy and more carbon than a litre of gasoline, minimum tax
rates per litre of diesel should eventually be higher than for gasoline.
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The proposed tax rates are reflected in the table below.
New tax rates for transport fuel
Current rate
01 Jan 13
01 Jan 15
01 Jan 18
Petrol (euro per 1000 litres)
359
359
359
359
Diesel (euro per 1000 litres)
330
359
382
412
Kerosene (euro per 1000 litres)
330
350
370
386
LPG (euro per 1000 kg)
125
125
311
501
Natural gas (euro per GJ)
2.6
2.6
6.6
10.8
Source: European Commission / Taxation and Customs Union
HDD catalysts market
Our view on the HDD catalysts market is the main reason we are below consensus
estimates for Johnson Matthey’s Environmental Technologies division. We are
more cautious than consensus on both short-term and medium-term market
development.
The only HDD markets of meaningful size at present are Europe and North
America. This situation should change significantly from 2014, when China finally
introduces Euro IV legislation (called Phase IV).
Less than a decade ago, the HDD catalyst market did not exist, but it is now
Johnson Matthey forecasts the HDD catalyst market to reach $2.1bn in 2015 and
$3bn by 2020.
We share Johnson Matthey’s view on short-term prospects (2013-15) but see
slower growth thereafter. The company itself has downgraded its forecasts several
times. Initially, it expected the HDD catalyst market to reach $3bn by the end of
2014; now, Johnson Matthey expects that it will reach this level only by 2020.
Obviously, the 2008/09 financial crisis hurt commercial vehicle production growth
severely, but we also see various obstacles to greater penetration of HDD catalysts.
We expect the HDD catalysts market to reach $1.9bn in 2015 and $2.5bn in 2020.
Based on our analysis, we expect the European HDD catalysts market to
grow by 2-2.5x as a result of Euro VI regulation.
not only particulate mass but also particle number limits. In the US, a similar
standard was already implemented in 2010 and the HDD catalysts market doubled
in value as a result.
Based on truck production data from IHS and Johnson Matthey sales data, as well
as our assumptions on the latter’s market share, we have calculated the HDD
catalyst value per vehicle.
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HDD catalyst value per vehicle Europe and US (£)
HDD production
NA
% change
Europe
% change
2010
301
2011
456.8
2012
448.9
2013
444
2014
467
2015
481
2016
495
2017
510
27.7%
360
51.8%
419
-1.7%
370.9
-1%
370.9
0%
5%
382.0
3%
3%
393.5
3%
3%
405.3
3%
3%
417.5
3%
Sales
NA
% change
194
295
297
302.94
312
318
328
338
52.1%
0.7%
2%
3%
2%
3%
3%
0.92
70%
0.95
70%
0.97
70%
1.03
65%
1.10
60%
1.10
60%
1.10
60%
per unit
market share
0.92
70%
Europe
% change
91
111
105
109.2
245.7
258.0
258.0
266.0
N.A.
22.0%
-5.4%
4%
125%
5%
0%
3%
per unit
market share
0.36
70%
0.38
70%
0.40
70%
0.42
70%
0.99
65%
1.09
60%
1.06
60%
1.06
60%
136
146
273
309
309
318
market size
Further growth in the HDD catalysts market is limited in both North America and
Europe. Legislative changes are the main trigger for an increase in catalyst value: in
the absence of radical legislative changes, catalytic technology becomes
commoditised and catalyst companies’ pricing power weakens. As mature markets
have already reached very tight levels of emissions control, we expect catalyst
growth to slow in the medium term.
Shorter-term, we think that the market is misinterpreting the way current truck
supply/demand dynamics translate to the catalysts market.
All the major European truck companies mentioned an improvement in order
intake at the Q1 2013 results, albeit from the very low levels seen in Q4 2012.
According to the GE European SME Capex Barometer from Q1 2013, which
includes data from more than 2,250 small and medium enterprises (SMEs), capital
investment will increase in most large Western European economies. SMEs
represent the lion’s share of truck buyers in Europe; hence overall market
expectations regarding European truck production are positive.
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Investment intentions of European SMEs in the next 12 months (€bn)
Source: GE Capital European SME Capex Barometer
The improvement in truck market supply/demand dynamics has triggered higher
expectations for catalyst sales. We think these expectations are premature.
The Euro VI standard comes into force in January 2014. Truck companies have
already announced that they expect these legislative changes to increase their costs
by c€10,000 per truck. They intend to pass the majority of the price increase
through to their customers (the average price per truck is expected to rise from
c€100,000 currently to €110,000 after Euro VI is in place). Euro VI not only
increases the initial selling price, but also negatively affects the total cost of
ownership over the entire lifecycle of the vehicle, as the truck’s fuel efficiency
decreases due to the complicated design of the emissions control system.
It therefore makes sense that truck buyers will pull forward purchases ahead of
such an increase. According to various estimates, up to 10% of annual truck
demand can be affected by pre-buying. This might be good news for truck
manufacturers, but for catalyst companies the effect is actually the opposite. The
pre-buying of Euro V trucks means a lower catalyst value per vehicle.
We therefore do not expect a significant increase in catalyst value per truck
in Europe in 2013.
We see the implementation of Chinese regulation as more problematic than that in
Europe. Implementation of the Phase IV standard was delayed for four years due
to the lack of low-sulphur fuel (which is necessary for Phase IV engines). We are
still not certain whether low-sulphur fuel is available throughout the country.
We see the dominance of local suppliers in emerging markets as one of the key
obstacles to international automotive catalyst players achieving greater penetration
in these regions. Johnson Matthey, BASF and Umicore entered the Chinese and
Indian passenger car markets together with their international auto customers – the
likes of General Motors, Volkswagen etc. After establishing initial positions in
these markets, they were able to gain local customers as well.
Barriers to entry in HDD catalysts are much higher, as international truck
companies have more limited presence in emerging markets.
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importance. We expect the overall profitability of the catalyst market in emerging
regions to be considerably lower than profitability in developed regions.
Johnson Matthey expects China’s HDD catalysts market to reach c$500m in 2020;
we think it will reach $250m. The company also expects to lose market share
somewhat as HDD technology matures.
The table below summarises our view on the development of the HDD catalyst
market relative to Johnson Matthey’s expectations.
HDD market forecast
Market size (USD m)
Berenberg estimates
NA
2013
2014
2015
2016
2017
649.2
720.1
795.7
819.5
844.1
10.9%
10.5%
3.0%
3.0%
441.0
501.6
501.6
516.7
88.5%
13.8%
0.0%
3.0%
238.1
288.7
326.6
366.7
% change
Europe
234.0
% change
Asia
196.6
% change
21.1%
21.2%
13.1%
12.3%
Brazil
37.5
45.0
49.5
54.5
59.9
Non-road global
75.0
225.0
300.0
330.0
346.5
2032
2134
JMAT expectations
HDD market
JMAT estimates
Market shares
JMAT market share
BASF market share
Umicore
total internationals
2020
500.0
1192
1669
1935
2100.0
66%
25%
3%
94%
60%
25%
5%
90%
56%
25%
7%
88%
3000.0
55%
23%
7%
85%
54%
23%
7%
84%
We also have some concerns about the short-term profitability of HDD catalyst
markets. Future changes in HDD legislation have prompted all the major players
to increase HDD catalyst capacity.
Johnson Matthey intends to double capacity at its Macedonian plant (flexible LDV
and HDD capacity). It is also adding HDD capacity at its plant in Royston, UK.
Umicore is adding capacity in China, Germany and India. BASF is doubling its
HDD capacity in Japan. Automotive catalyst production is quite flexible and the
majority of costs (up to 75%) are variable; however, in 2008-09, when Johnson
149
2550
54%
20%
7%
81%
Johnson Matthey plc
Chemicals
Process Technologies
We think that the market underestimates the importance of the process catalysts
segment to Johnson Matthey. The process catalysts segment is growing faster than
underlying industries due to constant innovation, which helps client companies
save money and allows catalyst companies to charge a premium for their products.
Contrary to market perception, specialty process catalyst companies generate
higher margins than automotive catalyst companies.
Johnson Matthey’s process catalysts business comprises various types of chemical
catalysts. It includes base metal catalysts such as nickel, copper and cobalt for the
production of syngas, ammonia, hydrogen, methanol, formaldehyde, oleo
chemicals, oxo-alcohols, gas-to-liquids, coal-to-liquids and additives for refining. It
also includes Davy Process Technology, which provides licences and know-how
for the use of advanced process technologies related to the manufacture of oil and
gas and petrochemicals. The company also manufactures base and precious metal
catalysts for the fine chemicals and pharmaceuticals industries.
The company expects double-digit annual growth in this division. We are
more conservative and assume 8% annual growth for the next five years.
Hydrogen
Johnson Matthey is the largest producer of catalysts for hydrogen consumption.
We estimate its market share at c40%.
As the global refining industry moves towards cleaner fuels, refiners are
aggressively increasing the consumption of hydrogen. Hydroprocessing is probably
growing the fastest, in response to the requirement for lower sulphur levels in
gasoline and diesel. Johnson Matthey is one of the leaders in hydrogen catalysts for
hydroprocessing, so we expect strong growth in this area to continue. Gas-toliquids and coal gasification projects all require extremely large quantities of
hydrogen and will boost the size of the market considerably in the next five years.
A surge in hydrogen consumption is also expected as a result of growth in the
manufacture of methanol. Substantial consumption of methanol as a direct fuel (ie
as motor gasoline) is expected in countries such as China, Russia, South Africa,
Venezuela and several Middle Eastern countries.
The main growth in hydrogen consumption is expected to come from China for
two reasons: the country is experiencing the strongest growth in auto production
as well as changes in environmental legislation.
Johnson Matthey has a very strong presence in Asia and good relationships with
major industrial gas companies that supply hydrogen to petroleum refineries, so in
our view it should experience very strong growth in hydrogen catalysts in the next
three years.
We expect the use of hydrogen catalysts to grow at a faster rate than hydrogen
consumption – 10-12% per year for the next three years.
Ammonia
Johnson Matthey is one of the leading producers of the catalysts for ammonia
production, along with Süd-Chemie. We are slightly less optimistic about
developments in the market for ammonia, but still assume average annual growth
of 5-6% for the catalysts.
According to Yara, global ammonia production grew at an average annual rate of
2.6% in 2001-11. We expect this trend to continue. We expect global capacity
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Johnson Matthey plc
Chemicals
growth in ammonia to reach 3.5% per year in the next five years and the
production of ammonia catalysts to grow at 5-6%.
Methanol
Methanol is a versatile liquid chemical produced primarily from natural gas (in
China, from coal) and used as a chemical feedstock in the manufacture of a wide
range of consumer and industrial products such as building materials, foams, resins
and plastics. The fastest-growing markets for methanol are in the energy sector,
which today represents one-third of methanol demand.
Demand for methanol is driven primarily by levels of industrial production, energy
prices and the strength of the global economy.
Methanex expects methanol demand to grow at a 7.6% CAGR during 2012-16,
driven mainly by energy applications.
China has now become the world’s leading consumer of methanol and should
account for 80% of demand growth through at least 2016. We expect the market
for methanol catalysts to grow at 10-11% per year in the next five years. Johnson
Matthey commands a 45% market share and is well positioned to capture this
growth with Apico catalysts and technology.
GTL, MTO, CTL
Gas-to-liquids (GTL) and coal-to-liquids (CTL) processing is an emerging area for
catalysts. One key advantage of GTL processes is that they provide clean fuels.
China is short of natural gas. As part of the country’s effort to reduce its
dependence on crude oil and utilise cheaper feedstock costs, there are several coalbased projects under development in China. The majority of capacity expansion
plans in petrochemicals announced beyond 2015 are China’s coal-to-olefins
(CTO), methanol-to-olefins (MTO) and US-gas-based cracker projects.
However, we do expect certain difficulties in the development of these projects.
Recent cost inflation has contributed to the cancellation or postponement of
certain gas-based projects in North America; in China, MTO projects face multiple
hurdles, such as lack of infrastructure, water consumption and high carbon
emissions.
Johnson Matthey expects double-digit annual growth in these types of project in
the next five years, but we are more cautious due to the challenges mentioned
above – we think growth will reach 7-8% per year.
Johnson Matthey is strongly positioned in the sector. Davy Process Technology
provides licences and know-how to operate advanced process technologies related
to oil and gas, MTO and CTL. Davy Process Technology increased its sales from
£44m in 2009 to £100m in 2012. It won a consistently increasing number of
contracts for methanol, oxo-alcohols, syngas and specialty chemicals plants,
especially in China. The business is now seeing large chemicals and coal companies
placing repeat orders for new plants.
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Precious Metal Products
•
In 2012, Johnson Matthey’s Precious Metal Products (PMP) division
represented 14% of group sales but 27% of EBIT.
•
•
Our expectations for the division are below consensus.
•
The market seems to believe that a similar contract can be signed with another
precious metals producer, thus restoring divisional profitability to the 2011
level. We regard this as unrealistic.
•
We think the market is underestimating the short-term impact the decline in
precious metal prices will have on the PMP division’s profitability.
The loss of the Anglo Platinum distribution contract will result in a £35m loss
of EBIT. We believe the EBIT margin on this contract was c80%.
The PMP division can be split into services (c33% of divisional sales) and
production (c67%). In the services business unit, Johnson Matthey provides global
marketing and distribution of PGMs. The refining and recycling unit recycles spent
automotive and process catalysts, residues from the precious metal mining industry
and jewellery scrap.
The noble metals unit produces a wide range of precious metals products for
industrial and medical applications. The colour technologies unit manufactures
PGM-containing decorative coatings and silver conductive materials for
automotive glass. The catalysts and chemicals unit produces precious- and basemetal-based catalysts for the chemicals and pharmaceuticals industries.
A tough environment for the services business unit
Services include platinum marketing, distribution and refining. Services activities
were traditionally dominated by the supply agreement with Anglo American
Platinum. Refining activities include the recycling of industrial and automotive
catalysts, gold and silver refining from mining residues as well as jewellery scrap.
Anglo American Platinum is the largest single source of precious metals for
Johnson Matthey (meeting c30% of its PGM needs). Historically, Johnson Matthey
served as Anglo American Platinum’s sole platinum distributor, as well as
providing research and market development for the company. The Anglo Platinum
operations were Johnson Matthey’s most profitable, with c80% EBIT margin
(based on our estimates).
In 2013, Johnson Matthey announced new contract conditions for its cooperation
with Anglo Platinum, which come into force at the beginning of 2014. Anglo
Platinum will continue to supply precious metals to Johnson Matthey; however,
Johnson Matthey will no longer serve as a distributor. The company estimates the
full-year impact on EBIT to be c£35m.
Johnson Matthey intends to seek similar contracts in the field of business
intelligence with other PGM miners and the market seems to support this view,
and is including such contracts in divisional profits.
However, we do not regard this as realistic. Even if such a partner is found, we
believe the terms and conditions will be much less favourable than those of the old
Anglo Platinum contract. The old contract was signed when the platinum market
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Chemicals
was much less liquid and transparent, and we do not think PGM-producing
customers will be willing to outsource the distribution of the product to their
client.
We expect lower EBIT and ROA for the division looking ahead.
Return on assets and operating margin of the PMP division
Negative impact of PGM price decline underestimated
Precious metal prices have a significant effect on divisional profits and a direct
impact on the profits of Johnson Matthey’s metal management activities. The
company does not take unhedged positions and most of the profits in the business
units come from the bid/offer spread. Spreads increase in periods of precious
metal price volatility; hence Johnson Matthey benefits from these.
Precious metal prices also have an indirect effect on the availability of metals for
recycling. As scrap collectors do not hedge their metal exposure, when metal prices
decline, they hold onto the scrap and wait for the price trend to change. The
profitability of the refining business is affected by loading rates; fixed costs in
refining represent up to 75% of total cash costs and low loading rates can
significantly reduce refining profits.
Ultimately, as for any other metal refiner, the key revenue streams in refining
include the treatment charge and sales of free metal (in the event of over-recovery
of the metal relative to the quoted metal credit yield). Umicore hedges its free
metal exposure; Johnson Matthey does not.
According to the company, each 10% decline in the platinum price results in a
£10m decline in group EBIT (5% of 2012 EBIT). With the loss of the Anglo
Platinum contract, this impact should halve.
We believe that the market is underestimating the current negative margin pressure
arising as a result of declining precious metal prices.
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Precious metals price dynamics
gold spot ($/troy ounce)
platinum spot ($/troy ounce)
2000
2000
1900
1800
1800
1700
1600
1600
1400
1500
1200
1400
1300
12/07/2010
12/07/2011
12/07/2012
12/07/2013
1000
12/07/2010
12/07/2011
silver spot ($/troy ounce)
45
42
39
36
33
30
27
24
21
18
15
12/07/2010
12/07/2011
12/07/2012
gold spot ($/ Troy ounce)
platinum spot ($/troy ounce)
12/07/2012
12/07/2013
silver ($/ Troy ounce)
Source: Bloomberg
Production unit performance also subdued
The production unit of the PMP division includes noble metals, colour
technologies and catalysts and chemicals. We expect the performance of this
business unit to remain subdued. In noble metals, Johnson Matthey develops a
wide range of precious metal products. As industrial products account for
approximately 67% of noble metal sales (with medical products accounting for the
other 33%), sales growth in this division is heavily linked to industrial production
growth. We do not expect a strong recovery in industrial production in the near
term.
In 2006, Johnson Matthey signed a marketing agreement with Yara for N2O
abatement catalysts. Yara is the world’s largest producer of nitrogen fertilisers. It
also has an industrial division which is a leading supplier of nitrogen-based NOx
abatement products.
The use of N2O abatement technology is very sensitive to the carbon price, which
has recently collapsed. This should have a negative impact on noble products sales
in 2014.
Colouring technologies has very high exposure to the automotive industry (c60%
of sales), as it manufactures silver conductive materials for automotive glass. As
mentioned above, we do not expect a fast recovery in automotive production.
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12/07/2013
Johnson Matthey plc
Chemicals
Fine Chemicals: no longer a monopoly
•
In 2012, the Fine Chemicals division represented 11% of group sales and 17%
of profits.
•
The loss of its monopolistic position in opiate-based pain management will
limit sales growth in the near term.
•
We expect the cost-cutting programme to boost the EBIT margin by 100bp.
The Fine Chemicals division consists of two business units: API manufacturing
and research chemicals. API manufacturing produces active pharmaceutical
ingredients (APIs) for pain management. Research chemicals supplies specialty
inorganic and organic chemicals for various research and development activities.
Changes in competitive dynamics
Together, Europe and North America account for 90% of the Fine Chemicals
division’s sales. Through its wholly-owned subsidiary, Macfarlan Smith, Johnson
Matthey is the world’s leading producer of opiates used mainly for pain
management.
This year, Macfarlan Smith’s business has been negatively affected by fundamental
changes. Previously, the company benefited from being the only UK governmentapproved importer of certain controlled substances, such as opiate-based pain
management. However, one of Johnson Matthey’s clients was recently granted an
import licence for the same products. The monopoly that Johnson Matthey
previously enjoyed was therefore disrupted, which led to some loss in pricing
power. The UK government is now reviewing the regulation of the market.
The company reacted to the changing dynamics in this division by cutting costs. It
reduced divisional personnel by 10% and expects to generate £5m of annual
savings (7% of current EBIT) starting from H2 of this financial year.
In our model, we do not assume a radical deterioration of the current competitive
situation; however, we are more cautious than consensus on potential growth rates.
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Johnson Matthey plc
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Johnson Matthey: company overview
Johnson Matthey has operations in over 30 countries and employs around 11,000
people worldwide.
Johnson Matthey sales split (2012)
Johnson Matthey regional sales split
Sales by key market
PGM
Services,
Other,
5%
11%
China,
10%
Rest of
Asia, 11%
North
America,
34%
Rest of
World,
12%
Europe,
33%
LDV, 38%
HDD, 18%
The ECT division manufactures automotive and process catalysts. Johnson
Matthey has c32% global market share in LDV catalysts and c65% in HDD. In
process catalysts, it produces catalysts for stationary sources. The Process
Technologies division includes base metal catalysts such as nickel, copper and
cobalt for the production of syngas, ammonia, hydrogen, methanol, formaldehyde,
oleo chemicals, oxo-alcohols, GTL, CTL and additives for refining. It also includes
Davy Process Technology, which provides licences and know-how for the use of
advanced process technologies related to the manufacture of oil and gas and
petrochemicals. The company also manufactures base and precious metal catalysts
for the fine chemicals and pharmaceuticals industries, as well as catalysts and
components for emerging fuel cell markets.
The battery technology business unit was formed in 2012/13 and comprises
Johnson Matthey’s R&D programmes in advanced battery materials and Axeon,
which specialises in the design, development and manufacture of integrated battery
systems. The business is focused on developing advanced technologies for
automotive batteries.
The PMP division can be split into services (c33% of PMP sales) and production
(c67%). It is the longest established part of Johnson Matthey, having existed when
the company was founded in 1817.
In the services business unit, Johnson Matthey provides global marketing and
distribution of PGMs. The refining and recycling unit recycles spent automotive
and process catalysts, residues from the precious metal mining industry and
jewellery scrap. The noble metals unit produces a wide range of precious metals
products for industrial and medical applications.
The colour technologies unit manufactures PGM-containing decorative coatings
and silver conductive materials for automotive glass. The catalysts and chemicals
unit produces precious- and base-metal-based catalysts for the chemicals and
The Fine Chemicals division consists of two business units: API manufacturing
and research chemicals. API manufacturing produces active pharmaceutical
ingredients (APIs) for pain management. Research chemicals supplies specialty
inorganic and organic chemicals for various research and development activities.
156
Pharmaceutical,
13%
Petrochemical,
15%
Johnson Matthey plc
Chemicals
New businesses include a number of new technologies which Johnson Matthey is
currently developing. The company is constantly looking for markets which offer
strong growth and present an opportunity for new market entry positions through
a new technology solution.
Johnson Matthey is already well positioned with technology to combat vehicle
emissions. Now the company is also targeting the indoor air pollutants market.
Johnson Matthey estimates that demand for new air purification technologies will
represent a market of around £1bn per annum by 2020.
Advanced food packaging is another area of prospective development for Johnson
Matthey. Increased international food transportation requires an overall
improvement in products’ shelf life. According to Johnson Matthey, advanced
food applications will represent a market of around £3bn per annum by 2020.
There is a clear need for more effective technological solutions in water
purification. Johnson Matthey focuses on niche areas with the most attractive and
urgent opportunities; the corresponding markets are estimated to reach £500m per
annum by 2020.
Johnson Matthey has a number of R&D programmes in battery materials EVs.
The company is also considering potential acquisitions in the area. The first of
these acquisitions took place in 2012, when Johnson Matthey acquired Axeon. By
2020, Johnson Matthey intends to have significant sales of battery materials
together with continued growth from the Axeon business.
Reorganisation. The company has recently reorganised its divisional reporting.
Process Technologies, which previously represented part of ECT, now reports
separately.
A new businesses division was also created. It includes the fuel cells and battery
technology business units, which were preciously reported under the ECT division,
as well as some new business units such as water purification.
157
Johnson Matthey plc
Chemicals
Valuation
158
Johnson Matthey plc
Chemicals
DCF analysis
159
Johnson Matthey plc
Chemicals
Financials
Profit and loss account
160
Johnson Matthey plc
Chemicals
Balance sheet
161
Johnson Matthey plc
Chemicals
Cash flow statement
162
Johnson Matthey plc
Chemicals
Divisional split (before restatement)
163
Chemicals
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For analyst certification and remarks regarding foreign investors and country-specific disclosures,
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Disclosures in respect of section 34b of the German Securities Trading
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Company
Umicore SA
Johnson Matthey plc
(1)
(2)
(3)
(4)
(5)
Disclosures
no disclosures
no disclosures
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The Bank and/or its affiliate(s) holds 5% or more of the share capital of this company.
The Bank holds a trading position in shares of this company.
Historical price target and rating changes for Umicore SA in the last 12 months (full coverage)
Date
15 July 13
Price target - EUR
26.00
Rating
Sell
Initiation of coverage
15 July 13
Historical price target and rating changes for Johnson Matthey plc in the last 12 months (full coverage)
Date
15 July 13
Price target - GBp
2800.00
Rating
Hold
Initiation of coverage
15 July 13
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Buy
Sell
Hold
41.98 %
19.08 %
38.93 %
51.52 %
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39.39 %
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164
Chemicals
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Third-party research disclosures
Company
Disclosures
Umicore SA
Johnson Matthey plc
no disclosures
no disclosures
(1)
(2)
(3)
(4)
(5)
Berenberg Capital Markets LLC owned 1% or more of the outstanding shares of any class of the subject
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Catalysts and metal recycling

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