We are at an inflection point in efforts to combat climate change. As well as large-scale shifts in consumer preference towards lower-carbon products, policy commitments at a governmental and corporate level to reduce emissions and reach carbon neutrality are becoming increasingly impactful.
As a result, this has created long-term secular demand drivers for a range of products and services which will enable the transition to a lower-carbon economy, writes Martin Currie’s Alastair Reynolds.
Emerging markets (EM) are key to this sustainable future, as following decades of investment in technological innovation, emerging market companies are now positioned at the heart of global supply chains. This means that they are uniquely placed to provide many of the solutions required to combat climate change, as they spear-head innovation in energy storage, electrical efficiency and the clean-energy transition.
In the last 10 years, cumulative demand for lithium-ion technology in electric vehicles (EVs) and energy storage has soared from 0.5 gigawatt-hours in 2010 to roughly 526 gigawatt hours in 2020. This trend is only expected to continue, with demand predicted to reach an incredible 9,300 gigawatt-hours by 2030, which translates enablement of tens of millions of new EVs, storage containers and consumer devices around the world.
EM battery producers such as Samsung SDI, LG Chem and CATL, are all set to benefit from the multi-decade EV revolution, due to the staggering 1,176% projected rise in EVs on the road over the next 10 years, climbing from 11 million in 2020 to 144 million in 2030.
Beyond battery production, EM companies also have exposure to EV demand at all ends of the supply chain. For example, Wuxi Lead, the world’s leading manufacturer of new energy equipment, is skewed towards lithium-ion battery manufacturing machinery and stands to benefit from the growing demand for EV battery production in China. The company also has good optionality around diversifying its customer base and is therefore shielded from most battery tech evolution debates, as well as potential disruptive producers.
In addition to new forms of energy storage, the need to replace technologies powered by fossil fuels will result in a significantly higher requirement for electrification infrastructure. This move is also well supported by EM companies.
The semiconductor sector, which provides the microchips that are used extensively in electronic circuitry, stands to gain from this huge rise in electrification. From an increased demand in sensor technology for vehicles and ‘smart’ products, to the rollout of 5G and the processing equipment required for national grids, semiconductor demand is set to remain on a steep upward trajectory. EM companies will play a significant role in this transition, such as Taiwanese electronics manufacturing company Delta Electronics, the largest power-supply vendor globally, which is already transitioning to meet demand for EVs, datacentres and industrial robots.
Alongside the widespread adoption of electronics devices comes an increased demand for raw materials, most notably copper. With the metal recently reaching an all-time high, copper producers will be a direct beneficiary of electrification. One such winner from this change is Antofagasta, one of the lowest-cost copper producers globally, which operates mines in Chile using a sustainable approach to extraction that will allow the company to expand future production.
Clean energy transition
The shift away from fossil fuels is underway, with renewable energy sources leading the way forward as the fastest growing source of electricity in the world today – more than doubling capacity in the last decade. In particular, solar electricity generation is growing, driven by rapidly falling costs and governments’ commitment to increasingly subsidy-free solar projects.
Within the solar supply chain, solar glass is the highest return, most consolidated and least deflationary segment and is one of the few renewable areas with a track record of clear value creation. One example of a company capturing this growing sector is Xinyi Solar, recognised as the global leader in solar glass manufacturing. Since the Chinese government’s policy on solar glass capacity indicated plans to ease restrictions on investments in new production capacity, the company has recently raised capital to fund expansion, suggesting a possible trebling of capacity on a five-year view.
The move away from fossil fuels as the world’s primary source of energy will not be an instantaneous change. Instead, the transition to clean energy will happen over many years, creating ongoing demand for solutions that support the shift to a more sustainable planet. EM companies have a significant role to play in the fight against climate change and will support and innovate efforts in energy storage, electrical efficiency and the clean-energy transition.
This article was written for Expert Investor by Alastair Reynolds, portfolio manager emerging market at Martin Currie, part of Franklin Templeton.