Umicore out of bounds due to weak batteries

While Umicore’s recycling business in Hoboken is booming, the critical battery materials division sees its profits drop sharply. This puts Umicore on the stock exchange.

Umicore

unexpectedly sent out a surprising update on Monday. The Belgian group is expecting an operating profit of between 465 and 490 million euros in the 2020 financial year. That is at least 4 percent less than the 509 million for fiscal year 2019, but in line with the 480 million that analysts assumed. “Despite the devastating effects of the pandemic, Umicore is on track to deliver a strong performance in 2020,” said CEO Marc Grynberg.

But the update exposes a huge discord within the listed company. The fact that profits have been maintained is largely due to the booming recycling branch in Hoboken. This department is heading for a record year with a profit contribution of 320 to 330 million euros, at least 70 percent more than in 2019. The recycling branch benefits from favorable trading conditions and higher prices for precious metals such as rhodium. There are no forward contracts for that substance, allowing Umicore to fully exploit the law of supply and demand.

The catalytic converters department also recovered in the third quarter thanks to the recovery of the automotive industry. Umicore expects global car production to decline “only” 20 percent this year, while the company previously feared a 25 percent decline. Especially China, where Umicore has a strong position with international car manufacturers, business is doing well. As a result, the catalytic converters branch should yield Umicore a profit of 130 million to 140 million euros this year.

The major concern is the ‘hipster department’ energy & surface technologies. That branch is the world market leader for cathode materials in battery materials. Due to the boom of the electric car, the department has to become Umicore’s major profit engine. While the overall car market declined almost everywhere in the disastrous corona year, sales of electric-powered vehicles increased by 9 percent in the first nine months of 2020.

But Umicore is failing to capitalize on the electric hype. For the whole of 2020, CEO Marc Grynberg sees the profit contribution of his hip battery branch drop at least 60 percent to 70 to 75 million euros. This means that the department, which made 54 million profit in the first half of the year, was barely profitable in the second half.

Umicore is facing headwinds in several markets. In Europe, the demand for plug-in hybrids in particular is increasing, which on average use less cathode materials than purely electric cars. In China, demand for electric cars has been declining since last year, when the government severely curtailed subsidy options. In the first nine months of this year, another 19 percent fewer e-cars were sold in China, the largest car market in the world.

Despite surging electric car sales in the third quarter, the Chinese battery materials market is still experiencing significant overcapacity. Due to high fixed costs, unused capacity in Umicore’s new Chinese cathode materials plant creates a negative leverage effect for the business. Moreover, Grynberg does not expect to get well soon. Due to the overcapacity in China, the battery department will ‘need more time to achieve the desired scale effects’.

Analysts were also concerned about the poor performance of the battery branch. “ Even though at a group level the strong recovery in catalysts and the persistently high metal prices in recycling provide a counterbalance, the news will cast even more doubt on the competitive position of the cathode materials and the future returns of the division, ” says ING analyst Stijn Demeester .

Wim Hoste, analyst at KBC Securities, even cut his price target from 44 to 37 euros. “Profitable growth in the battery materials business is of course key to Umicore’s long-term story. This update does not alleviate concerns about this. ‘