The question of how many people will be driving electric vehicles (EVs) by 2030 is critical to the future of Johnson Matthey (JMAT). In April, 23 per cent of cars made in the UK were either hybrids, plug-in hybrids or EVs, according to the Society of Motor Manufacturers and Traders (SMMT), but consumers are not so keen yet.
The top 10 cars sold in the UK are still all petrol or diesel cars. The Vauxhall Corsa leads the way, although the company with three cars in the top 10, Ford (NYSE:F), has just forecast that 40 per cent of its global sales will be from EVs by the end of the decade – the predicted volumes for Europe are even more optimistic.
Johnson Matthey’s earnings are dominated by its clean air division, which makes and sells catalytic converters for internal combustion engine (ICE) and hybrid cars.
Just as BP (BP.) is positioning itself as a post-ICE company while still generating plenty of free cash (“performing while transforming”) from oil and gas, Johnson Matthey now has to balance big capital spending requirements, keeping the balance sheet in shape and paying dividends.
Matthey finance chief Stephen Oxley told Investors’ Chronicle that there was plenty of cash flow to come from the clean air division.
“Yes, at some point [the sun] is going to set [for clean air], but actually, even under our most pessimistic scenario... that business is not only growing in the short and medium term, but is throwing off an awful lot of cash,” he said.
Clean air’s underlying operating profit of £269m was 9 per cent below last year, while sales fell 8 per cent to £2.4bn. ‘Efficient natural resources’, a higher-margin business, upped its underlying operating profit by 5 per cent to £268m, on flat sales year on year of around £1bn.
The new markets division had total sales of £356m in the same period, an 8 per cent drop on the year before, but snuck into an underlying operating profit of £9m.
Oxley said that the company’s pessimistic forecast for clean air was cash flow of around £400m a year for the next decade.
Johnson Matthey has built one cathode plant in Poland, opening next year, and has recently signed a deal to build another, in Finland. Lithium-ion battery cathodes vary in composition but Johnson Matthey is making a nickel-based cathode. The industry has looked to nickel instead of cobalt for technical reasons as well as supply difficulties for the latter.
Johnson Matthey has agreed a supply deal with Norilsk Nickel, which was famously hit with a $2bn fine for spilling diesel and has a long record of environmental issues. Oxley said nickel supply was limited and Johnson Matthey was in the same boat as competitors, and that his company would work with the Russian miner to "improve its record".
The other big area of investment is hydrogen, which fits with Johnson Matthey because of its platinum group metal (PGM) expertise. Platinum, palladium and other metals that are used in catalytic converters are also critical for clean technology, such as the electrolysers that split water into hydrogen.
Despite massive hydrogen investment globally in the past year or so, its use-case is less certain. Johnson Matthey forecasts that its fuel cell business will have sales of £200m a year by 2025.
Johnson Matthey is painting electrification as a massive opportunity. This is true, and we are bullish on its prospects, but it will have to quickly ramp up spending to get there.
