You could be forgiven for thinking that the latest figures from the Society of Motor Manufacturers and Traders (SMMT) point to an industry in structural decline. It was the worst March for new car registrations since 1998. They were down 14.3 per cent year-on-year even though showrooms were shut in March 2021 due to social distancing provisions. And it looks as if business confidence is beginning to wane, at least judging by a one-third fall in fleet registrations.
It’s hard to see how volumes are likely to pick-up in the near-term given a worsening cost-of-living crisis, the prospect of increased credit costs, and no end in sight to the global semiconductor shortage.
The one bright spot was the market in battery electric vehicles (BEVs), where sales increased by 78.7 per cent to 39,000 units, equivalent to 16 per cent of the overall total. Unfortunately, BEV motoring does not exist in isolation and is certainly not immune to volatility in fossil fuel markets. So, it was no surprise to learn that electric charging firm Ubitricity, a subsidiary of Shell (SHEL), is increasing its prices by a third and introducing a 35p connection fee per charging session.
I hope nobody rolling off the forecourt in a new Tesla imagined that the oil majors were buying into the net-zero transition to try and keep global sea levels at bay. And it would also be naïve to assume that central government won’t come calling eventually. For now, BEVs pay no fuel duty or vehicle excise duty, but the Office for Budget Responsibility estimates that the switch away from the internal combustion will trim government finances to the tune of £1.4bn a year by 2026/27. That represents an accelerated rate of reduction from previous estimates, and a headache for Whitehall mandarins given that existing fuel duties added around £28bn per annum to the coffers of HM Treasury in the three years prior to the pandemic.
The statutory targets linked to BEV adoption, together with the explicit pledges on the part of auto manufacturers, have created an uncertain commercial backdrop for supply chain companies, a situation that could be exacerbated when governments respond to taxation shortfalls. There is always the risk that fiscal intervention could reduce incentives to go electric, slowing overall take-up and creating strategic problems for companies that are rejigging their business models in response to the transition to electric motoring.
In a market update, Johnson Matthey’s (JMAT) newly-crowned chief executive, Liam Condon, said that the board was examining ways in which the self-styled ‘global sustainable technologies company’ could “create value from the many exciting opportunities we face as the world transitions to net-zero”.
Chief among those “exciting opportunities” is the government-mandated move away from catalytic converter technology - the primary source of group revenues, with the ‘clean air’ segment accounting for 62 per cent of sales at the September half-year.
Johnson Matthey has evolved constantly over its 205-year history, so you wouldn’t bet against its net-zero metamorphosis, though the seemingly arbitrary nature of the timeframes involved presents a real stumbling block, especially in terms of capital allocation.
Though the group has received significant government funding aimed at developing technologies linked to the BEV transition, the impression that the group was playing ‘catch-up’ in terms of its transformation plans was given ballast late last year, when it announced that it had decided to exit the battery materials business because it was too far behind rivals who are already producing on a massive scale. Accordingly, it has fully impaired the carrying value of its battery materials assets, which, together with associated exit costs, will result in an exceptional item outside of underlying operating profit of up to £465mn.
Johnson Matthey will now refocus its investment on projects involving hydrogen and decarbonising chemical production. The former energy source has been rarely out of the news of late, particularly the much hyped ‘blue’ hydrogen derived from natural gas. The group has years of practical experience and relevant intellectual property linked to the production of hydrogen, and it has highlighted that current estimates show that global production will need to increase ten-fold by 2050 if it's to fulfil its potential as a clean fuel source. Presumably, expansion on that scale would necessitate sizeable investments from the energy sector, though critics argue that a widescale switch to blue hydrogen would simply mean ‘business as usual’ for the fossil fuel industry. Any such scenario might also attract further government support measures – if it was thought that it would ease the increased burden on state finances.
