Grand targets, mundane actions – Supply chains key to tackling GHG emissions

Argentina 51 Canada 457 Chile 91 China 2799 Cons. Discr. - Autos 1061 ESG 50 Energy - Renewables 154 European Union 734 Industrials - Capital Goods 539 Japan 556 Materials - Metals/Mining 683 Mexico 804 U.S. 5005 United Kingdom 322

The climate summit hosted by President Joe Biden has been accompanied by a series of new greenhouse gas emissions targets including: a U.S. commitment to cut emissions by 50%-52% in 2030 from 2005 levels compared to 26% to 28% by 2025; Japan will cut emissions by 46% in 2030 from 2013 levels and be at net zero from 2050; Canada will cut emissions by 40% to 45% in 2030 from 2005 levels; the United Kingdom will cut emissions by 78% in 2035 from 1990 levels including aviation and shipping; and the European Union‘s new climate law will cut emissions by 55% in 2030 versus 1990 levels. 

Others reiterated existing targets with elemental extensions. That included China’s plan to reach peak emissions by 2030 and carbon neutrality before 2060 including reducing the growth in the use of coal over the next five years and cutting it thereafter.

The Biden administration has also outlined a “Climate Finance Plan” which, at its center, provides additional funding to support exports of “low-carbon and climate resilience technologies” to developing economies. There will also be an end to official financing provided to fossil-fuel based energy projects. 

While specific technologies and funding are not discussed, there is a broad reference to helping the “deployment of renewables, energy storage, and low carbon transport” infrastructure. Notably these are products where the Biden administration’s critical supply chain review, ongoing through early June, will aim to support U.S.-based manufacturing, indicating a holistic industrial policy for such technologies.

As outlined in Panjiva’s research of April 20, stricter climate targets bring opportunities for supply chain operations in enabling technologies including renewables and electrification as well as challenges for supply chain decision makers in logistics and complications for higher-emitting sectors from carbon pricing and leakage measures.

While governments can direct policy it is companies investing in, and redirecting the operations of, their supply chains that will bring many of the targets to fruition.

The issues and policies surrounding climate change have become more of a focus for corporate management teams and their investors. Panjiva’s analysis of conference calls held by over 7,000 companies via S&P Global’s Machine Readable Transcripts since 2010 shows that “climate change” has been mentioned in 13.6% of calls held in Q1’21. That was the highest since at least 2010 and compares to a prior peak of 9.5% for calls held in Q1’20.

The subsequent drop in Q2’20 to Q4’20 is somewhat unsurprising given the short-term issues of dealing with the pandemic overwhelmed the long-term concerns presented by climate change, as discussed in Panjiva’s March 1 research.

Notably, discussions of the potential solutions to climate change challenges that could impact upon corporate supply chains, including cap-and-trade scheme, taxes and border adjustment taxes have yet to be discussed. Only 1.0% of calls mentioned “carbon tax” while 0.2% discussed “carbon trading”.

Record level of focus on climate change in corporate conference calls

Chart segments mentions of keywords in transcribed earnings calls by quarter. Source: Panjiva

Perhaps unsurprisingly the widest mentions and biggest pickup in mentions of climate change related topics have been in the utilities and extractive industries that face the most direct impact. Climate change topics were mentioned in 29.4% of gas utilities’ conference calls, up from 5.0% compared to 2019 while the oil and electric utility sectors were among those discussing the topic most widely at 51.1% and 32.5% of calls respectively.

The physical risk aspects of climate change may be increasingly weighing on the minds of the insurance industry, potentially brought home by issues such as the Texas winter storms, with 35.8% of firms mentioning the topic compared to just 7.5% in 2019. Similar issues may have applied the minds of executives and investors in the chemicals (26.4% of calls in 2021 from 6.0% in 2019) and building materials sectors (28.1% from 3.3%). The latter may also be a beneficiary from increased consumer spending on energy efficiency.

Makers of technical equipment needed to tackle the challenge of climate change have also begun to discuss the topic in more detail with 25.6% of electrical equipment conference calls and 24.1% of machinery sector calls discussing the topic while 20.8% of automakers have discussed the topic, likely in the context of vehicle electrification.

Physical risks from climate change coming to investors’ attention

Chart segments the number of companies mentioning climate change in earnings calls by year. Source: Panjiva

While it is tempting to focus on the large scale, visible projects for evidence of progress, much of the hard work will be done at the component level.

The automotive sector has been a major focus for both investment and government action. The latter has been driven by a desire to improve employment as well as ensure supply chain security. With technologies maturing, the most important policies may come in access to materials. The Biden administration’s critical supply chain review due to run through early June will be key in that regard. While much of the focus is on rare earths, access to lithium remains vital. 

Thus far the U.S. has relied on Chile for 44.9% of lithium imports in 2020 and Argentina for 43.8%, Panjiva’s data shows. The U.S. is having to compete with an increasingly assertive China for access to Chile’s resources and may instead look to incentivise more domestic production. Indeed, U.S. imports of lithium dropped by 79.7% year over year in February to their lowest since Sept. 2010.

Chilean, and now Argentinian lithium shipments have fallen

Chart segments U.S. imports of lithium by origin on a monthly and three-month average basis. Source: Panjiva

China accounted for 41.9% of exports of lithium from Chile in the 12 months to Feb. 28, which are dominated by shipments linked to Albemarle and SQM, compared to 27.3% in 2017. The U.S. dropped to a 4.5% share though the biggest gap has emerged for Japan and the EU which represented 12.0% and 10.3% respectively in the past 12 months from 21.0% and 18.2% respectively in 2017.

China has become the largest destination for Chilean lithium

Chart segments Chilean exports of lithium by destination on a three-month trailing basis. Source: Panjiva

At the household level there is the potential for aggressive investment in renewable energy, though simple measures including more effective control systems (smart meters) and heating / cooling (heat pumps) can make a difference. Panjiva’s data shows that U.S. imports expanded rapidly in 2018 and 2019 by 20.4% and 9.3% respectively, in part reflecting utility investments in smart meters. 

There’s been a marked slowdown since, in part reflecting the impact of the pandemic and potentially the reluctance of households to carry out more complex home improvement tasks without professional help. The downturn has continued into 2021 however, with a 16.4% year over year decline in the first two months of the year, including a drag on suppliers from Mexico who had previously benefited from reduced imports from China linked to section 301 tariffs. 

Meter imports measurably lower in 2021

Chart segments U.S. exports of meters and heat pumps by origin. Source: Panjiva

All the leading Mexican exporters of thermostats and heat pumps to the U.S. have experienced a downturn in shipments in January and February. That was led by a slide in shipments linked to Landis+Gyr with a contraction of 33.5% year over year, though it remained the largest exporter in dollar terms. Shipments linked to Honeywell and contract manufacturer Flextronics fell by 32.0% and 30.4% respectively while Badger Meter did better than most with a decline of 17.2%.

Mexican meter makers deal with slowing demand

Chart segments Mexican exports of meters and heat pumps to the U.S. by shipper. Source: Panjiva

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