TheChek News Flow

Russia’s invasion of Ukraine threatens to halt slide in cost of manufacturing batteries

The car industry’s multibillion-dollar bet on electric vehicles was built on a single premise: that batteries would carry on getting cheaper.

In 2019, Volkswagen executives even brandished charts predicting a steady decline in battery costs, as they laid out their ambition to consign the combustion engine to history.

For years the industry was proved right: battery costs fell from $1,000 per KWH for the first models more than a decade ago to about $130 in 2021, paving the way to making them affordable for middle income families.

But Russia’s invasion of Ukraine threatens to halt the slide.

Prices of nickel, lithium and cobalt — key raw materials for battery manufacturing — were already rising because of global demand. But with Russia accounting for 11 per cent of the world’s nickel, and supply chains already stretched, the war has sent the cost of such commodities skyrocketing.

The price of these three metals required in a 60KWh battery, enough for a large family sport utility vehicle, has risen from $1,395 a year ago to more than $7,400 in early March, according to battery group Farasis Energy.

Battery companies, carmakers and suppliers are now grappling with the prospect that electric cars may be less profitable, or require cheaper materials, if they are to remain financially competitive.

“At the moment the raw material prices are a burden for our target to reduce battery costs,” said Audi chief financial officer Jürgen Rittersberger, whose brand has pledged to launch battery-only electric cars from 2026.

However, neither Rittersberger nor most of his fellow European car executives are yet raising the alarm about the impact of rising prices on the rollout of electric cars.

For a start, battery material prices are not rising in isolation — costs of aluminium, steel and copper that are also used in engine-powered models have risen since the invasion, too.

“We have to bear in mind that we need specific materials for batteries . . . but we also need, for example, rhodium, palladium and platinum for the [catalytic] converters in our [combustion engine] cars, so we have to expect that the cost in both cars will increase,” said Volkswagen’s chief financial officer Arno Antlitz.

BMW sustainability boss Thomas Becker said the Munich-based carmaker was also not concerned. “We have long term supply contracts with all battery cell suppliers. So I wouldn’t say that there was any imminent effect on the structure of supply,” he said.

“It would be premature to make any predictions about a longer lasting and structured impact on our supply chains at this point.”

In addition, the prospect of electric vehicle price rises comes as demand has surged for battery-powered cars, helped by the big increase in the cost of petrol.

More than 1.1mn battery-driven cars were sold in the first two months of the year, according to figures by Bernstein, an almost 90 per cent rise on the same period last year.

Interest has risen even faster since the invasion of Ukraine, as higher fuel prices increase consumer concerns about running costs.

“Demand [for EVs] has been staggering over the past few weeks,” said Kia’s UK boss Paul Philpot.

AutoTrader, the largest British online marketplace for cars, found that almost a quarter of searches in March were for electric cars, up from 15 per cent a month earlier.

The company’s commercial director Ian Plummer said fuel prices are consistently “the single biggest driver of consumer interest in EVs”.

But in the longer term, electric car prices may still rise, as battery material costs account for about a third of the EV vehicle prices paid by motorists, according to industry estimates.

Chang Jung-hoon, an analyst at Samsung Securities, calculated that a 10 per cent rise in nickel prices will lead to a 2.4 per cent rise in the cathode price. If the spot nickel price of $42,995 on March 7 translates directly into battery prices, the cathode will rise by 26 per cent and the price of the whole battery by 6 per cent.

Much depends on whether higher raw material prices feed into batteries and cars and, eventually, on to consumers.

SK On, one of the world’s largest producers of high-nickel batteries, is “actively hedging against price fluctuations of those metals but surging prices will definitely have a negative impact on our profitability,” head of procurement YJ Kim said.

LG Chem, another battery maker, said: “If the uncertainty continues in the long term, it will have a negative impact on the battery and EV industry as a whole, so we are closely watching the situation.”

Negotiations between carmakers and suppliers, notoriously robust at the best of times, will be key in determining who shoulders the higher prices.

Vitesco, a German auto supplier that makes powertrains, is assuming it can pass through about 80 per cent of higher costs on to manufacturers, finance officer Werner Volz said.

Analysts say manufacturers’ recent enthusiasm for battery cars may even wane as they realise they cannot make as much money from them as previously expected.

“Automakers are likely to shift to premium gasoline cars for higher profitability as their EV profitability is likely to get worse,” predicted Kim Young-woo, an analyst at SK Securities.

“So higher prices of nickel and other metals are likely to fuel concerns for both EV and battery makers because higher prices would dampen consumers’ appetite for EVs.”

VW still predicts its mass market rollout, as well as its collaboration with Ford, will help the company rein in electric vehicle costs.

Andy Palmer, chief executive of Hindujah-backed electric busmaker Switch Mobility who oversaw Nissan’s launch of the electric Leaf car in 2010, says the long-term trajectory of battery prices still heads downwards.

“Over time, I think we’ll continue to see some fall in the cost of batteries through technology change and economies of scale,” he said.

“When we started the production of Nissan Leaf, we were paying about $1,000 per kilowatt hour,” he added. “The price now is about a hundred dollars per kilowatt hour. So over time, you’re definitely seeing a reduction in the price of batteries, and that’s obviously driven by demand and supply.”

Even if prices do rise, sales of electric cars have a momentum that makes them almost unstoppable.

“EVs and batteries are related to the industry trend of regulating carbon emissions,” said Kim at SK On. “They cannot be simply approached from a profitability perspective.”

“Nickel’s price surge can have an impact on EV demand, but it is far-fetched to assume that EV demand will fall.” 

Russia’s invasion of Ukraine has disrupted decades of security thinking in Helsinki

Just four months ago, the idea of Finland joining Nato this year would have seemed far-fetched. Now, the prospect of Russia’s once-neutral neighbour applying to become a member of the western military alliance seems all but inevitable.

Vladimir Putin’s brutal invasion of Ukraine, another non-Nato member that shares a border with Russia, has disrupted decades of security thinking in Helsinki, and for the first time led to a majority of Finns supporting Nato membership.

“All of a sudden, it seems the Finnish population have decided: there is only one option. It’s a radical change, a huge shift in momentum,” said Charly Salonius-Pasternak, leading researcher at the Finnish Institute of International Affairs.

Carefully neutral throughout the cold war, Finland believes it chose sides when it joined the EU in 1995. But it also thought its security was best served outside a military alliance in order to foster good relations with Russia, with which it shares a 1,340km border. Heavy defence spending was meant to deter any Russian thoughts of invasion.

It had long been expected that Sweden, the other non-Nato Nordic country, would lead the way in the debate about future Nato membership and that Finnish politicians would have to work hard to convince the public of any benefits. But the opposite has happened: according to the latest poll, 62 per cent of Finns are in favour of joining.

Finland’s government is now preparing a white paper on the country’s security, including potential Nato membership, to be released this month. A parliamentary debate will follow, with some MPs pushing for a decision to be taken before a Nato summit in Madrid at the end of June.

One senior Finnish official said he had long wondered what it would take to shift his country’s Nato stance. Neither Russia’s 2008 war with Georgia, nor its 2014 annexation of Crimea changed public opinion in Finland, and support for Nato membership remained at about 20 per cent.

“A major conventional war in the middle of Europe by an aggressive Russia did it. The Finnish political elite have always thought Finland is best served by having a working, rational relationship with Russia . . . But seeing how Russia behaves now has changed people’s minds and means we can’t have a rational relationship,” he said.

Tytti Tuppurainen, Finland’s EU minister, said it was of “paramount importance” that the majority of Finns wanted to join Nato. “It is a call to us decision makers to swiftly analyse the situation and make decisions. We are ready for that.”

The conflict in Ukraine has shown what can happen to countries not covered by Nato’s collective defence pledge. But in Finland it has also revived memories of its 1939-40 winter war against the Soviet Union in which Finnish forces, largely alone, resisted a far larger army but lost territory in the process.

“We should never have to be alone again . . . In order to improve our security and guarantee our independence, we should join Nato. We still have a powerful and aggressive neighbour,” said Petteri Orpo, leader of the main opposition National Coalition party, a longtime supporter of membership.

But the position of the two largest government parties, the Social Democrats of prime minister Sanna Marin and the Centre party, will be crucial. Both have previously been divided over Nato. Marin said on Saturday that a decision on whether to join Nato should be taken “this spring”.

There are also concerns in Helsinki about Finland’s potential vulnerability in the period between voting to join Nato and actually becoming a member. “How long would it be and what would Finland’s security look like during that timeframe?” asked Orpo.

Last month Sauli Niinisto, Finland’s president, discussed Nato membership with the alliance’s secretary-general Jens Stoltenberg, who has previously said any application would be processed quickly. But it would still take several months to be ratified by all 30 members and some Finnish officials worry that a Nato country could push for a delay for fear of provoking Russia.

Niinisto declined to comment when questioned by the Financial Times on whether he had asked US president Joe Biden for security guarantees when visiting Washington in March.

There is also debate over whether a Finnish application to Nato might be seen as a provocation to Russia rather than simply a response to Moscow’s aggression in Ukraine.

The senior official said: “Applying for membership carries awful risks for Finland, and for Nato. We have a very unpredictable, aggressive neighbour . . . I have always said that joining military alliances is something you do in quiet times, so that you do not import any instability into the organisation you join.”

Others argue that Finland, with its well-trained army and high level of preparedness, would be useful for Nato both in its defence of the Baltic states and the Arctic.

Foreign minister Pekka Haavisto said the whole European security order had been destabilised by Russia’s attack on Ukraine. “So many principles were broken, so many agreements violated. Everybody’s interests are to try to make decisions so they are not provoking anything or destabilising things. But, at the same time, you have to make your own decisions to improve security.”

The timing of a potential Nato bid by Finland is far from decided. Orpo worries that a drawn-out process would become more complicated if Sweden’s elections in September and US midterms in November muddied the waters.

Those advocating a swift request point to the lack of a real alternative. Niinisto said the point would be to further deepen ties with the US and Sweden. But Orpo and others said that Nato membership would mark the final step in Finland’s process of fully joining the west.

“For me, Nato membership is not just about the pro and cons, it’s a bigger question of our identity,” said Orpo. “We are a western country and have been a member of the EU for 25 years. In this sense, our place is in Nato as well.”

Enel chief blames EU energy policy for bloc’s reliance on gas imports

Head of world’s second-biggest utility says region should have tackled the problem long ago

The head of the world’s second-largest utility has hit out at the EU’s energy policy, saying the bloc should have “aggressively” addressed its dependence on imported gas long ago.

Francesco Starace, chief executive of Italy’s Enel, urged member states to switch rapidly to other energy sources in order to sever ties with Russia, after Vladimir Putin’s move to issue gas invoicing in roubles added to tensions over the war in Ukraine.

Russian president Vladimir Putin signed a decree last week demanding that nations deemed “unfriendly” must pay for gas deliveries in roubles from April, using an account in the Russian currency at Gazprombank, or face a halt in supplies.

Starace, who has been at the helm of state-controlled Enel since 2014, said European nations should have started worrying about their energy dependency from third countries years ago.

“This is Russia’s turn but let’s not forget what happened in Libya 10 years ago,” said the 67-year-old chief executive. “Where gas is coming into Europe from is a problem.”

He said the EU should have managed its “dependence on fossil fuels, namely gas, in a better and more aggressive way”.

Starace urged European nations to free themselves from “physical links” to other countries by building regasification plants and leasing floating ones to process seaborne liquefied natural gas, which would allow them to diversify supplies and cut ties to fixed pipelines.

He also called on them the accelerate the transition to other energy sources including renewables, while acknowledging this could not be done overnight.

“Burning gas to generate electricity is totally stupid . . . both from economic standpoint and from an environmental [one], gas is precious and it should be used where it is irreplaceable,” Starace said.

“Of course these things require some time, so you need to do things in the order of importance,” he added. “And clearly you have first to survive and then try to reduce your dependence.”

Enel, which has a market capitalisation of €62bn and is one of the world’s largest renewable energy producers, plans to stop using fossil fuels to generate electricity by 2040.

It signed an agreement with the European Commission last week to ramp up solar panel production in Sicily within the EU’s Innovation Fund framework.

The EU hopes to build its renewables capacity to 600 terawatt hours by 2030, a timeline that has run into criticism from businesses and politicians across Europe because of the potential impact on jobs and a rise in costs linked to the transition.

But for Starace, “the cost is when you buy gas, you burn it, and it’s finished . . . When you put your money into something that remains in your hands and keeps producing energy, that’s an investment.”

Gas, mostly Russian, currently makes up 40 per cent of Italy’s electricity generation mix.

Starace insisted he was “not demonising Russia”, saying the problem would be the same with “any other place”.

Enel has €300mn exposure to Russia, where it employs 1,500 people at its three large combined-cycle thermoelectric power plants using gas to produce electricity for the domestic network and provide heating to three large cities.

The Enel chief was one of a group of chief executives to enervate the Rome government in January by attending a video conference with Putin to discuss expanding business ties between the two countries.

Starace said he had not been expecting “this kind of escalation” at the time and that Enel was now looking at leaving the country. “If we can sell [to a Russian party], then we will exit,” he said.

“Otherwise I think it will be very difficult for us to continue anyway, to guarantee the functioning of these units in the proper way.”

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Partnerships provide emerging designers with a platform

Until 2000, collaborations weren’t on the cards for luxury brands. That changed when Marc Jacobs, creative director of Louis Vuitton at the time, enlisted artist Stephen Sprouse for the brand’s spring/summer 2001 collection. The graffiti-clad totes that emerged from the collaboration were a commercial success and a precursor of all the fashion link-ups to come.

Today, collaborations with artists, celebrities, influencers, streetwear labels and high-street fashion brands are the norm for luxury houses from Balenciaga to Zegna. Even luxury houses that could be considered rivals have partnered up. That was the case with Fendace, the mash-up between LVMH-owned Fendi and Capri Holding’s Versace unveiled last September, and the Balenciaga/Gucci “Hacker Project” launched earlier in the year (although in this case, the houses share Kering as a parent company). In both collections, the brands sampled and reworked the other’s signature motifs, silhouettes and logos.

“It says everything about how fashion has changed,” says fashion and retail consultant Robert Burke. “Designers now realise that they can feed off each other’s talent and creativity.”

At their core, collaborations are clever marketing ploys by brands that enjoy a similar level of commercial success and popularity. More interesting are the instances in which storied luxury houses lend their platforms and means to emerging designers.

In November 2020, Chinese designer Rui Zhou released her first short film, Emerald, the story of a rabbit with an emerald eye and the magical powers that it bestows on other creatures. The actions and thoughts of the animals, played by models clad in Zhou’s skintight knitted garments, are narrated in the style of a fairytale.

It’s a sweet and quirky story that in little more than three minutes offers a window into the aesthetic world of the emerging designer. “We never thought about doing a narrative [film] because we didn’t have a budget,” says Zhou on the phone from Shanghai, where she is based. “Then Gucci gave us this chance.”

Zhou, who founded her label Rui in 2019, was one of 15 young brands picked and financed by the Italian luxury house to create short films for a week-long digital “film festival” called GucciFest in the first year of the pandemic. The festival was followed, in September 2021, by the launch of Gucci Vault, an ecommerce concept store where products created by the same 15 designers were made available for purchase, alongside vintage Gucci items.

Described by Gucci creative director Alessandro Michele as “a space for expressive, aesthetic, and social contaminations”, Gucci Vault functions as a hyper-curated, Gucci-owned, multi-brand retailer. Effectively, Gucci is sharing its customer base with other designers, while giving them cachet by association. The emerging labels’ products are even styled with Gucci items, blurring the lines between the brands. It is perhaps the most remarkable example of how luxury labels, once territorial and closed off, have embraced a more open, collaborative and supportive ethos within the industry.

Gucci is not the only one lending a hand to younger talent. During Milan Fashion Week in February this year, Dolce & Gabbana hosted the debut show of Miss Sohee, the brand launched in 2020 by South Korean designer Sohee Park, in its Alta Moda premises. The Italian brand invited Park to use its ateliers to create accessories and lent archive fabrics that were upcycled in the collection. In the same week, Valentino showcased designer Marco Rambaldi’s catwalk show on the @maisonvalentino Instagram account as part of a larger initiative that will see the Italian brand spotlighting an emerging designer each season. Giorgio Armani lent his showspace to young Milanese designers in 2013.

These initiatives come at a time of particular need for emerging designers. The top luxury brands have increased their market share during the Covid-19 pandemic at the expense of independent brands.

London-based designer Bianca Saunders, who was part of GucciFest and Gucci Vault, describes the initiative as “a massive turning point” for her brand. Zhou says that the reverberations were felt across her business, from more Instagram engagement to increased retail orders.

For big players, lending their names to other brands comes with obvious reputational risks. What is the advantage for them? “Big brands can be very visible in amplifying small brands by giving them a helping hand and a platform, which can help consumers’ perception of them,” says Kathryn Parker, senior associate in luxury goods research at Jefferies. “When millennials and Gen Z are deciding which brands to buy from, they very much think about values rather than just products and marketing campaigns.”

Partnerships of this kind also allow luxury houses to build early relationships with promising designers who might eventually become candidates for in-house roles. In the case of Gucci Vault, they also serve to diversify the offer and price range.

This genuinely supportive environment is commonplace, especially across the younger cohort. Designer Hillary Taymour of Collina Strada has built her brand around a community of friends while London-based Phoebe English launched a WhatsApp group in 2019 called Fashion on Earth to share information with other designers about sustainable practices.

Like Saunders, who has often called on fellow designer Saul Nash to choreograph her short films and shows, they are inspiring examples of this new climate. Luxury brands are just starting to catch up.

“It speaks to the psyche of fashion today,” says Burke. “There is strength in numbers and supporting each other as opposed to being in a stand-off.” 

Stocks rose Monday amid a rally in Hong Kong spurred by China’s move to ease a dispute with the U.S. over audits. Treasuries fell on the prospect of sharp Federal Reserve interest-rate hikes to fight inflation. Chinese tech shares in Hong Kong rose 3% after Beijing sought to modify a rule that restricts offshore-listed firms from sharing sensitive financial data with foreign regulators. That may allow the U.S. to gain full access to audits, reducing the risk of Chinese firms losing their Wall Street listings. S&P 500, Nasdaq 100 and European futures were steady, while the dollar was firm. Traders weighed the prospect of stiffer sanctions on Russia over the war in Ukraine. Some European governments are pushing for new penalties due to reports that Russian troops executed unarmed civilians in Ukrainian towns.

Oil paused a retreat sparked by the U.S. announcement of an unprecedented release of strategic reserves to fight elevated energy costs.  The Treasury yield curve is flashing more warnings that economic growth will slow as the Fed raises rates to tame stoked in part by commodities. The two-year U.S. yield has exceeded the 30-year for the first time since 2007, joining inversions on other parts of the curve. The Fed minutes later this week will shape views on the odds of a half percentage-point rate increase in May and provide key details on how the central bank will shrink its balance sheet.  A strong jobs report Friday bolstered the case for the Fed to push up borrowing costs. The U.S. added 431,000 jobs in March while the unemployment rate fell to 3.6%, near its pre-pandemic low. In China, where markets are closed for a holiday, most of Shanghai’s 25 million residents are under some form of Covid lockdown. State media also reported a new subtype of the omicron variant.

• Reserve Bank of Australia rate decision, Tuesday
• Fed Governor Lael Brainard speaks, Tuesday
• Federal Reserve minutes, Wednesday
• China Caixin composite and services PMI, Wednesday
• EIA crude oil inventory report, Wednesday
• Philadelphia Fed President Patrick Harker speaks, Wednesday
• St. Louis Fed’s James Bullard, Atlanta Fed’s Raphael Bostic, Chicago Fed’s Charles Evans speak at separate events, Thursday
• Reserve Bank of India rate decision, Friday

Nikkei +0,01% HangSeng +1,67% CSI +1,27% Shanghai +0,94% Shenzen +0,47%

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S&P +0,19% Nasdaq +0,17% EuroStoxx +0,44% FTSE +0,43% Dax +0,59% SMI +0,68%

Macro :

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- TIT IM : KKR Plans to Abandon Telecom Italia Deal Without Due Diligence

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