Daily Update: June 29, 2023

Start every business day with our analyses of the most pressing developments affecting markets today, alongside a curated selection of our latest and most important insights on the global economy.

Electric Vehicles Run on Private Equity

Electric vehicles are an interesting business. On the positive side, they emit no carbon as they don’t use gasoline, break down less due to having fewer moving parts and have the potential to disrupt the automotive industry. On the negative side, there isn’t enough infrastructure for EVs. There aren’t enough battery metals for anticipated demand, and the industry hasn’t aligned on common technologies or standards. The massive automotive industry, with billions of dollars in annual sales, doesn’t want to be disrupted. This kind of big-risk, big-reward opportunity is a natural fit for private equity. Unsurprisingly, the private equity sector has invested heavily in EVs.

According to S&P Global Market Intelligence, manufacturers of EVs, batteries, energy storage systems, and related materials and components raised nearly $60 billion in debt and equity through July 2022 from investors including private equity firms. In Europe, where EV adoption is significantly ahead of the US, private equity and venture capital investment in the EV industry grew to $964.7 million in the first quarter, compared with $374.6 million in the same period a year earlier. By contrast, manufacturers of internal combustion engines (ICEs) received only $59.6 million in the first quarter from private equity investors.

Michael Robinet, executive director of automotive advisory services at S&P Global Mobility, appeared on the “Private Markets 360 podcast to discuss private equity investment in EVs. “Private markets are looking at a couple of different sectors. They’re looking at some new opportunities — for instance, the charging structures,” Robinet said. “They’re also looking at the upstream refinement of minerals and putting in investments to bring that along, knowing that that’s going to have a long tail to it as well.”

So far in 2023, the two biggest private equity investments went to companies that operate EV charging stations. Private equity firms are also playing an increasing role in financing new critical mineral projects, as banks have been reluctant to finance raw material extraction for still-evolving technologies. Some business owners have decided to postpone their plans to sell transportation assets due to tight conditions in debt markets.

Meanwhile, private equity funds have begun to play a more active role in the legacy ICE manufacturing industry. While tier 1 and tier 2 manufacturers of ICE components may end up with stranded assets, the margins remain appealing while their businesses last. ICE margins stand at approximately 15%-25%, versus EV margins of about 5%. Private equity funds have been looking at those margins and buying ICE suppliers to consolidate suppliers and rationalize operations. 

“We’ve seen some sectors that are seeing some consolidation already: the engine component space,” Robinet said. “We know that there are major tier 1 suppliers, the largest suppliers that supply to the vehicle manufacturers. Many of them that were in the engine component, or powertrain, space decided to spin off those operations or sell them off to another company, sometimes private equity.”

Today is Thursday, June 29, 2023, and here is today’s essential intelligence.

Written by Nathan Hunt.

Economy

US Dollar Falls As Biggest Fed Rate Hikes Have Likely Passed

The US dollar is falling against its G10 peers, a boon for domestic companies with relatively high exposure to overseas markets, as the Federal Reserve has likely already enacted its largest increases to benchmark interest rates, even with future rate hikes expected later in 2023. The US dollar index, which measures the greenback against a basket of six G10 currencies, is down nearly 8% from Nov. 2, 2022, when the Fed approved a fourth-consecutive 75-basis-point rate hike to bring the benchmark fed funds rate to a range of 3.75% to 4.00%.

—Read the article from S&P Global Market Intelligence

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Capital Markets

Credit Conditions: Credit Conditions Europe Q3 2023: The Slow Burn of Rising (Real) Rates

Credit conditions will continue to tighten as central banks maintain their focus on curbing inflation and ensuring price stability, lending banks become more risk averse, funding costs rise and the focus on credit quality increases. Access to, and cost of, speculative-grade issuance is likely to become more problematic as we edge closer to 2024.

—Read the report from S&P Global Ratings

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Global Trade

Yemen's Oil And Gas Sector Faces Precarious Future As Peace Talks Intensify

Yemeni oil and gas production has slowed to a trickle in recent months after the Iran-backed Houthis attacked oil export terminals to cut off the Saudi-backed government's vital revenue source, despite renewed hopes for a peaceful resolution to the country's eight-year war. Although the violence has cooled since landmark negotiations began in April between Riyadh and the Houthis — who control a large swath of northern Yemen — analysts told S&P Global Commodity Insights that oil production and investment would not increase until a comprehensive peace agreement is in place.

—Read the article from S&P Global Commodity Insights

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Sustainability

Carbon Body VCMI Releases Code To Help Buyers Navigate Offsets

The Voluntary Carbon Markets Integrity Initiative, or VCMI, launched its Claims Code of Practice on June 28, which outlines guidelines for companies to credibly make voluntary use of carbon credits. This comes as the voluntary carbon market finds itself mired in a credibility crisis, as increased scrutiny over the efficacy of some carbon offsets and projects has led to both a steady fall in liquidity and confidence, and a downward spiral in the prices of carbon credits.

—Read the article from S&P Global Commodity Insights

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Energy & Commodities

A More Volatile Normal For Food And Agricultural Commodities

Inflation has been the central economic story of the last year, with food prices perhaps drawing the most attention. Many consumers in the US and Europe are encountering fast-rising food prices at supermarkets and there is no shortage of articles and op-eds (and blog posts) wondering when consumers will ultimately see relief. Food companies and retailers are also facing increased public pressure as commodity prices, which were pointed to as the key driver of inflation, have fallen from their peaks last year.

—Read the article from S&P Global Commodity Insights

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Technology & Media

Fuel for Thought: The Transformation of Auto Retail — Bricks, Clicks, and People

While most other industries have transitioned to a digital model for more than a decade — from travel services to consumer-packaged goods to banking — the car-buying process has remained a very traditional physical process. Until now. No-haggle pricing, direct-to-consumer and the agency model are new retail concepts often referenced in an EV context. But is selling EVs really all that different from selling ICE vehicles in an omnichannel environment?

—Listen and subscribe to Fuel for Thought, a podcast from S&P Global Mobility

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