Why You Always Have to Watch for a Change in Trend

Hands up if you have a spare US$4 billion to fund a European factory. Anyone?

Oh dear. It’s not going to be easy for Peter Carlsson. That’s the amount the former Tesla executive needs to set up a new lithium-ion-battery factory in Scandinavia.

Carlsson’s got his eye on the growth of electric vehicles; he wants to steal market share from existing Asian manufacturers. Apparently, he’s worried about Europe’s supply of the necessary strategic minerals needed to make the batteries as well.

This battery trend is getting very complicated and competitive. Last month came the news that hedge funds have been stockpiling cobalt — another strategic mineral lithium-ion batteries need — to cash in on the demand.

Most cobalt supply comes from the Democratic Republic of Congo. That’s not a country known for stability and respecting the rule of law. No wonder Carlsson is a little nervous about supply.

That’s not his only problem. Chinese firms have been locking up resources where they can. They’ve taken stakes in key lithium projects worldwide in recent years.

It’s unlikely there’ll be a shortage of supply if current trends in the lithium market persist. Bloomberg reports that Argentina could flood the world with lithium if rumoured projects go ahead.

There are already miners digging all over Australia and Chile, as well as the US, on the hunt for lithium. Will hindsight show lithium as the resource world’s next fad to complete a boom and bust cycle? Maybe. I’ve seen a few come and go in my time covering markets.

And yet Chinese firms are quite public about their ambitions to displace the South Koreans and Japanese as the premier global experts in batteries.

The trend to electric cars is here. What the cars need is batteries with the energy density to drive for longer periods. There’s no guarantee they’ll be lithium-ion batteries, though.

One Aussie company to keep an eye out for is 1414 Degrees. It’s hoping to smash the economics of lithium batteries by using silicon instead. It’s reported that it will look to raise cash this year and list on the ASX.

Silicon is not the only rival. Colleague Sam Volkering sent out a note recently to subscribers of his advisory service, Revolutionary Tech Investor, saying that the man who played a key role in inventing the original lithium-ion battery may be working on a new technology to make it redundant.

Tread carefully, as always, in the market. Lithium is hot now. I remember when that was true of copper, rare earths, oil…you get the point. The market is always moving. Catch the trends where you can, but be prepared to hop off if the wind changes.

You can apply the same principle to Australian retail. This can be for both the good and bad. I happened to see Beacon Lighting Ltd [ASX:BXL] in the press recently saying that it was finally free of the Masters hardware chain gouging its margins.

Beacon sells lighting fixtures, globes and fans. It also designs and develops its own products.

The liquidation of Masters hurt Beacon because Masters was offloading its stock at low prices. You can see how any liquidation is a bit of a nightmare for competitors.

Granted, eventually, they can take the market share that’s left behind. Before that happens, they have to withstand fire-sales. The business being liquidated snatches at whatever cash it can for its creditors.

Actually, I just saw this dynamic at work with the collapsed Pumpkin Patch chain. Pumpkin Patch sold cute children’s clothing and shoes at high prices. As the stores sold off, their remaining inventory was going for 70–90% off.

My partner and I scooped up a few things for our daughter Ema. Obviously, the remaining retailers can’t compete at those prices. They withstand the pain as best as they can, knowing that it can’t last.

The distressed selling from Masters took sales away from Beacon Lighting. It also hurt its margins, as the company was forced to drop prices to defend its market share.

That hurt the share price. Now Masters is gone. Beacon has every opportunity to get back on track.

The company released its earnings announcement in late February for the first half of the financial year. Sales were up 10.9%, but profits were down on lower margins.

That’s all in the share price now. What’s of interest is Beacon’s potential growth from here. The company plans to open six new stores in Australia per year. 2017 could see a record number of new openings for the company.

It’s also launched an international division, as well as an energy-efficiency solar component, to the business. A strong housing market will flow to Beacon, both in terms of orders and consumer confidence.

I don’t mean to imply Beacon as any sort of recommendation. I think Beacon is a handy stock to keep an eye on to track the housing market from a slightly different angle. It’s a national chain.

Growing sales and a rising trend in price suggest calmer seas than some headlines would have you believe. Furniture retailer Nick Scali is rising higher after its recent positive earnings announcement too. I take these as positive signals for Aussie real estate and consumer confidence.


Callum Newman,
Editor, Cycles, Trends and Forecasts

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Callum is a feature editor for Money Morning. He covers areas of interest arising from world markets and the global economy that could mean new investment opportunities for Aussie investors.

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