Companies buy into suppliers to secure deliveries, hit green targets
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[July 21, 2023] By
Clara Denina and Sarah McFarlane
LONDON (Reuters) - Major brands, including the investment arm of the
IKEA group, are following automakers' lead in snapping up stakes in
suppliers of raw materials and energy, seeking greater control over
their production to meet emissions targets and limit disruptions.
After global supply chains buckled under pressure from the coronavirus
pandemic and the war in Ukraine, a wider array of companies are
embracing vertical integration and investing in suppliers of renewable
energy, metals, agricultural products and many more.
In the past six months, more than $4 billion was spent by firms
investing in their supply chains across industries including food,
batteries, chemicals, autos, mining, and waste and recycling, data from
market intelligence platform Climate Tech VC shows.
While global supply networks recover from the pandemic shock, fresh
impetus is coming from tougher environmental standards, which drive
companies to invest in new technologies to reduce their and their
suppliers' emissions.
"We are in the fastest transition in our industry ever... We are sending
clear signals to the innovators in our supply chain that we will support
them," said Andreas Follér, head of sustainability at truck maker Scania.
"So in battery, steel, aluminum and cast iron we will only source green
materials and technologies by 2030," Foller told Reuters.
Efforts to reduce reliance on China and Russia also play a role, even
though for many buying into their supply chains could be a big and
costly leap into the unknown.
"The events of the last three years have taught businesses a lot about
the fragility of supply chains. Vertical integration is first and
foremost a strategy that minimizes risk of disruptions," said Rebecca
Campbell a partner at White & Case law firm that advises companies on
such deals.
Export controls Beijing is due to impose next month on
gallium and germanium, used in the semiconductor and defense industries,
are a case in point.
China's move took end-users in multiple sectors by surprise, with some
fearing more curbs could follow from the world's largest producer of
many raw materials.
RETAILER-TURNED-SHOPPER
Although not a new phenomenon, control and ownership of key aspects of
production have made a comeback since the pandemic's outbreak in 2020,
with global automakers, including GM and Stellantis, under added
pressure to go electric fast, investing in lithium, copper and nickel
mines.
Other sectors, including retail, are also shopping around.
The IMAS Foundation, the investment arm of furniture retailer IKEA's
owner, spent over 1 billion euros ($1.12 billion) on "decarburization
assets and strategies", including stakes in steelmaker H2 Green Steel
(H2GS) and battery manufacturer Northvolt.
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A view of power-generating windmill
turbines owned by Ikea Retail amid wheat fields near Rymanow,
Poland, June 12, 2023. REUTERS/Kuba Stezycki/
The foundation told Reuters it would also consider further
investments in producers of steel, construction and green aluminum
produced with hydropower or from recycled materials.
"In times of de-globalization and higher geopolitical risks, the
security of supply has become more important," it said in an email.
Both H2GS, which is building a hydrogen facility powered by
renewable energy, and Northvolt are based in Sweden.
Scania's Foller told Reuters that the Swedish truck maker, which is
also an investor in H2GS and Northvolt, was deliberately seeking
some investments located closer to its home base to support its
efforts to cut carbon emissions.
Scania said that following its 10 million euro ($11.15 million) seed
investment in H2GS in 2021, it has entered a steel supply agreement
from 2027.
In the aviation industry, airlines have started to invest in fuel
production, concerned about insufficient supply of biofuels which
several countries, including Norway, Germany, Indonesia and Britain,
will require to be part of jet fuel mix.
RISKY CYCLES
United Airlines in March invested in an algae-based fuel producer,
Britain's Jet2 has invested in a plant converting landfill waste
into fuel, while Hungary's Wizz Air invested in a Bristol-based
company converting sewage sludge into fuel.
"They're still taking risk on supply in a business they are not
experts in," said Maybel Saleh, EMEA managing director for aviation
at Citi.
Supply chain investments are inherently risky, partly due to the
cyclical nature of commodity markets, and might only work as
temporarily to resolve bottlenecks and polish environmental
credentials, say auditors and lawyers who assist companies on such
transactions.
"Margins rise and crash with volatile prices," White & Case's
Campbell said. "Equity investments that appeared sage in June 2023
may look foolish on a corporate balance sheet in 12 months' time."
While companies will keep investing in their suppliers in the short
to medium term, the market will eventually reach saturation, said
Jon Chadwick, global energy transition lead at
PricewaterhouseCoopers.
"That's when the shareholder pressure will come back to say: 'we're
not getting the returns on these, how do we start to divest?'"
($1 = 0.8967 euros)
(Reporting by Clara Denina and Sarah McFarlane; additional reporting
by Helen Reid; Editing by Veronica Brown and Tomasz Janowski)
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