BMW Carbon Lets Vehicles Follow Road Bicycle to Lightness: Cars
Comment of the Day

June 15 2011

Commentary by Eoin Treacy

BMW Carbon Lets Vehicles Follow Road Bicycle to Lightness: Cars

This article by Chris Reiter for Bloomberg may be of interest to subscribers. Here is a section:
Bayerische Motoren Werke AG is spending $100 million to gain an edge on German luxury rivals by entering the commodities business. BMW is building its own carbon fiber factory, the first carmaker to do so, to secure supply of the lightweight material and lower expenses by refining the production process. Even though carbon fiber has cost 20 times as much as steel, BMW is embracing the material to reduce the weight of its electric cars and counteract the added heft of their batteries.

Daimler AG's Mercedes-Benz and Volkswagen AG's Audi have joined BMW's pursuit of the material, which is 50 percent lighter than steel, as they strive to meet tighter environmental rules. BMW has partnered with SGL Carbon SE, the only Europe- based producer of the material, to build the plant, prompting VW to buy 9.9 percent of SGL to ensure its own access. The battle has made SGL the world's most expensive carbon-fiber company.

"The capacity to produce carbon fiber isn't that big, so manufacturers are looking to secure access," said Robert Outram, program manager for automotive chemicals with Frost & Sullivan in Oxford, England. "There are not many people who do it well. It's a long-term strategy play."

VW's SGL investment prompted Susanne Klatten, a member of the Quandt family which is BMW's largest shareholder, to raise her SGL holding to 27 percent from 24 percent. The Wiesbaden, Germany-based company's price-to-earnings ratio of 43 is double the value of rivals Toray Industries Inc., Teijin Ltd. and Hexcel Corp.

Eoin Treacy's view The viability of electric cars is predicated on being able to create a battery efficient enough to power them over long distances. The problem with such endeavours is the power to weight ratio involved. Batteries are heavy and while capital is being poured into research to find ways of making them lighter, more efficient and quicker to charge, there is still a long way to go.

There is reason to be optimistic about the potential for battery technology to develop but over a medium to long-term horizon rather than the short term. As a result companies with the desire to build electric cars have gone for the alternative of making everything else lighter including the body of the car. (Also see David's piece on carbon fibre in Comment of the Day on July 10th 2007).

German listed, SGL Carbon rallied impressively from March to hit a peak near €40. It pulled back for a few weeks, unwinding at least part of its overextension relatively to the 200-day MA, and found support near €33.25 a month ago. It has rallied to retest the recovery peak and a sustained move below the May low would be required to question medium-term upside potential.

Formosa Plastics is a substantially larger, more diversified company. It has a 12-month yield of 6.15% and an indicated yield of 3.62% which is competitive with the Taiwanese market generally. The share remains in a relatively consistent medium-term uptrend and has been clear outperformer. It hit a peak below TWD120 in May and remains in a period of mean reversion. A sustained move below TWD 100 would be required to question medium-term uptrend consistency.

Toray Industries has rebounded from its post tsunami decline faster than most Japanese shares and continues to consolidate in the region of ¥600. A sustained move below ¥550 would be required to question medium-term scope for an upward break. Teijin Ltd has a very similar pattern.

Hexcel Corp has posted a progression of higher reaction lows since early 2009 and has found support in the region of the 200-day MA on successive occasions. A sustained move below $18.50 would be required to question medium-term scope for additional higher to lateral ranging.

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