production capacity

The Commodities Feed: USD boosts the complex The commodity complex continues to move higher, aided by the weakness seen in the USD since the US CPI release. For oil, supply disruptions have provided a further boost to the market.   Energy – Oil supply disruptions grow Oil continues to move higher thanks to tailwinds from the below consensus CPI report earlier this week along with weakness in the USD. ICE Brent is now trading above US$81/bbl, the highest levels seen since late April. Brent is set for its third consecutive week of gains. It is not just macro factors driving crude at the moment. Chinese trade data for oil was constructive with flows significantly higher year-on-year and also up month-on-month. In addition, there are some renewed supply concerns. Both Libya and Nigeria are seeing disruptions at the moment. In Libya, both the Sharara and El Feel oil fields are in the process of being shut down due to protests spreading in the country. These fields have a combined production capacity of around 370MMbbls/d. Meanwhile in Nigeria, Shell has suspended operations at its Forcados oil terminal due to a possible leak. The terminal was set to ship 220Mbbls/d of crude in July. Combined, these disruptions are significant and will be felt in a market that is already set to tighten. There is also uncertainty over whether we will see reduced appetite for Russian crude oil, given that Urals are now trading above the G7 price cap. Western shipping and insurance services can only be used for crude priced under US$60/bbl. Russia has tried to blunt the impact of the price cap by securing alternative shipping capacity, but only time will tell how successful it has been in doing so. Both the International Energy Agency (IEA) and OPEC released their monthly oil market reports yesterday. The IEA revised lower its demand growth forecasts for 2023 by 220Mbbls/d to 2.2MMbbls/d, which still leaves oil demand this year at record levels. This should also mean that the oil market still tightens up over the second half of 2023. As for 2024, the IEA expects oil demand to grow by 1.1MMbbls/d. OPEC are more bullish on oil demand, revising up their demand growth forecasts for 2023 slightly to 2.44MMbbls/d, whilst for 2024 the group expects oil demand to grow by 2.25MMbbls/d. This is quite aggressive when considering the uncertain macro outlook. In Europe, refined product inventories in the ARA region have declined for the fifth consecutive week, falling by 53kt over the last week to 5.65mt. Gasoline stocks fell by 30kt over the week to 1.34mt, although stocks are still comfortable and well above the 5-year average. However, middle distillates continue to tighten. Jet fuel stocks in ARA fell by 20kt to 730kt, which is the lowest level seen at this stage of the year since 2018. Meanwhile, gasoil inventories fell by 29kt over the week to 1.93mt, which is around 371kt below the 5-year average. These draws continue to offer good support to the gasoil market, with the crack remaining above US$20/bbl whilst the prompt time spread remains in backwardation.

Metals and global supply chain vulnerabilities Metals are another obvious vulnerability in the global economy, particularly those linked to the green transition. Scarcity due to a lack of production capacity and/or geopolitics are important risks. The challenges in scaling up the production of electric vehicle batteries are a good example, as we highlighted in a recent report. Nickel-based batteries, currently favoured for their superior driving range, not only face constraints from long lead times on new mining development, but 20% of high-grade nickel, the type used in batteries, is sourced from Russia, and trade restrictions are also a key risk for supply. Supply chains of alternative battery technologies – lithium iron phosphate (LFP) and sodium iron (Na-ion) – are almost entirely reliant on China. Geopolitics is clearly a risk here too. That battery story can be expanded to other metals associated with the green transition. While lithium and nickel are the most exposed to critical supply risks, according to analysis by the US Department for Energy (chart below), plenty of others are seen as near-critical. Those include aluminium, where more than 80% of inventory on the London Metals Exchange is Russian material. Meanwhile copper prices – currently dampened by China’s weak recovery – are more likely to rise in the longer term, in part owing to a lack of investment in mining facilities in South America.   Nickel and lithium are most exposed to critical supply risks   Against this backdrop, near-shoring (or “friend-shoring”) will undoubtedly rise – though it’s early days and evidence of companies exiting the likes of China in favour of alternatives is mixed. Green industrial policy, like the US Inflation Reduction Act, is also beginning to reshape supply chains at the margin. Near-shoring is likely to be a slow-moving ship, but ultimately, if firms are trading lower costs for greater resilience, that’s likely to be inflationary. A recent ECB working paper concludes that re-shoring increases the price level for both producers and consumers, particularly in trade-intensive manufacturing. Is any of this capable of pushing inflation to the sorts of levels seen in 2022? Perhaps not. However, the glut of new vehicles and the resulting demand for used cars alone succeeded in adding more than a percentage point to US CPI in 2021. That showed that disruption for key products is capable of generating sizable upward inflation moves.

Metals and global supply chain vulnerabilities Metals are another obvious vulnerability in the global economy, particularly those linked to the green transition. Scarcity due to a lack of production capacity and/or geopolitics are important risks. The challenges in scaling up the production of electric vehicle batteries are a good example, as we highlighted in a recent report. Nickel-based batteries, currently favoured for their superior driving range, not only face constraints from long lead times on new mining development, but 20% of high-grade nickel, the type used in batteries, is sourced from Russia, and trade restrictions are also a key risk for supply. Supply chains of alternative battery technologies – lithium iron phosphate (LFP) and sodium iron (Na-ion) – are almost entirely reliant on China. Geopolitics is clearly a risk here too. That battery story can be expanded to other metals associated with the green transition. While lithium and nickel are the most exposed to critical supply risks, according to analysis by the US Department for Energy (chart below), plenty of others are seen as near-critical. Those include aluminium, where more than 80% of inventory on the London Metals Exchange is Russian material. Meanwhile copper prices – currently dampened by China’s weak recovery – are more likely to rise in the longer term, in part owing to a lack of investment in mining facilities in South America.     Against this backdrop, near-shoring (or “friend-shoring”) will undoubtedly rise – though it’s early days and evidence of companies exiting the likes of China in favour of alternatives is mixed. Green industrial policy, like the US Inflation Reduction Act, is also beginning to reshape supply chains at the margin. Near-shoring is likely to be a slow-moving ship, but ultimately, if firms are trading lower costs for greater resilience, that’s likely to be inflationary. A recent ECB working paper concludes that re-shoring increases the price level for both producers and consumers, particularly in trade-intensive manufacturing. Is any of this capable of pushing inflation to the sorts of levels seen in 2022? Perhaps not. However, the glut of new vehicles and the resulting demand for used cars alone succeeded in adding more than a percentage point to US CPI in 2021. That showed that disruption for key products is capable of generating sizable upward inflation moves.        

Mabion – untapped potential The turbulent period of the COVID-19 pandemic had its significant impact on the biotechnology sector. For Mabion, it became the gateway to signing a deal with Novavax and completely changing its strategy. From a company developing its own biosimilar drug, Mabion wants to transform itself into a leading CDMO provider on the European market in the area of biological drugs. Biologics CDMO market in the long term is expected to grow low double digits, as demand for outsourcing CDMO services is systematically growing. In our view, signing contracts with brand new customers will be the catalyst for a change in the company's perception. Based on our forecasts, we value the company at PLN 22.9 over a 9-month horizon.   1H2023 results - good half-year ahead of planned shutdown In 1Q2023, Mabion realized revenues of PLN 39.5 million, operating profit of PLN 18 million. The EBITDA result was PLN 19.8 million, and net profit was PLN 16.5 million. We expect 2Q23 to be weaker than the first quarter, but in our view the entire first half of 2023 will be very good in terms of results. Given that the company is planning a shutdown in the second half of the year, the H1 EBITDA result could be a major part of the full-year result. In 2Q23, we expect revenues of PLN 34.4 million, EBITDA of PLN 13 million and net profit of PLN 9.9 million.   Untapped potential Mabion, which specializes in the field of monoclonal antibodies, will have a production capacity of almost 10,000 liters and modern equipment after the ongoing modernization of its production facility. The value of the company's fixed assets (excluding depreciation and amortization) after the PLN 100 million investment will increase to PLN 260 million. The company's market value of PLN 290 million and EV/EBITDA ratio of just over 6x, with median ratios of peers at over 14x, leads us to believe that the company has a large untapped potential for value growth and that it is valued slightly above replacement cost. However, to bring out its potential, Mabion needs to diversify its customer portfolio and prove that it can win other orders beyond pandemic-driven Novavax contract.   Biologics CDMO market is attractive, but needs to recover from pandemic Market analyses indicate that in the long term, the market for biologics CDMOs is very attractive - Prophecy Market Insights estimates the market's CAGR between 2023 and 2032 at 11.8%. However, Mabion has had to build its reputation and recognition there and seek new customers in a challenging post-pandemic period. Large European companies such as Lonza Group and Catalent are now reporting pressure on margins and pointing to post pandemic revenue declines. In our view, however, the experience of working with Novavax indicates that Mabion is a flexible enough organization that it will be able to adapt to customer expectations and successfully win new orders.   Risks to valuation and recommendation The main risk factor we see for our forecasts and valuation is the risk of failing to win orders to eventually replace the contract with Novavax. Our valuation is based on DCF (PLN 18.3, 75% weight) and peers (PLN 29.1, 25% weight) which implies a valuation over a 9-month horizon of PLN 22.9/share.    

According to the latest CFTC report, the past week was relatively calm in the futures market. One notable change was the value of the net short yen by position, which corrected by 1.2 billion, while changes in other currencies were minimal. The US dollar's net positioning, after sharply rising the previous week, saw a 0.3 billion correction, bringing it to 8.5 billion, indicating a firm speculative positioning for the dollar. Other factors that supported the greenback are the drop in the number of long positions in oil and especially gold, with a weekly change of -4.8 billion, implying further declines. This often signifies growing bullish sentiment for the US dollar.   The University of Michigan's Consumer Sentiment Index fell to 63.0 in October, the reading was below the forecast of 67.2, reaching the lowest level since May. This marks the third consecutive decline and can be largely attributed to rising gas prices and a decline in the stock market. However, consumer spending remains at a good level despite weaker sentiment in recent months. China's consumer price index remained flat from a year earlier in September, while the Producer Price Index fell by 2.5% as concerns linger about weak demand. Both figures were slightly below consensus estimates. This week's data on industrial production, retail sales, and third-quarter GDP will provide a clearer picture of the impact of the government's additional stimulus measures. The conflict between Israel and Hamas has quickly escalated into the bloodiest clash in the past 50 years from both sides. As both Israel and Iran are minor natural gas exporters, European natural gas prices rose by about 40% last week. Oil markets remain calmer due to reduced demand and excess production capacity. US consumer price inflation for September shows headline prices rose 0.4% month-on-month (consensus 0.3%), and the core index slowed down from 4.3% year-on-year to 4.1% year-on-year, which is a positive sign for the Federal Reserve. There is growing confidence that the Fed's rate hike cycle is coming to an end.   The British pound corrected slightly above the resistance level at 1.2305 and then resumed its decline. It is assumed that the local peak has been formed, and the sell-off will continue, with the nearest target being 1.2033 (the low from October 4). In case it breaks below this level, selling pressure may intensify, with the long-term target being 1.1740/90.  

Q3'23 EBITDA below expectations; 2023-26 strategy announcement Q3'23 results are below our expectations at the revenue/EBIT/EBITDA level. Revenue was below our expectations (PLN -0.4m) mainly due to the recognition of a lower amount of grants in the current period. The company recognized higher-than-expected cost of sales (PLN +0.16m), lower R&D costs (PLN -0.23m) and higher general and administrative expenses (PLN +0.23m), which ultimately translated into EBIT/EBITDA below our expectations. The slightly lower difference on net income is a result of recognition of higher-than-expected financial income (PLN +0.1m).     Revenue. Revenues from sales of products and services were in line with published preliminary estimates (-1% y/y to PLN 3.6m in Q3'23). The product sales line posted a 76% y/y increase in revenue to PLN 2.5m, and the R&D line saw a 50% y/y drop in revenue to PLN 1.1m. Sales and rental of printers generated PLN 2.3m in revenue in Q3'23 (+71% y/y), and sales of nanoinks generated PLN 0.2m in revenue in Q3'23 (-50% y/y).   Costs. On the cost of sales side, R&D expenses were maintained at a lower level y/y (PLN -0.19m), while cost of goods sold increased (in line with the increase in product sales). General and administrative expenses increased y/y and q/q in Q3'23 mainly due to intensified efforts to commercialize the developed technology.   Financial activities and net profit. The balance on financing activities amounted to PLN 0.1m in Q3'23 vs. PLN -0.1m in Q3'22. Income tax amounted to PLN 0m, resulting in a net loss of PLN 0.8m in Q3'23 vs. a net profit of PLN 0.5 million in Q3'22.   Cash flow from operations amounted to PLN -2.4m in Q3'23 (vs. PLN 0.9m in Q3'22), which was negatively affected by an increase in inventories (stocking up for new orders), an increase in receivables (contracted equipment sales) and a decrease in payables. Capex was PLN -2.7m in Q3'23 (PLN +1.5m q/q vs. PLN -0.7m vs. Q3'22).   The company approved a strategy for 2023-26 which aims focus on two main business areas - business development and sales, and operational development to increase production capacity in all three business lines. The company reiterated the goal of increasing revenues to PLN 100m by the end of 2026 and achieving the first industrial-scale deployments of XTPL technology. In addition, it plans to expand the projects under development into new industries in the form of telecommunications and biosensors, as well as to further expand its international distributor network and establish stationary sales centers in key technological destinations: USA, Taiwan, South Korea.   NEUTRAL. We expect a neutral investor reaction to the company's results, which are below our expectations. We note that current results have little impact on the company's valuation, and in the short term, results are likely to be burdened by investments in scale growth and product commercialization. Printer sales are taking an increasing share of the sales structure, which is a positive sign. Two industrial modules were sold in Q3'23, indicating progress in industrial deployment processes. For the full year, the company should sell 13 devices. The assumptions of the published strategy are in line with previously communicated targets. Printer sales should accelerate in the coming quarters, but we expect further investment in sales development, which could be a drag on results. Important for the company's valuation in the medium term will be information on progress in implementation projects and progress in printer sales.