DETROIT () -- I've noticed over the years that whenever I write or speak about a metal, which is not well known to the investment community, or the public, but I think should be, I can gauge the interest I have generated by the length of time between my article being published, or my speech being concluded, and the first question: "What's the play in...?" So I am going to use this article to inaugurate a new policy. I will tell you my answer to the question above before I start. The answer is Honda [NYSE:HMC].
Before I explicate my reasoning let me give you some background to show you how I reached this conclusion:
First of all the Honda Motor Co., Ltd., a truly global Japanese owned and operated, and Japan based, OEM car, truck, motorcycle, motorbike, aircraft and boat maker is, when all of its various internationally located company owned and operated engine plants' production is totalled, the world's largest manufacturer of internal combustion (IC) engines. Honda makes 14 million IC engines a year just for cars and trucks; it makes a similar number of engines, in addition, for the other vehicle applications listed above.
Honda's U.S. website, prominently notes that it first began marketing an in-house designed and built engine in 1974, which was able to meet the then newly mandated, required for 1976, U.S. emissions requirements for an IC engine without the need for a catalytic converter.
Late last year, the engineer who was in charge of the development of that 1974 low emission IC engine, now the CEO of Honda in Japan, Takeo Fukui, announced that Honda would market in the 2010 model year a four cylinder IC engine, which would meet 2010 U.S. mandated emissions levels without the need for a catalytic converter, or, in case the more stringent California emissions rules for 2010 were adopted, it would require a lightly loaded catalytic converter, and in either case a small car being powered by this new engine would use less platinum group metals, as little as none at all, than used by Honda in 2008 for the same displacement engine running at the same weight loads.
While four of today's Big Five global car and truck makers, General Motors (U.S.), Toyota (Japan), Ford (U.S.), Honda (Japan) and the Nissan-Renault Group (Japan-France) have made public commitments, withdrawn them, and made them again to market hybrids, plug-in hybrids, all battery powered, fuel cell powered and/or hydrogen fuelled vehicles, utilizing what they call light(er) weight, higher power density, lithium chemistry based rechargeable storage batteries, Honda has been more circumspect.
Admittedly last year Honda announced that it would produce only hybrid motor vehicles by 2018, and although I cannot find where, or if, it has withdrawn from that commitment, I do find that just last week the brilliant engineer-CEO of Honda, Mr. Fukui, made an announcement about a production ready next generation affordable Honda hybrid that may be ignored by the herd of OEM automotive CEOs and their faithful industry press, but must be carefully examined by the readers of Resource Investor.
On March 24, 2008, Automotive News, the bible of the American OEM automotive industry, carried a story entitled, "." With the subheading, "Honda won't follow rivals down lithium road-for now."
The article is worth reading in its entirety just to get the viewpoint of a leader, not a follower, in the global OEM automotive industry, on practical step-by-step solutions to political issues of correctness that manifest themselves as engineering problems such as emissions reduction and reduced dependence on imported fuel.
Honda's CEO, Mr. Fukui. Does not, in any way, dismiss rechargeable lithium storage batteries as a possible future solution to the industry's political problems rather he says:
"Lithium ion batteries are still not usable from our [italics mine] perspective. In terms of reliability and durability, I must say there still remain some concerns. I don't think they are necessarily best suited for mass-produced vehicles.... Timing wise, I would say there is no possibility we would resort to lithium ion batteries in the new hybrid due next year ."
Investors may want to hedge their bets on lithium ion batteries. This would mean holding some Honda shares in a portfolio built on rosy predictions of the imminent arrival of hybrid and battery powered cars and trucks utilizing only rechargeable lithium ion batteries.
You should be aware of the fact that everyone but Honda has burned their bridges to being able to build or obtain the raw materials to build rechargeable nickel metal hydride batteries.
They have done this by what is known in the industry as "single sourcing" lithium batteries for limited mass production. General Motors has chosen Hitachi of Japan as its first lithium ion battery supplier, Daimler has chosen Continental AG for the same role, Nissan has chosen NEC (Nippon Electric Company), Mitsubishi has partnered with GS Yuasa Corp. (Japan) and Toyota has bought out, and taken the work in-house from, its original battery development partner, Panasonic (a unit of Matsushita).
Panasonic also originally completed for Toyota the development of the first truly mass produced battery for hybrids based on the rechargeable nickel metal hydride battery invented at Detroit's Energy Conversion Devices, Inc. in the 1980s, and tested and rejected originally by GM for upgrading the all electric EV1 thus giving Toyota the opening to introduce the original Prius hybrid, without any competition.
The Prius assembly plant in Japan has so far used one and 1.5 million rechargeable nickel metal hydride battery packs and achieved with them some of the lowest numbers of service issues ever seen in the OEM automotive industry. In fact most of the original Prius rechargeable nickel metal hydride battery packs have exceeded their 8-year 100,000 mile warranty and are still functioning.
Honda, almost alone today, still has multiple suppliers looking at lithium ion batteries for the future, which emphasizes that Honda is still sceptical about the practicality of the technology, and it is still working with the now Toyota-free Matsushita on advanced nickel metal hydride batteries as well as with Japan's Sanyo, which today supplies General Motors with all of the nickel metal hydride batteries it currently uses on all of the hybrids it sells at the moment. GM, for one, claims that its nickel metal hydride battery packs come from Chevron Ovonic Battery SYStems (COBASYS), but, in fact, COBASYS only assembles components mainly from Sanyo and certainly does not manufacture state-of-the-art nickel metal hydride electrode alloys.
The main drivers for a battery system to replace nickel metal hydride are range and performance. The current Prius under battery power alone can only travel one or two miles, but when its hybrid system is functioning it can consistently run at 80 miles per hour and its (gasoline) fuel requirement is one gallon for every 46 miles at 80 miles per hour; a friend of mine just got a 2008 Prius and these results are his in trips between Detroit and Washington, D.C. (1,200 miles round trip) and between Detroit and Orlando, Florida (2500 miles round trip). I believe that the car has a relatively small gasoline tank, but the Prius appears to have a range of nearly 300 miles even with a 6-gallon fuel reservoir!
Honda believes and its CEO states that the bulk of the mass produced cars of the future will be smaller and lighter than those of today, and that the product mix of the future will be modelled on the needs of western city drivers and short range commuters and the requirements for travelling on the congested roads of Asian countries such as India, China and even Russia where cars will mostly be for transportation rather than status. Honda therefore sees the move to lithium ion batteries, which is only to allow larger cars to be hybrids and still mimic the performance and range of their IC powered predecessors, as premature, considering the safety and reliability issues, which have by no means been resolved.
Honda's bet is that its model of the future market is correct and that until and unless lithium ion technology gets safer, less prone to catastrophic failure, and cheaper to build the best bet is to rely on the safety, reliability and range obtainable with current nickel metal hydride technology. It is difficult and perhaps foolhardy to dismiss the conclusions of the world's largest manufacturer of high quality IC engines, but it is also foolish to simply ignore Honda's vested interest in promoting the continued use of IC engines.
So now, why is Honda a lanthanum play? Let me explain. A current production Prius nickel metal hydride battery pack uses 30 kilograms of nickel, 2 kilograms of cobalt and 12 kilograms of lanthanum because the active hydrogen storage alloy in the battery is either LaNi4.5Co0.5 or (Ce, La, Nd, Pr)Ni5.
The second formula above uses (Ce, La, Nd, Pr) as shorthand for a rare earth alloy called mischmetal (German for 'mixed metal'), which is a made from mixed rare earth oxides, which have not been expensively separated.
The rare earth metals are known to chemists as the 'lanthanides', because they form a group of elements with very similar chemical properties, and the similarity of chemical properties begins with the chemical element lanthanum and continues on for the next 14 elements as the atomic numbers increase from 57, lanthanum, to 71, lutetium. These elements were called rare earths not because they were uncommon but because it was once rare to see ores of them and even rarer to see them as individually pure prior to the modern age of commercial ion exchange process chemical separation and purification. It is still expensive and time consuming to separate them and purify them individually, so that it has been common to use mischmetal in nickel metal hydride batteries just to hold down costs.
A relatively new use for the rare earth metal neodymium has made the use of mischmetal for batteries wasteful. In 1984, General Motors and Sumitomo invented the neodymium-iron-boron high field strength permanent magnet; this has made possible many design improvements in miniature electric motors so that thinner doors, for example, have become common even on cars that have power windows and locks.
Neodymium demand for permanent high strength magnets has caused its price to skyrocket during the last year reaching a level currently of four times the price it had just a year ago. The revenues from neodymium today constitute 25% of the total revenues generated from the production and sale of rare earth metals; it has been predicted that this percentage could be 50% by 2014.
The demand for neodymium has increased the supply of lanthanum, because neodymium is almost always found associated with lanthanum, as well as cerium and praseodymium.
There are today just two producing sources of neodymium; the Chinese mining complex ay Bayan Obo in western China and the aboveground tailings (residues from previous ore concentration) at Mountain Pass, Inyo County, California, site of America's most extensively worked rare earth mine until it shut down in 1994. Mountain Pass is being reworked by Chevron Mining, the successor in interest to Molycorp. Chevron is producing, I believe, only didymium, the trade name for undifferentiated mostly neodymium and praseodymium, which is also used to make didymium-iron-boron permanent magnets, at this time, but if neodymium prices hold up then I suspect that Chevron will restart the process to separate didymium into its pure constituents.
Dozens, perhaps a hundred Chinese companies, manufacture nickel metal hydride batteries for use in electric motorbikes. This manufacturing may well constitute the largest use for rare earth metals of any application on earth. Honda builds IC engines for vehicles and stationary applications in China for the Chinese market, and, unlike every other non-Chinese car maker, except GM, maintains a steady purchase, to maintain its allocations, of both rare earth metals and fabricated components for rechargeable nickel metal hydride batteries from Chinese manufacturers.
It has been confidently predicted that the Chinese production of rare earth metals will equal the domestic Chinese demand for rare earth metals by 2014. At that point in time only those car makers with in-place and functioning long term strategic sourcing plans or cradle to grave recycling will be able to obtain the raw materials to make nickel metal hydride batteries.
It is looking more and more likely that hybrids and battery powered cars using lithium ion technology may be only a small portion of the product mix even by 2014. If Honda's vision of the hybrid and battery powered car of the future is correct then it may only be Honda and its licensees who can obtain the raw materials to make nickel metal hydride batteries in 2014. I will not be surprised to find out that Honda is stockpiling lanthanum, and I would be very surprised if GM had even thought of doing it.
China today produces essentially 100% of the world's rare earth metals, and China's only concern is the development of its domestic market. Millions of electric motorbikes are built and sold in China each year, and increasingly such vehicles utilize nickel metal hydride batteries rather than lead-acid types.
Unless and until North American rare earth mining ventures are funded and up and running, we can only watch as China literally controls the rare earth metals market. This may in fact be the main driver for the lithium ion mania among all of the world's car makers except Honda.
Honda confidently expects to sell 200,000 of its new affordable hybrids a year within two years of its introduction next year. Takeo Fukui believes that all of his company's hybrids, when they first reach that target level of sales, will be using nickel metal hydride batteries. If you believe in hybrids and you think Honda is a well-managed company with intelligent long-range product planning, then Honda is the play for lanthanum.