July 24, 2020
Image: U.N./Mike Zuidgeest/Protocol
Hello! This week: The geopolitics of the Star market and Ant's dual-listing, Tesla's mining adventures, and Intel's continued fall from grace. Want Index in your inbox each week? Subscribe here.
Less than a year after it launched, China's Star market has found itself playing a big role in what could be the biggest-ever IPO, by Ant Group. Jack Ma's fintech company announced this week that it would dual-list on Star and the Hong Kong stock exchange, hoping to value itself at $200 billion in the process.
But does a juggernaut like Ant need the simplicity of Star, or is there something else going on? For one, Morningstar's Michael Wu told me that Western investors might struggle to understand Ant's products, so the company could benefit from selling to "domestic users of the application who actually understand what Ant Financial is."
And as always with China, politics is involved. "There is significant political pressure for all of China's 'homegrown champions' to relist on local exchanges," Brock Silvers, chief investment officer of Adamas Asset Management, said via email. Silvers also noted that U.S. threats to delist Chinese companies have encouraged them to return to Asia. "Ironically, Donald Trump may have saved the Star Market," he said.
In the case of Ant, one of China's crown jewels, the pressure to list on a new exchange like Star may have been particularly significant. Fraser Howie, co-author of "Red Capitalism," told me that Ant is listing on Star "partly to curry favor with Xi Jinping."
As for why Ant's pursuing a dual-listing rather than just listing on Star? China Renaissance Securities' Bruce Pang said that Ant is so large as to cause a "potential liquidity drain" on Star, forcing it to spread its listing across two markets. Tricor's Pamela Chung, a self-described "IPO Queen," told me that Hong Kong is also still a more international market, pointing to "compliance issues" that foreign investors might face buying on Star.
Ant is yet to announce the timing for its IPO, but it is sure to be a landmark moment for Star. By the time it comes around, that could be sorely needed: The exchange's index of its top 50 companies, which launched this week, was down a massive 7% Friday.
Join us: Protocol's transformation editor Mike Murphy will lead a discussion on how businesses have long "gone digital" even if they didn't start that way. We are joined by New Balance CEO Joe Preston, WW CEO Mindy Grossman, and Honeywell Chief Digital Technology Officer Sheila Jordan. This event is presented by AlixPartners.
"Please mine more nickel," Elon Musk practically begged mining companies in Tesla's earnings call this week. "Tesla will give you a giant contract for a long period of time if you mine nickel efficiently and in an environmentally sensitive way," he said, pointing to the importance of the metal in building Tesla's batteries.
It was a stark reminder of the very physical processes that underlie modern tech — and a revealing look at the way tech companies are getting involved in mining.
Tesla primarily uses NCA batteries, which have higher energy-density and give its cars a longer range. On Wednesday, Musk said that the new Semi would use these batteries, fueling the company's demand for nickel.
But there's a problem.
Nickel prices are very low, Wood Mackenzie's Milan Thakore told me. That's not good news for Tesla: "It's still too low to incentivize new mining projects going forward," Thakore explained. And the prospect of future demand isn't enough to encourage miners to start digging: It takes such a long time to get mines online — as many as 15 years, Thakore said — that investing now is a big risk.
The same thing is happening with other battery metals, too, such as cobalt. To address the problem, electric vehicle manufacturers are going directly to the source. Recent reports said Tesla signed a huge cobalt deal with mining company Glencore, while BMW secured supply from Morocco's Managem. With Musk's comments this week, it sounds like Tesla might be about to look for a nickel deal, too.
These "off-take" deals guarantee miners' income, giving them the confidence to invest so that supplies for the automakers are reliable. But they also have repercussions for manufacturers that don't sign these deals. Mining, particularly for cobalt, is fraught with ethical concerns: "Artisanal mining" in the DRC often employs child labor, which is why companies like Tesla source from the relative safety of Glencore. But Thakore said Glencore's cobalt supplies have almost all been bought up — meaning other companies "are at risk of having to use [artisanally mined] cobalt."