Umicore SA

XBRU:UMI

Earnings Call Transcript 2020-Q3

[Eva Behaeghe]

Good morning to all. Thank you for standing by, and welcome to Umicore's Conference Call. Please note that this conference is being recorded today. [Operator Instructions] But now I would like to hand the conference over to Marc Grynberg. Marc, please go ahead.

[Marc Grynberg, Chief Executive Officer]

Thank you, Eva, and good morning, everyone, and thank you for joining this conference call. The purpose of the call is to provide some additional color to the release we issued this morning and answer the questions that you may have. The market context has been extremely volatile since the outbreak of the pandemic. And with this press release, we wanted to inform you about the changes in trading conditions, which we have observed since our last communication at the end of July. The automotive market, for example, posted a much stronger third quarter than anticipated when we communicated at the occasion of our first half results. Also, this year, due to the highly unpredictable context and unlike in other years, we have not yet been in a position to provide a quantified guidance for the full year. Now with 10 months in the books, I believe we have sufficient visibility to do so. Finally, while the overall visibility remains extremely limited, I felt it was appropriate to provide some perspective on the building blocks for 2021 and highlight my expectation that Umicore is in a strong position to resume its growth trajectory once the disruptions caused by the pandemic will be behind us for good. As you will have read in our communication this morning, I confirm the directional guidance I gave earlier this year, both for the group and for the different business groups. Umicore is on its way to deliver a solid performance this year, notwithstanding the severe disruptions caused by the pandemic, and I expect adjusted EBIT for the full year to be in the range of EUR 465 million to EUR 490 million. Let me now walk you through the recent trends performance and outlook in all 3 business groups. Catalysis posted a very strong third quarter performance, benefiting from a sharp recovery in the automotive market in most regions and particularly in China, where the recovery in car sales has been remarkable. You will recall that Umicore has a very strong market position in China, in particular with international OEMs, and this has allowed us once more to outperform the market globally. Earnings in the business group reflected the strong volume uplift as well as the impact of cost reduction measures introduced earlier this year. Based on current market trends, we now expect global car production to be down by approximately 20% for the full year. You may remember that earlier this year, we anticipated a contraction of the global car market of 25% in 2020. In the scenario of a 20% contraction, I expect adjusted EBIT for Catalysis for the full year to be in the range of EUR 130 million to EUR 140 million, which is well above the current market consensus. Looking already cautiously at 2021, I can say that we should continue to benefit from our strong market position in gasoline light duty applications, the start of the rollout of China VI legislation for heavy-duty applications and the cost savings resulting from measures that we have implemented this year. I said cautiously because the evolution of the pandemic, unfortunately, makes it impossible today to predict how automotive demand will develop in the near term. This being said, I expect Umicore to continue to outperform the market. I am now moving on to the performance in Energy & Surface Technologies, which as anticipated, was impacted by a significant negative operating leverage. Looking first at the EV market itself, I would like to bring some prospective to numbers that are circulating and are sometimes unduly extrapolated. EV sales in the third quarter grew substantially. However, this is compared to a very undemanding third quarter last year. Looking at year-to-date sales provides a better view on battery demand. EV sales in the first 9 months of 2020 were up 9% year-on-year, and the increase was driven by the growth of plug-in hybrids. Full EV sales were roughly flat year-on-year. And you will recall that plug-in hybrids have much smaller batteries and therefore less kilowatt hours of cathode materials, on average, 5 to 6x less than full electrical vehicles. So if you duly take into account the growing share of plug-in hybrids in the mix, the global demand for batteries used in automotive applications expressed in gigawatt hours grew by about 5%, which is the correct metric to look at in order to assess the evolution of the cathode materials market. Now if we would exclude the share of Tesla demand, as you know that we are currently not supplying this brand and demand in the market, which is effectively addressable to Umicore was actually flat. You will have seen in our release that we expect to grow sales volumes of cathode materials for EVs in the second half, both year-on-year and sequentially, which should be looked at against the flattish market context I have just sketched. The reason why I take the time to explain these market data is that, too often, quarterly data or announcements made by a single market player are being extrapolated or misread. Looking at our position over a somewhat longer period than the quarter, our market share is solid and stable, give or take, minor movements linked to platform or regional mix. In China, for example, the growth of Tesla has been spectacular. And obviously, Umicore is not benefiting from that. So I would like to emphasize once more that we are faring relatively well in a challenging market. We have not lost market share and are not losing market share. Turning back to the market now in Umicore's performance in that market. The European EV market continues to do well. This has helped to bring down the levels of inventories in the battery materials value chain. And we expect the inventory effect to subside by year-end. It is also encouraging to see EV sales pickup in the Chinese markets. This being said, we put again, things in perspective, the level of EV sales in China continues to be well below the peak levels seen in the second half of 2018 and way below the levels required in order to absorb the existing overcapacity. It may take a few years for supply and demand to be back in balance in China and for market conditions to improve. This being said, I'm convinced that this is not a structural issue as the Chinese government remains fully committed to electrification. Against this market backdrop and as anticipated, the underutilized capacity in our plant in China, in combination with higher fixed costs related to our expansions continue to induce a significant negative operating leverage in the rechargeable battery materials activity. The unfavorable pricing environment in China, where we do have some short-term price exposure, also impacted earnings. In the other business units of Energy & Surface Technologies, performance continues to reflect the impact of weak trading conditions resulting from the pandemic. Against this backdrop, I expect adjusted EBIT for Energy & Surface Technologies in 2020 to be in the range of EUR 70 million to EUR 75 million. I realize that our current performance may be below expectation, but this does not reduce our determination to maintain a strategic course of action and prepare for profitable growth in this emerging market. While market conditions have played against us since last year and may continue to prove challenging for some more time, I have no doubt that we have the right capabilities and strategy to develop successfully as one of the leading technology providers. It takes sizable upfront investments to participate in this fast-growth industry and reach scale effects. In the current market context, it takes more time than originally anticipated to bring the business to satisfactory and sustainable levels of profitability. I'm now turning to recycling, which posted, as you might recall, record results in the first 6 months of the year. We also indicated in July that this first half performance was not to be extrapolated to the second half of the year, taking into account the reduced availability of the smelter due to the 4-week maintenance shutdown in Hoboken in July as well as the seasonality effects in the jewelry and industrial metals business units. Over the third quarter, the business group continued to benefit from favorable trading conditions, a supportive supply environment and high precious metal prices. Considering the maintenance shutdown in Hoboken and anticipated seasonality effects in jewelry and industrial metals, I expect adjusted EBIT for recycling in 2020 to be in the range of EUR 320 million to EUR 330 million, which corresponds to a new all-time high. I also expect that the business group will continue to benefit from a favorable supply and metal price environment in the coming year. We have a fairly good visibility as we have secured a sizable part of our supply and metal exposure. Visibility is far from perfect, though, as a result, also depend on price levels of metals, which cannot be hedged, and those price levels cannot be predicted. You will also have read in our communication this morning that we expect EBIT adjustments in the second half to be in the region of EUR 150 million. These adjustments come on top of the EUR 72 million adjustments booked in the first half and are, again, mostly noncash in nature. The main adjustments in the second half relate to the charges of EUR 55 million for the streamlining of our activities in Cobalt & Specialty Materials, some asset impairments and a provision to create a green zone next to the Hoboken plants. You will recall from the communication at the end of July that the lead in blood levels of children living close to the Hoboken plant showed elevated readings as opposed to the historically low levels in 2019. The emissions from the plant, as measured both by the authorities and by Umicore, have been consistently well below the legal norm, and there was no indication that such an increase in lead in blood values would occur. Although the root cause investigation has shown that there is no major source of lead emissions in the plant, the unexpected elevated levels, it is explore new avenues such as making an offer to buy the houses closest to the plant to create a green zone and thereby increase the distance between the residential area and the site. These provisions for a green zone are included in the EBIT adjustments. To conclude and before we turn to your questions, I would like to repeat the main messages from this morning's communication. I expect Umicore to post a solid performance this year despite the unprecedented challenges caused by COVID-19, and we are extremely well positioned to benefit from market growth once the impact of the COVID-19 pandemic will be behind us for good. My priority today, clearly, remains the health and safety of all of Umicore's employees, and I'm grateful for their commitment and agility as they have demonstrated on a daily basis since the beginning of the pandemic. Despite the many uncertainties in the near term, Umicore remains committed to its long-term growth strategy in clean mobility and recycling. And I'm convinced that we will come out of this challenging period, well positioned and well prepared for growth. Filip and I are now ready to take your questions, and I hand over the call to Eva first.

[Eva Behaeghe]

[Operator Instructions] And the first question was sent to the IR mailbox comes from Charlie Webb, Morgan Stanley, and the question is, how do we think about recovering E&ST in 2021? It sounds that you expect the inventory issue to be concluded by the end of this year. EVs are recovering well. But presumably, we will also need to account to the rent cost of Poland. Consensus expects this division to more than double in terms of EBIT in 2021, is this is achievable?

[Marc Grynberg, Chief Executive Officer]

Charlie, so I think it would be premature to go into a quantified guidance for 2021. And what the market will do in 2021 remains also somewhat hard to predict given the current evolution of the pandemic in some regions and the possible impact thereof either at the end of this year or in the course of next year. This being said, I would say that if you disregard for a moment, the pandemic and the possible impact it may have in 2021 on the overall market, I expect -- I would expect Umicore to do well in terms of volume developments compared to this year, if indeed, the EV market continues to grow and also considering the launch of some EV platforms on which we are qualified. From a, I would say, results point of view, I would expect the -- again, with the caveat that I don't know where the market will be going, we should see improvements compared to this year, driven by the volume growth -- EBIT volume growth is confirmed and again, with the caveat that I mentioned regarding the market. And still considering that we are incurring significant investments and significant costs to bring the business where it needs to be from a technology and scale point of view.

[Eva Behaeghe]

And the next question comes from Sebastian Bray.

[Sebastian Christian Bray, Analyst]

It was on the calculation of addressable market size. Is it right to simply exclude Tesla from this? Now I'm thinking especially how do you think about the rise again of LFP and new LFP cathode technology in China? And do your comments mark earlier on the market being roughly flat, excluding Tesla, take into account the fact that LFP has gained share in China this year? Do you think this is a longer-term trend that could constrain the growth of E&ST?

[Marc Grynberg, Chief Executive Officer]

Sebastian, no, I'm not concerned about the LFP story. It is confined to China and is addressing a niche of somewhat less performing cars, which indeed is not going to dense the growth of Umicore overall. And whether it's appropriate to exclude Tesla? I mean I'm not going to -- it's not -- I would say, I was just mentioning that as an observation that since we are not, I would say, supplying Tesla and Tesla represents a significant portion of the gigawatt hours demand and the growth in gigawatt hours in 2020, that it was a relevant way to look at how we are faring in the non-Tesla business in a way. And even if you include Tesla, I think it's important, and this has been vastly misinterpreted, I would say. It is important to note and to bear in mind that even if you include the growth of Tesla, the market overall in 2020 has grown by 5%. So it's important not to extrapolate from monthly or quarterly data or from data of a single player. The market has grown by 5% and against that backdrop, we are faring quite well. And the fact that we confirm that our volumes are growing in the second half of the year, and that we did well in a way in the first half of the year as well, while the market was down in gigawatt hours confirms that we are maintaining at least our position.

[Eva Behaeghe]

And the next question comes from Mutlu Gundogan.

[Mutlu Gundogan, Analyst]

Just one question on E&ST. You're guiding for a second half REBIT of some EUR 19 million, if I take the midpoint. So that's a decline of almost 70% sequentially. I think that volume should be up sequentially. So it must be the lower prices that you alluded to or higher operational cost that is driving the lower results. So can you tell us which is the most important one? And how we should look at the trajectory going forward?

[Marc Grynberg, Chief Executive Officer]

Yes, So it's a combination of, I would say, mostly 3 factors. It's the price pressure in China that we have described earlier. It's the costs which we have to continue scaling up as we develop new technologies, new processes, new sites, and it's some mix effects as well. So the cost factor is quite significant. And if I had to join them at first sight, I would say that the cost element is probably among the top factors. And in that respect, I would like to also remind everyone that we have a different strategy than most or all of our competitors in the cathode material space as we have decided to go for a multiregional approach with capabilities, equal capabilities in 3 major regions being Korea, China and Europe. And this comes at a much higher fixed cost level than most of our competitors. So you will imagine that in the current depressed market context where scale effects are not being reached and where price pressure is there, that this strategy is not helping us in the short term to produce adequate margins. This being said, and as I mentioned in my remarks, I'm really convinced that looking at where the market trends are from a regional and from a global point of view, that this is the right strategy. And that having the same capabilities in 3 key regions for EVs is going to pay off. But it takes a bit of time indeed.

[Eva Behaeghe]

Next question comes from Mubasher Chaudhry.

[Mubasher Ahmed Chaudhry, Vice President]

Can you just provide an update on the Polish plant? And have you seen any delays in contracts or volumes that were expected for that plant from your customers given the weakness?

[Marc Grynberg, Chief Executive Officer]

So in a nutshell, the answer is no. We mentioned some delays in the construction projects a while ago, which were due to the restrictions imposed by the pandemic and the lockdown measures and the possibility to travel for some teams or contractors or engineers. And this remains valid. So we have delays in the construction and now expect the plant to be commissioning around mid of next year. Then if you take into account the time it takes after commissioning to qualify for the customers, to qualify the lines and for us to start mass production, it means that, indeed, we will start production towards the end of the year, next year and the more significant -- the more visible contribution of the new plant from a revenue ramp-up point of view will be in 2022. This does not mean or imply that there are any delays in terms of contracts or demands or changes in forecast from our customers. As you will possibly recall that while we are building the plant and will take time to start up the plant in Poland, we are serving the European market through our Korean factory. So there is no change in that respect.

[Eva Behaeghe]

The next question comes from the IR mailbox. It was sent by Geoff Haire from UBS. When do you expect to reach fully capacity -- full capacity in China and in Europe? How much of the current capacity in China is exposed to Chinese pricing in the LG and a SDI contract or prices and volumes fixed?

[Marc Grynberg, Chief Executive Officer]

Yes. So a few questions embedded in the -- quite the overall questioning. The -- let me start with the LG and SDI contracts. So these have indeed fixed prices. And so -- and some of the volumes for -- some of these volumes for LG and SDI are indeed being produced in China. This being said, I would say that the majority of our capacity in China would be exposed to the Chinese price pressure. Following it will take for the capacity underutilization supply, it's difficult to say today because -- can all participants, please go on mute because we have some noise in the -- background noise on the line, sorry for that. It's difficult to say because today, I mean, I don't have a clear view of how the market in China will develop. What I see is that the excess capacity in the industry is quite substantial and will take a few years to be worked out of the system. So it's not a, I would say, a matter of a few months, unfortunately. And that's why we mentioned explicitly in our communication today that we expect this overcapacity to continue to result in price pressure in the near term.

[Eva Behaeghe]

Next question comes from Adam Collins.

[Adam Robert Collins, Analyst]

I had a question about your sort of capacity alignment at the moment. I think we're sort of slightly dancing around a pin in that we're discussing a scenario where there's, at this stage, still too much China capacity and some pricing pressures without really understanding how your capacity splits between the 3 regions. And I wondered if you would be in a position to give us any sort of sense whether China capacity is now above Korea? And if you look at, say, the 2021 plan, how does the capacity split by the 3 regions? Just to give us a sort of sense to the extent to which you've got a surplus issue in China.

[Marc Grynberg, Chief Executive Officer]

Yes. No, Adam, and indeed, I think this is a very relevant point. So the capacity in China is not as large as the capacity in Korea, but close to. So that's why, unfortunately, today, in the current market environment, this is such a drag on profitability and does not allow us to reach the desired and required scale effects indeed. And over time, the -- I would say, the relative importance will change because the -- as you know, we have decided to postpone further additions of capacity in China. So to be better aligned with the timing of the market demand. And as Europe will grow in terms of production capacities, in the near term, the relative importance of China will decrease.

[Adam Robert Collins, Analyst]

Marc, are you able to say where your capacity is now in overall terms? Or whether that is relative to the original plan of 200,000 by '21?

[Marc Grynberg, Chief Executive Officer]

Well, it's -- because we have decided to postpone some capacity expansions given the state of the market. I mean the market has been more or less stagnant in 2019, 2020 after an acceleration in '17/'18. And the -- so clearly, we have taken that duly into account in adjusting our CapEx plans and our capacity additions. So we are far from the figure that you have mentioned in that respect. Plus, there is another element is that as the product mix has changed quite substantially with much higher nickel chemistries in our mix today, the capacity should be looked at in terms of gigawatt hours rather than in terms of tonnages because the -- for the same tonnage of high nickel chemistry, you have more gigawatt hours or more kilowatt hours. So I think that gap in terms of tonnages, which we referred to some 2 years ago, is fairly significant in terms of gigawatt hours, less significant for the reasons I've just mentioned.

[Eva Behaeghe]

Next question comes from Chetan Udeshi from JPMorgan. Marc, could you give some color on the EV casual material volumes for the second half of the full year 2020 for Umicore in Europe versus China?

[Marc Grynberg, Chief Executive Officer]

No. I think that's not the kind of -- sorry, Chetan it's not -- I don't want to go into that level of breakdown of regional sales. I think that, clearly, China is a depressed market for us and depressed in terms of volumes. So by definition, this is not contributing so much to the growth that we see in the second part of the year.

[Eva Behaeghe]

And he has the second question. Is there a change in full year 2020 D&A CapEx or CapEx outlook?

[Marc Grynberg, Chief Executive Officer]

Filip?

[Filip Platteeuw, Chief Financial Officer]

Yes, I can maybe address that, Chetan. So I mean, for the CapEx, currently, I would guide for the full year 2020 for a CapEx number just above EUR 400 million. So that compares to about EUR 550 million last year. And D&A, I would currently -- again, it depends a bit on the -- some exact timing towards the end of the year. But I would guide for the full year D&A between EUR 260 million and EUR 270 million, and that compares to about EUR 240 million something last year. So that's about EUR 20 million increase, give or take, between last year and this year, that would be the current guidance.

[Eva Behaeghe]

Next question from Jean-Baptiste Rolland.

[Jean-Baptiste Henri Rolland]

Hi. Can you hear me?

[Marc Grynberg, Chief Executive Officer]

Yes. Now we can.

[Jean-Baptiste Henri Rolland]

Okay. Great. Sorry for that. Marc, Filip, Eva, I wanted to ask you, what makes you confident that LFP will remain a niche in China and that it will also remain contained to China? And a follow-up question to this is, maybe could it be that going for less performing cars ends up being the right strategy if that segments develop better simply because customers could be very much cost constrained?

[Marc Grynberg, Chief Executive Officer]

And the reason I'm confident about that is because the reason LFP is gaining some ground in China and has some sort of a second life is because there is spare capacity. And so the question is, does it make sense to invest in new capacities outside of China to produce, I would say, technologies, which are less performant in terms of density and ranges and which may not be necessarily so cost competitive if you have to make a greenfield investments in regions outside of China? And I think the answer based on the -- what I see today is no. It doesn't -- wouldn't make sense for investments to be made outside of China. And -- but there is a vast capacity available in China, and there is some audience, some, I would say, consumer audience for less-performing cars, which you do not necessarily have in other regions like Europe or North America. So I'm not so much concerned. I'm not saying that LFP will not be there. I'm just saying that this is not going to be mainstream outside of China, in my opinion.

[Eva Behaeghe]

Next question comes from Charlie Webb. Can you quantify your provisions that sign for the green zone around? What solution has been agreed around zones today?

[Marc Grynberg, Chief Executive Officer]

So the -- there is no agreement yet. The discussions and the process -- the discussion and the process are ongoing, both with the residents and with the authorities. So it would be too early to put a figure at this point in time. And we expect and we hope to be more advanced or sufficiently advanced when we speak next -- beginning of February to provide more color on this. Suffice to say at this point in time that we're talking about a meaningful number, meaningful enough, material enough to be mentioned in the release.

[Eva Behaeghe]

There was another question from Charlie Webb. How should we think about working capital for full year 2020 as it does recover stronger than expected?

[Filip Platteeuw, Chief Financial Officer]

Yes, indeed. This -- so I mean catalysis clearly plays an important role, as you know, in the working capital. As you rightly mentioned, there's the recovery aspect of volume-related, but there's also the metal price aspects. As you've seen the PGM prices and particularly rhodium is as a basically historic high. So indeed, we do expect for the second half to have an increase in working capital for the group, more than what we had in the first half, which was EUR 72 million. So that will be indeed a driver in the second half, an increase in working capital. And definitely, Catalysis will play an important role in that, yes.

[Eva Behaeghe]

Next question comes from Mutlu Gundogan.

[Mutlu Gundogan, Analyst]

Just another follow-up question. Can you share with us what the core capacity utilization is in your cathode material plants? And assuming you expect eventually a significant volume recovery/volume growth within EVs, but prices may be the biggest risk. So at this price, will you make your cost of capital where you make your return targets?

[Marc Grynberg, Chief Executive Officer]

If we single out the Chinese operations at the current price levels, we cannot make the cost of capital. And So there are 2 aspects to the equation. One is the capacity underutilization, which prohibits us from reaching the required scale effects in order to reach the cost of capital and secondly, the pricing pressure. And both factors today do not allow us to reach the current -- to reach the cost of capital in China. So that's why we would need both the price pressure to subside for the excess capacity in the industry to be worked out of the system and on our side also be able to utilize our capacity fully in order to reach that target. And I'm not going to comment on the degree of capacity utilization. I can only say that it's the underutilization today is quite material as you can infer from the financial results coming out of the business.

[Eva Behaeghe]

Next question comes from Chetan Udeshi. What is GPF adoption for the Umicore's platforms for 2020 in China and Europe?

[Marc Grynberg, Chief Executive Officer]

We actually -- we have the full effect of GPF adoption in China and in Europe in our platform mix. So all the other platforms that Umicore has -- where Umicore is qualified and which require GPF are in production and have been in production for some of them since 2019 and for all of them in 2020. So I would not expect if that is the gist of the question, I would not expect, and we don't need to expect an uptick in terms of GPF adoption in the coming year for Umicore because our portfolio includes all of that already.

[Eva Behaeghe]

Next question comes from Wim Hoste.

[Wim Hoste, Executive Director Research]

A question on the announcements of Tesla made in its battery day a while ago, that's not going for vertical integration and also making some statements that they have developed better process technology. So the question is to what extent do you see it as a threat? And how do you see your process technology? I know you did a lot of investments in that technology. And how does it kind of compare to competition? Any statements on that would be helpful.

[Marc Grynberg, Chief Executive Officer]

I believe that, as I mentioned on previous occasions, Tesla is clearly a game changer because it is setting the tone and setting the pace and setting the direction for the industries, putting the right level of pressure and targets in front of the automotive industry and the supply chain. So in that respect, it is acting as a real game changer. And this I see as a very positive for us because it's driving the market development to quite some extent. This being said, I believe that many observers share my assessment that some of the statements that have been made are aspirational at this stage and have not yet been worked out in any kind of detail. So there is no particular impact or threat that I see from that. And I believe that we have excellent process capabilities to compete in this technology-driven industry.

[Eva Behaeghe]

Next question comes from Sebastian Bray.

[Sebastian Christian Bray, Analyst]

Could I ask a question about the choice between price and volume in China? I believe you, Umicore is one of, if not, the largest producer in that geography. And you'd assume if scale effects were very important than it would be amongst the lowest cost producers, why not push your strategy, which if Umicore the lowest cost of favoring volumes at this stage? Is that because we impact on profitability would be worse than under the current scenario of selectively producing volumes? And how do you view the position of a Chinese plant in terms of the cost curve versus low competitors?

[Marc Grynberg, Chief Executive Officer]

Yes. Sebastian, I think the -- it's a business strategy choice and philosophical choice and business model choice to be selective and to go for a profitable business and not compromise our position and strategy to go for -- to actually sell great technologies at lousy prices. I think this is not -- I would not set the right benchmarks in the industry and may be difficult to rectify if and when the market turns around. So we'll continue to be selective, we have to. And I don't want you to create the wrong precedents by actually selling technologies at the wrong price.

[Wim Hoste, Executive Director Research]

And when did the Chinese customers come to Umicore and put pressure on prices? Do they point towards commodity indices when asking for price reductions? Or is this more of a bespoke negotiation that goes on between Umicore and its customers?

[Marc Grynberg, Chief Executive Officer]

I'm not sure what you mean with the commodity indices. Can you maybe clarify them?

[Wim Hoste, Executive Director Research]

What I mean is that do your customers come to you with a graph of NMC532 prices published by industry providers in China and say, "all right, can we have a 30% discount?" Or does -- is it still in the realms of -- this is a bespoke negotiation and the graph doesn't play a role, so to speak?

[Marc Grynberg, Chief Executive Officer]

No, we have never had this type of discussions around indices or graphs or -- and we have never looked at this type of data being provided by external sources. These are not relevant in our negotiation processes. Now, it's a bespoke negotiation about certain grades of products that we make and which other -- some other players in China can also produce. And given the overcapacity, some of them make different trade-offs than we do and are ready to sell at prices which are, in my opinion, way too low.

[Eva Behaeghe]

The next question comes from Chetan Udeshi. The press release, you said that capital material business continues to be driven by ecological innovation. However, at the same time, we have pricing pressure from overcapacity. How do you tie these 2 costs together?

[Marc Grynberg, Chief Executive Officer]

Yes. I mean it's -- I mean I could also send the question back to you. I mean if you say that we have to look at the Tesla announcements as some sort of a threat in terms of technology developments and new processes. This is a clear indication that the business continues to be driven by technology. And I think if you analyze the announcements made by Tesla, there is a lot of technology development and innovation in there in terms of batteries cell design, battery pack designs, in terms of anode materials, in terms of cathode materials, in terms of production processes. This is just and exclusively a technology story, but we're not alone in that. And there are a number of players who are capable -- which are capable of developing innovative technologies and high-quality technologies. So it's a competitive play, but it's driven by technology, innovation and technology development. 2

[Eva Behaeghe]

Next question comes from Charles Bentley from Crédit Suisse. In light of the pricing and utilization in China, is there a risk of impairment?

[Marc Grynberg, Chief Executive Officer]

Filip?

[Filip Platteeuw, Chief Financial Officer]

Well, there's -- again, you've seen in the adjustment announcement that we do foresee some additional impairments like we had them in the first half, that's typically an exercise we do at the full year close. So it's a bit too early to comment on that. We will look at that. Now obviously, when you look at impairments of, I would say, production assets, you take a sufficiently long period of time. So that would not be focused on short-term trends and context. So it's a bit too early, and we'll provide the details of any of those impairments at -- well, in the month of February, basically.

[Eva Behaeghe]

And on the second question, can you indicate on much cost savings for analysis in the second half? How much of this is sustainable versus February?

[Filip Platteeuw, Chief Financial Officer]

Yes. So we already had the cost savings in Catalysis in the second half indeed on the footprint adjustments we've announced and we implemented the first part now next to that also cost savings from, I would say, the context -- the COVID context, which has meant that on SG&A level, think of travel, et cetera. There's obviously some -- also some cost savings. Now limiting it to the footprint adjustments, I would say the impact in total is probably something similar to the impact we see in the adjustments we've announced in cobalt and especially materials. The only thing is that in Catalysis, it will come earlier. So you should see next year indeed a -- basically a full year impact of that cost saving. And for -- just to give you an idea for Cobalt & Specialty Materials, I think we've said it's about EUR 15 million on a full year basis. So for CSM that would only be there once we fully implemented the footprint adjustment. So we're talking 2023. While in catalysis, that will clearly come much earlier that we should see in next year.

[Eva Behaeghe]

Next question comes from Adam Collins.

[Adam Robert Collins, Analyst]

Actually I had 2, if that's okay. The first one is, has there been any further price hedging for gold, platinum and palladium in the recycling business? Do you want to just do that? And then if I can...

[Marc Grynberg, Chief Executive Officer]

Yes, I'll take that at first, Adam. So nothing material compared to when we last spoke in July, just as a repeat, We have a significant portion of palladium and gold for next year had significant, you could think something in the order of 2/3 of the estimated exposure, obviously. And that goes into 2022, but at a lower percentage or less than half. And we do have some hedges in place also for next year for platinum and silver, but definitely less than half. So nothing materially has changed compared to July. Just as a reminder, so that is what we have hedged, as you know, and as we also set out in the press release, obviously, the recycling business does have quite some exposure as well to unhedged metals, right?

[Adam Robert Collins, Analyst]

Yes. Okay. The second question is back to the cathode business. We've been discussing the mix headwinds associated with rising plug-in hybrid share, particularly in Europe this year. But there is an expectation longer term that the share will increase as Europeans get their act together in terms of new models and as battery costs come down. I wondered if you could say whether in your pipeline, you're seeing a good number of remodels looking forward.

[Marc Grynberg, Chief Executive Officer]

Well, if you look at the near term, Adam, of the next 2 or 3 years, we see still a very significant share for plug-in hybrids. And they are quite popular in Europe. It's a matter of consumer acceptance, consumer adoption more than anything else. And it's not so much a matter of battery costs in a way, perhaps unlike in other regions. But it's a matter of consumer mindset that twice a year, you need the range to go on vacation and that you don't want to -- you don't see an alternative to a plug-in hybrid for that reason for now. So if I look at the pipeline for the next -- for the -- I would say, the near term, I would expect the share of plug-in hybrids to remain pretty high in Europe. What it will be longer term may depend on -- I mean, it's difficult to predict today in a way because it will depend on the consumer experience and perhaps that second-generation buyers who have had a plug-in hybrid will move after that, after 4 or 5 or 6 years to a full EV, if they have enjoyed the electric experience on a limited basis and have figured out how do you go on vacation other than by car. So that may change. And it may also change in function the tightening CO2 regulations, which will increase the pressure on car OEMs in the region. So difficult to make out at this stage for the longer term. But I would say, I would not expect major shifts in the links in the short term.

[Eva Behaeghe]

Last question comes from Mutlu Gundogan.

[Mutlu Gundogan, Analyst]

Yes, Marc, coming back to the price in China. Can you provide some clarification or some color on what is happening there? Because if I go back a few years, I remember when you were announcing contracted, you would always say prices are largely locked in. So but it seems that customers are significantly renegotiating their contracts. I mean can you confirm that? Can you tell us what's happening? Is it dual sourcing? Are customers switching volumes if you don't agree on a significantly lower price? Just some color would be helpful.

[Marc Grynberg, Chief Executive Officer]

Mutlu, really, what it is, is that the at the contract durations are shorter in general in China than they are in other parts of the world. And you have to bear in mind that when we announced the multiyear strategic contracts with LG Chem and SDI, these were first in industry. And so the industry has only started to move to multiyear contracts to secure supplies and with fixed prices. This is a very recent trend with a limited number of key battery makers. But in China, typically, the contracts are more limited in time. And so at every term, you have to renegotiate the conditions in function of where the market is. So that's really what it is.

[Mutlu Gundogan, Analyst]

Can I just add to that? So is it impossible that you might lose a customer if they demand a significantly lower price? Because my understanding was that you apply for a model because you can't switch in the meantime because otherwise, the OEM would have to use a different supplier. Can you explain that?

[Marc Grynberg, Chief Executive Officer]

Well, let's keep in mind that we have been in a growth mode. So we have, like others, been adding capacity to -- in anticipation of new business and significant growth. The market has not grown in China since 2018, unfortunately, for reasons which we have explained on previous occasions. And this has prevented us from booking new business and using the capacity at adequate conditions to a very large extent. I mean this is what it down to.

[Eva Behaeghe]

With this, we're going to conclude the Q&A session and I hand over to Marc Grynberg for his final conclusions.

[Marc Grynberg, Chief Executive Officer]

Thank you, Eva. And at this point, I would simply like to thank you for attending the call this morning despite the short notice. And as usual, I would invite you to raise the follow-on questions to reach out to -- for follow-on questions to reach out to our Investor Relations team. And as a last remark, I would like or comment, I would like simply to wish you all well. Please keep safe and talk to you soon. Have a nice day. Bye-bye.

[Eva Behaeghe]

This does conclude our conference today. Thank you for participating. You may all disconnect.