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Among UK lithium shares, should I buy Johnson Matthey?

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With the demand for new sources of power surging, alternative energy shares have been attracting a lot of attention. Some UK lithium shares and hydrogen stocks are fairly small, new companies. But Johnson Matthey (LSE: JMAT) is a long-established company with exposure to the lithium battery business. But I wouldn’t add it to my portfolio on that basis after the latest news from the company. Here’s why.

Johnson Matthey and a changing world

While it has been around for over two centuries, the changing world has made recent years challenging for Johnson Matthey. One of the company’s key focusses in recent decades has been catalytic converters. The best-known use for these devices is to help filter out some chemicals when cars burn fuel.

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But fuel has been cleaned up in recent decades. Even more alarmingly for the business’s prospects, some countries may phase out internal combustion engines in coming decades. So in the long term, the market for automotive catalytic converters will likely shrink and could even disappear altogether.

Johnson Matthey has been alert to this possibility. It has been developing other businesses, including one focussed on batteries, which could be a fuel source for electric vehicles. These include lithium batteries. But while that makes Johnson Matthey one of the better known UK lithium shares for now, that is about to change.

A strategic shift among UK lithium shares

The company announced that it plans to exit the battery materials business altogether. The company reckons that, although demand for batteries is growing, as it does so the market is becoming high volume and commoditised. That makes it harder for a company like Johnson Matthey to exert pricing power. In a high volume, commoditised market, cheap overseas competitors can hurt the profit margins of companies based in higher cost production areas.

The company is not hanging about, either. It told the market that it will “move swiftly” in getting out of the batteries business. So, while there are still listed UK lithium shares, Johnson Matthey will likely soon have no exposure to the lithium business.

Why I like the Johnson Matthey strategy

The market punished the company, sending the shares 19% down in today’s trading, at the time of writing this article earlier today. Over the past year, the shares have lost 9% of their value.

I reckon that reaction may have been overdone. Johnson Matthey has been serious about the battery materials business and invested heavily in it. It has now come to a considered strategic decision that it lacks long-term competitive advantage. It has therefore decided to throw in the towel. While that may be painful in the short-term, it strikes me as a smarter thing to do than spend years fighting what it thinks is a losing battle. The company has enough challenges ahead with falling demand for catalytic converters – getting out of the difficult battery business seems like a prudent call to me.

Whether or not I consider Johnson Matthey attractive, when considering it for my portfolio I would no longer consider it among UK lithium shares. If I wanted exposure to lithium for my holdings, I would now look elsewhere.

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Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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