biofuels boom, investing in biofuels, ethanol

Three stocks set to benefit from the biofuels boom

03.02.2006

by Merryn Somerset Webb

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Our MoneyWeek Roundtable this week covers many of the usual subjects that occupy investors’ minds these days (how horrible a situation is the UK economy really in? Will there be a house price crash? Is inflation back? Where will interest rates go next?).

But when it came to asking the participants for their stock tips, the answers were mainly about energy. James Ferguson is still a fan of oil stocks, Jim Mellon, Espen Baardsen and David Stevenson are bulls on nuclear energy, and hence on the price of uranium, while John Walter pointed to gas storage as an interesting area to invest in.

But one subject we never quite made it on to was that of biofuels (my fault – I let them argue about house prices for too long and we ran out of time) and the extent to which they might end up substituting for oil if the price of the latter keeps rising.

We’ve compensated for this a bit by looking at how this affects the sugar market in sector of the week, but the biofuels boom is about more than sugar. In the US, ethanol (which even ex-Texas oil man George Bush is keen on) is made from everything from corn to woodchips, prairie grass and, says Fortune Magazine, all manner of other “agricultural waste”.

It’s also very much in demand. It’s cheaper than petrol at today’s prices, it produces few of the emissions thought to cause global warming, and best of all (and I’m guessing this is why Mr Bush likes it), it comes mainly from the states of mid-west America rather than the Gulf. So keen is the US on ethanol that the Department of Energy thinks it could have displaced 30% of America’s petrol consumption within the next 25 years.

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All in all, it could soon be a serious solution to the world’s most serious problem: the end of an easy supply of cheap and accessible oil. So how do we invest?

We’ve looked at a few ways in our sector of the week, but Fortune suggests a few more. One is long time MoneyWeek favourite Bunge (BG), which processes lots of biofuel feed stocks, such as soy beans and rapeseed, and is planning to open a biofuel plant in Germany.

Another to look at – and probably “the safest choice”, says Fortune – is Archer Daniels Midland (ADM), an agricultural giant whose growth is being “turbo charged by its ethanol business”.

Finally, Fortune suggests another MoneyWeek favourite, Royal Dutch Shell (RDSA). We love it because it makes huge profits and is very cheap, but apparently it also has a large stake in Iogen, a Canadian firm with an exciting-sounding “potential breakthrough in ethanol technology”.

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