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In December 1952, a vast smog engulfed London. Over the course of six days, more than 4,000 people died. A further 8,000 were killed in the following six months. The public outcry led to some of the earliest pollution controls – regulations on coal fires. It wasn't until 1966 that noxious air quality in Los Angeles saw California introduce the first rules on automobile emissions. Today, in developed societies at least, we're used to emissions controls on sources as diverse as cars, power stations, factories and ships. These regulations are getting tighter all the time, which provides excellent business opportunities for companies in the sector.
The three main human sources of emissions and pollution are power generation, transport and industrial processes. Such pollution can be reduced in three different ways:
Efficiency: the polluting process can be made more efficient in order to reduce its emissions, so you generate less pollution per unit of energy used. Examples include more fuel-efficient cars, or power stations that generate less waste heat. A good example of a company operating in this field is Rolls-Royce. Its success depends on developing ever more fuel-efficient engines. For example, Rolls is launch supplier for the Boeing Dreamliner and its engines power the huge Airbus 380 Superjumbo. This engine also has much lower noise pollution – essential for the A380 to meet tighter airport noise limits.
Clean up: a second option, often used with the first, is to use a device that cleans up some of the emissions given out by the polluting process. Autocatalysts (such as the ones based on platinum group metals) fitted to modern cars are an example. This category also includes flue gas de-sulphurisation techniques and carbon capture for power stations. Catalysts are an important weapon in emissions reduction; they are special materials that promote chemical reactions to yield less harmful emissions. Johnson Matthey is the leading UK catalyst group.
Alternatives: the third and best solution is to achieve the same aim as the polluting device by a different, non-polluting means. Examples include renewable electricity generation and electric cars. Concepts for electric cars have been around for years. But the battery has always been a barrier to commercialisation. Now lithium battery technology offers the prospect of decent performance and range, at a reasonable cost. Other examples include modern wind turbines and fuel cells (made by Johnson Matthey) which turn methanol or natural gas into electricity with no need for combustion.
All three techniques require innovation to find reliable, cost-effective ways to cut pollution. The best approaches are capable of ongoing development, so they continue to be used as regulatory limits get tighter. So successful firms in the sector invest heavily in research and development to improve existing techniques and develop new ones. Many are suppliers to multinational automotive or aerospace groups, who rely on quality suppliers with the technological and financial strength to ensure a long-term future.
It's a huge field, one which I've explored in more detail in my Research Investments newsletter and will discuss further in a future issue of MoneyWeek. Meanwhile, below I look at one particularly promising smaller firm that should profit as rules on pollution tighten across the world.
One of the best bets in the sector
One interesting small company that works to reduce pollution is Hamworthy (LSE: HMY). The company specialises in the marine and oil and gas sectors. Hamworthy now has a global business with a broad spread of niche businesses governed by environmental legislation. In the marine sector, these include waste water and desalination systems for cruise ships, ballast water cleaning for cargo ships, marine exhaust sulphur reduction, and systems for the transport of liquefied natural gas.
In the oil and gas sector, Hamworthy provides systems for the recovery rather than burning of flare gas, as well as systems to ensure the safety of the tanks of floating production and storage facilities. It also has a system for recovering environmentally harmful volatile organic compounds from onshore and offshore facilities. Broker Arden Partners expects earnings per share of 23.4p for 2011, which gives a p/e of around 14. Hamworthy has an order book of ten months' sales and further upside potential when shipbuilding recovers.
• Dr Michael Tubbs is a Fellow of the Institute of Physics. He also writes the Research Investments newsletter. For more, call 020-7633 3672.
• This article was originally published in MoneyWeek magazine issue number 498 on 6 August 2010, and was available exclusively to magazine subscribers. To read more articles like this, ensure you don't miss a thing, and get instant access to all our premium content, subscribe to MoneyWeek magazine now and get your first three issues free.
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