How to invest in the revolutionary new materials replacing plastics
James McKeigue Jul 12, 2012
Oil, plastics, metals, silicone: these are just some of the key building blocks that have shaped the 20th century, making everything from jet planes to the internet possible. Now, driven by scarcity, environmental concerns or the need for better performance, scientists have developed a new range of ‘super materials’ that promise to achieve similar advances in the 21st century.
They also spell opportunity for smart investors. Take plastics. When the first fully synthetic plastics were developed in the early 1900s, they were quickly adopted by a range of industries. As time went by, plastics were developed to be lighter, stronger, more flexible, or more stiff, depending on the end product.
Nowadays, plastic is ubiquitous – and this success has become one of its biggest problems. It’s estimated that more than a billion tonnes of plastic has been dumped on land and at sea. In the Pacific Ocean, between Hawaii and Japan, there is a large floating rubbish dump of about 100 million tonnes of plastic debris.
It is trapped in a vortex in the North Pacific gyre – an area where the ocean circulates slowly because of little wind and extreme high pressure systems. “Historically, rubbish that ends up in oceanic gyres has biodegraded. But modern plastics are so durable that objects half a century old have been found in the north Pacific dump”, says Kathy Marks in The Independent. Scientists predict that if its growth continues unchecked, the dump will cause serious health problems because either the plastics, or the toxic chemicals they leach, will end up in the food chain.
Another concern is the oil price. Plastics are derived from oil, which means they suffer from similar price volatility and have also become a lot more expensive. “When oil was cheap, it became pervasive throughout our economy in hundreds and hundreds of invisible ways, as a raw material,” says Daniel Yergin, an energy consultant and author. Now efforts are accelerating to “squeeze oil out and find ways to substitute for it. That is the power of price.”
A wave of legislation
As a result of such concerns, a wave of legislation has come into force, or is being planned, to phase out the use of traditional plastic bags. China, India, Malaysia, Bangladesh, Germany, Denmark, Kenya and Italy have all banned or taxed certain types of plastic bags.
These new rules are creating huge demand for ‘bioplastic’ bags. Just as ethanol has replaced oil in some car engines, it can also be used to make ‘environmentally friendly’ plastic. A PricewaterhouseCoopers study found that “ethanol-based polyethylene derived from sugar cane typically removes some 2.5 tons of carbon dioxide per ton whereas its petroleum-based equivalent releases 2.5 tons of carbon dioxide into the atmosphere”.
As John Rumsey puts it in the Financial Times, “the idea of everyday plastics used in shopping bags, yoghurt pots and shampoo bottles taking carbon dioxide out of the atmosphere fits in well with concerns over global warming”. Car giant Ford is now using soybean foam in its upholstery, while Toyota uses bioplastic in new Lexus models. Food maker Heinz has teamed up with Nike to develop plant-based plastics, while Coca-Cola Co and PepsiCo Inc are becoming bioplastic bottlers. Proctor & Gamble and Johnson & Johnson are also using bioplastics to package niche, environmentally friendly products.
And it’s being driven by hard-nosed economics, rather than a desire to be seen as ‘green’. “A lot of brand owners, particularly those that rely heavily on packaging, are interested in protecting their long-term costs,” says Douglas A Smock of BCC Research. “They want more predictable cost structures going forward. The high price of oil is responsible for the rapid emergence in interest in bioplastics.” That’s sparked a race from petrochemical firms to meet the new demand.
Last year, Brazilian chemical giant Braskem built a biopolymer plant, while Italy’s Novamont has just announced a new bioplastic plant in Thailand. Dow Chemical and Mitsui have combined to build the world’s largest bioplastics plant and German firm BASF recently upgraded its bioplastic plant.
According to BCC, the global market for bioplastics totaled more than 850,000 metric tonnes in 2011 and is expected to increase to more than 3.7 million metric tonnes in 2016, a five-year compound annual growth rate (CAGR) of 34.3%. This suggests the global market for biodegradable and bioplastics will be worth $3bn by 2015. Below, we look at ways to play this.
Plastic planes take flight
Since the early days of civilisation, metals have been an engineer’s favourite material. Under the right conditions they were malleable, and had the highest strength-to-weight ratio of any material so far used by humanity. But now metals have a rival – composite materials.
Normally, these are made by laying a plastic resin on top of a matrix of fibres, before cooking in a type of industrial oven called an autoclave. The right mixture can produce materials that are stronger, more durable, and far lighter than metals. What’s more, because composites are soft before cooking, they can be moulded to form almost any shape. That makes it easier for manufacturers to make innovative forms.
It also makes it less wasteful than traditional metal components that are made by adjusting a block down to the right shape. Manufacturers have been quick to take advantage. US plane-maker Boeing’s latest product, the 787-Dreamliner, was made up of 50% composite materials. Its European rival Airbus should beat that next year when it launches the A350, which will be 52% composite parts.
To make the A350’s new wings, strands of carbon fibre are mixed with an epoxy resin. The carbon fibre composites have a greater tensile strength (a material’s resistance to being pulled apart) and stiffness than a piece of aluminium of the same weight. The resin keeps the fibres in place and gives them compressive strength, making the wing harder to crush. So you end up with a wing that’s both stronger and lighter than any aluminium version.
Parts of the Rolls-Royce engine propelling the plane are also made of composites. Having a lighter engine creates a virtuous circle as the spar supporting the engine can also be lighter.
Developing carbon-fibre planes hasn’t been easy. Rolls-Royce first tried to develop carbon-fibre engine parts in the 1970s, before shelving the project. But the company, and the industry, kept investing in composites for one simple reason. The prospect of improved fuel efficiency means that airlines are willing to pay for them. Thanks to high oil prices, fuel now accounts for about half of an airline’s operating costs.
Roughly speaking, a 1% improvement in fuel efficiency knocks $1m off an airliner’s fuel bill over its lifetime. So “even slight gains in efficiency quickly pay off”, says The Economist. For example, the 787 is 40% more fuel-efficient per passenger than its 1970s-designed predecessor.
It’s not just planes. Carbon-fibre cars, long a familiar sight on Formula 1 racetracks, are becoming more common in showrooms. First it was more sporty models: the first production car to use an all-carbon-fibre chassis was the Porsche Carrera GT. But now mass car producers such as Ford, GM, Mercedes and BMW have either invested heavily in composite research or are about to launch models with far higher carbon-fibre content.
Again, it’s down to fuel efficiency. A lighter car will go further on the same amount of fuel. That means a lot for consumers paying record prices at the petrol pump. Also, tax rules in many countries, especially Europe, favour environmentally friendly cars: a lighter chassis is easier for relatively weaker electric motors to haul around.
Composites are becoming more affordable too these days, notes Keith Barry in online transport site Autopia. Companies have developed methods of “mass-producing carbon fibre that take less than a minute to build each component. By comparison, back in the early 1990s, it took 3,000 hours to build the carbon-fibre tub of a McLaren F1.”
This is the key to the composite story. It’s not just about mixing materials. After all, many of the most common, such as carbon-fibre, have been known for years. The trick is how firms can integrate composite materials into cheap, scalable manufacturing processes. We’ve more below on the stocks that will benefit.
The superhero of materials
The most impressive ‘super material’ is graphene. Its theoretical existence was first suggested in 1947 but it proved impossible to isolate. It wasn’t until 2004 that scientists from Manchester University managed to extract graphene from graphite (yes, the stuff that makes pencil leads) by pulling it away with Sellotape. Pencils and Sellotape tape might not sound very Tomorrow’s World, but graphene certainly is.
Firstly, it’s two-dimensional: a sheet of single atoms, about one nanometre (nm) thick. You’d have to pile about three million sheets on top of each other to get a layer that’s one millimetre thick. So to work with it, you need to use nanotechnology – the science of making things smaller than 100 nanometers (that’s less than one ten-thousandth the thickness of tissue paper).
Yet graphene is the strongest material ever measured, more than 200 times stronger than steel. As James Hone of Colombia University put it: “It would take an elephant, balanced on a pencil, to break through a sheet of graphene the thickness of Saran [cling film].”
It is also the best-known conductor of electricity at room temperature and incredibly transparent: it absorbs just 2.3% of the light that lands on it, compared to the 10% absorbed by the indium tin oxide (ITO) used in most touchscreens. In practical terms, this means clearer touchscreens.
Graphene is also the hardest known material – harder even than diamonds – while also being relatively elastic for a crystal.
Unsurprisingly, given this range of qualities, there has been a huge increase in academic and commercial research of graphene. However, it’s worth noting that people mix it with other elements to make new materials, so in many ways graphene is becoming a generic term, in the way that different types of plastics are just known as plastic.
Many firms think that because graphene is a good conductor of electricity, transparent and light, it would be great for making more efficient touchscreens, lights and solar panels. Indeed, Samsung Electronics has demonstrated a 25-inch flexible touchscreen that also uses graphene’s elasticity. The company has a graphene ‘roadmap’ and expects to launch dozens of such products over the next five years.
Graphene is a semiconductor, like silicon, and its ability to conduct electricity makes it ideal for circuit boards. IBM has created a 150GHz graphene transistor, which easily outpaces the fastest silicon version of 40GHz. While graphene is unlikely to replace silicon soon, there is potential for tiny lightweight processors that could make a credit card as powerful as your smartphone is today. And because graphene has only just been discovered, scientists are finding out more about it every day.
Just this year, it was found that a mix of graphene oxide keeps graphene’s impermeability to tiny atoms but, bizarrely, lets through water vapour. That’s sparked hope it could become a cheap alternative to expensive water desalination plants. An amazingly permeable material would also help solve some of the safety issues holding back hydrogen-powered cars. Graphene can also be used to make lightweight, more powerful batteries for electric vehicles.
So far, the UK government has invested £50m in graphene research, and the EU plans to invest a further €1bn. But by 2022 the global market for graphene-related products could be worth $300bn. We look at potential ways to profit below.
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It has not all been plain sailing for bioplastics. Agricultural giant Archer Daniels Midland recently ended a bioplastics joint venture with small technology firm Metabolix, citing “uncertainty around projected capital and production costs”. However, Ramani Narayan, a professor of chemical engineering and materials at Michigan State University, believes bioplastics can be competitive when the oil price is above $65 per barrel.
One leading company in the field is UK bioplastics producer Biome (Aim: BIOM). The firm extracts biodegradable natural polymers from feed stock such as starch. It then turns them into plastic pellets that can replace conventional oil-based plastic.
It also runs a joint venture, Biotec, with French firm Sphere. Biome’s share price took a battering recently, falling 60% when Italy announced that it would delay penalties for those using oil-based plastic bags. But given the bioplastics growth potential in other parts of the world, the sell-off looks overdone.
Edward Hugo at Daniel Stewart thinks the firm will be able to compensate for a short-term fall in sales by cutting costs. “The company is looking to shave £600,000 a year off its overheads and has an unused loan facility.” Longer term, Biome looks well placed to benefit from the bioplastics boom. “Biotec’s utilisation currently stands at 50%, so there exists clear room for expansion without the need for extra capital.” Hugo sees 77% upside to the share price from here.
British engineer GKN (LSE: GKN) is known as a car-parts maker, but over the last 20 years it has quietly built up a leading position in composites. Part of the reason is the firm’s aerospace unit. In the last 20 years it has grown from a small sideline to make up around 33% of group sales. As well as making composite wings for Airbus, GKN makes components for Boeing’s composite plane, the 787, and has set up a composite engine joint venture with Rolls-Royce.
It recently bought Volvo Aero for £633m to increase its expertise and market share in engines. Another new division, Land Systems, was set up in 2010. It is expected to have doubled its revenue from £700m to £1.5bn between then and 2015. The idea is that the unit will use GKN’s composite expertise to access new markets.
GKN is also pioneering composite use in some of its car-part products. As more car makers increase the composite content of cars, GKN’s experience in working with the materials should come to the fore. On a forward p/e of eight, GKN is priced as a car-parts manufacturer rather than a leading composite player. “The core expertise of GKN is composite materials”, says Glenn Liddy of JP Morgan, who rates the stock a ‘buy’.
Graphene is the most exciting of the new super materials, but it is also the hardest to invest in. “One of the main obstacles to all these applications becoming a reality is the lack of economically viable large-scale graphene production”, says Kiril Mugerman from Industrial Alliance Securities. “Several methods exist but all have certain limitations. Graphene production is still in its infancy and therefore it is hard to speculate which manufacturing method, whether natural or synthetic, will become the method of choice.”
One way to play it is to invest in the base commodity – graphite. World graphite reserves stand at 76 million metric tonnes (mt) – compared to around 670,000mt of copper – but that is likely to grow if high demand encourages exploration programmes.
One mining play is Focus Graphite (TSX: FMS). It owns the Lac Knife graphite deposit in Quebec. The deposit has promising geology, which suggests low-cost production. It’s also based in a mining-friendly country, good news if graphite becomes a geopolitical commodity. Lac Knife also has ‘high-grade’ graphite. It’s still not certain how important the grade is to producing graphene, but if it does turn out to be important, Focus should benefit.
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