How Chemical Companies are Adapting to Difficult Environment

By Paul Baiocchi | August 21, 2008 | 12:34 PM | 0 Comments

At first glance the Petrochemical complex looks like a sore thumb in the world of investments. After all, any industry with "petro" in its name must be a margin disaster with oil above $100, right? This conventional wisdom, while true in a vacuum, has created investment opportunities for those willing to exploit old-world market preconceptions. In addition to raising prices, many chemical companies are leaning on technology and innovation, manifested in the form of biomass, to combat margin pressure.

For example, the increased usage of biomass to create ethanol has been well documented so one only needs to go so far to find it. On the other hand, little has been made of the opportunity for petrochemical companies to use the same waste wood and crop trimmings to produce everything from plastic resins to food sweeteners. That is until now. 

Singapore-based Pure Power, a closely-held renewable energy company producing cellulosic ethanol for distribution in Asia, is leading the charge in this field. The company is using the willow plantations it owns in New Zealand to not only grow its ethanol business, but to revolutionize the petrochemical business. In a recent interview with Reuters, CEO David Milroy said the company's phenol substitute (a popular petrochemical used to produce plastics) is cost-effective with oil as low as $70. With oil hovering above $110 after a major sell-off, the company's natural Lignin product offers a real alternative to petro-based Phenol.  Add to this the potential for the high quality sulphur-free lignin to be made into diverse industrial products, such as carbon fibers, and you have another example of a company adapting to higher energy prices.

Now higher energy prices will continue to weigh on company earnings in the near term. That much is obvious. What is much less obvious is that alternative energy companies like Pure Power are getting closer than most people realize to breaking industrial dependence on traditional energy sources.  Whether the company's Xylitol sweetener is used to help patients with diabetes or dental care professionals is beside the point. The point is that it is made from Xylose produced from biomass and Japanese firms have tested the compounds; garnering the attention of major Petrochemical companies.  

Even if Pure Power is off limits for investors due to its private nature, China Biodiesel International (CBI.LON) is a company that you can own as long as you have access to the London Exchange.  CBI is engaged in the production of Biodiesel and is making significant strides in the push to create naturally based "Petro" chemicals.  The company, by way of its two production facilities, has capacity of up to 100,000 tons after opening the first of its Xiamen facilities in June of 2008.

Where we go from here is anybody's guess, but good luck convincing Pure Power and China Biodiesel that the road is paved with fossil-fuel based plastics.