How One Technology Innovation Could Crush the Oil Boom

Even though the price of oil has plummeted, efforts to reduce dependence on fossil fuels roll on.
We see it in steadily growing demand for electric cars, solar panels and energy-efficient thermostats. And we see it in demand for everyday products derived from renewable feedstocks, like corn and beets.
The latter is a trend that the chemical industry is embracing in no small way. And as a result I’ve been following companies that make bio-based chemicals, which are derived from renewable feedstocks.
These bio-based chemicals, also known as sustainable chemicals, are “drop in” replacements for the petroleum-derived chemicals that currently dominate the market. That means they are exactly the same, only they are produced in a giant fermenter and not an oil refinery.
The fact that they are drop-in replacements is critical to their future use. Because it means that purchasers – massive companies like Cargill and DuPont (NYSE: DD) – don’t need to do anything different to integrate them into everyday products. They just replace the petroleum-derived chemicals with the bio-based version, and they’re off.
Because of the ease with which certain bio-based chemicals are integrated into manufacturing lines, they are being used in everyday products such as paints, plastics, clothes, personal care products, and even food.
The benefits of these sustainable chemicals are many. Because they are derived from renewable feedstock they have a lower carbon footprint. And their greenness means that products made from the bio-based chemicals can be advertised as eco-friendly. That’s a bonus for many manufacturers that differentiate based on an eco-friendly supply chain.
But perhaps most importantly, many bio-chemicals are cost-competitive as compared to petroleum-based versions.
The cost advantage of many sustainable chemicals depends largely on two variables: the price of oil and the price of the alternative, in most cases corn. I’ve seen examples where at $95-per-barrel oil and $6.50-per-bushel corn (the high in 2013), many clean and green chemicals were 50% cheaper than similar chemicals derived from oil.
That cost advantage has certainly diminished with oil at its current price near $50. But it hasn’t evaporated, especially since corn trades closer to $3.75 a bushel now. With the current price of corn, oil needs to trade down to around $30 for many bio-based chemicals to lose their price advantage.
While this is still a small market, the use of bio-chemicals is growing fast. Industrywide growth is expected to be 10% annually, while demand for specific bio-based chemicals is growing far faster. For example, demand for bio-based succinic acid is expected to grow by 20% to 30% per year over the next five years.
Bio-based succinic acid is used to make personal care products, food additives, plastics and resins. And it can also be transformed into 1,4-Butanediol (BDO) and Tetrahydrofuran (THF), which is used to make plastics, polyurethanes, biodegradable polyesters and spandex.
As you know from reading headlines, industrial biotechnology isn’t a sexy area of the market. Companies in this space aren’t going to garner the same attention as Apple (NYSE: AAPL) and Tesla (NASDAQ: TSLA). It’s far more interesting to contemplate a world filled with electric cars than a giant fermenter cranking out powders that go into plastics.
But there is very real and very large potential with select stocks in the sector. For those of you who, like me, enjoy an off-the-beaten path growth story, it’s worth following companies in the bio-based chemicals space. Especially interesting are those that have multi-bagger potential as they race toward large-scale development.
One in particular that I follow will be reporting results in early March. I’m expecting an update on its first full-scale production plant, which is being built right now in North America. This plant alone should increase revenue by more than 1,000% over the coming year as the company graduates from development-stage status.
If you’re at all interested, you can click here to learn more.

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