Bitterly cold weather and snow have come early this year for much of the Northeast with places such as Erie, Pa., getting twice the normal snowfall thus far. That can only mean one thing: It's time to bust out the snow shovel from the garage, hoard road salt, and put the snow tires back on your ride. The routine has become a seasonal habit for many, which means there's a good chance you have never pondered what goes into making your winter necessities -- or most everyday products for that matter. An emerging shift to bio-based chemical production -- and the investing opportunities it creates -- means you may want to start.
As it turns out, snow tires are the perfect product for highlighting the possibilities. What makes them different from regular tires? Snow tires contain higher percentages of diene rubbers, such as butadiene, to enhance their low-temperature properties, while mineral oils are often used as a softener. All major components are within reach of biotech platforms.
A recent partnership between industrial biotech company Genomatica and Brazilian chemical giant Braskem (NYSE: BAK ) promises to produce commercial scale quantities of butadiene from microorganisms within a few years. Meanwhile, synthetic biology pioneer Amyris (NASDAQ: AMRS ) and Michelin are developing a process for producing biobased isoprene, or natural rubber, primarily for use in car tires. The company is also working with Japanese chemical manufacturer Kuraray for testing its liquid farnesene rubber with the world's major car tire manufacturers. Renewable-oils manufacturer Solazyme (NASDAQ: TVIA ) could produce the oils needed to soften the mixture and make the tires road-ready.
It may be crazy to think about, but by the end of the decade you will have the option to purchase brands of tires that had their major components produced in a renewable process from yeast, bacteria, and algae. Are there major opportunities available today for investors in biobased butadiene or biobased chemicals in general?
The biobased butadiene opportunity
Think this is all just a wishful lab trick? Think again. Genomatica has raised more than $100 million in investments from Braskem and Versalis alone. In fact, butadiene is the industrial biotech platform's second product. The company has already successfully commercialized and licensed a process for producing 1,4-butanediol, or BDO, to Novamont, Mitsubishi Chemical, and BASF -- the world's largest chemical producer and largest BDO producer. Companies around the world, such as Toray, Lanxess, clothing company Far Eastern, and DSM, have validated that Genomatica's BDO can be used to create products with the same properties as petroleum-based BDO.
Butadiene is a fine second product for Genomatica, while Braskem, which is the world's third largest producer of the chemical and the largest producer of biopolymers, may be a near perfect partner. The two will look to capitalize on a growing $20 billion global market that saw production top 20 billion pounds in 2011. That leads us to two quick conclusions about butadiene: the market is relatively large and the selling prices, at roughly $1 per pound, are pretty low. Therefore, it seems unlikely that investors will be able to profitably capture the market opportunity presented by biobased chemicals with butadiene alone. Braskem's struggle to maintain a profit with its portfolio of sustainable bulk chemicals points to that reality.
Luckily, butadiene is far from the only chemical within reach of industrial biotech platforms.
Butadiene's use in everyday products is an easy way to highlight that biobased chemicals are for real, but don't let low margins mislead you: There are numerous high-margin commercial opportunities for disrupting the chemical industry's love affair with petroleum-based hydrocarbons. For instance, Genomatica's platform has 20 intermediate and basic chemicals in its crosshairs. Amyris is focusing its efforts on the renewable hydrocarbon farnesene, which is a building block molecule with countless derivatives.
Meanwhile, Solazyme can produce an impressive portfolio of oils with similar or enhanced properties over their petroleum or natural (derived from palm oil, for instance) counterparts. Both Amyris and Solazyme can produce high volume, low margin products such as fuels and low volume, high margin products such as cosmetics, food ingredients, and fragrances. Amyris has already achieved commercial scale operations in Brazil using sugarcane as a feedstock, while Solazyme is scheduled to complete two commercial scale facilities in Brazil and the United States in the next few months. All three have attracted an impressive list of world-class companies -- from BASF to Total, Cosan to Bunge -- as partners for development and funding.
Where are the investing opportunities?
I don't think butadiene or biotech snow tires represent a profitable opportunity for investors, but I do think investors will continue to see strong interest from blue chip chemical manufacturers in industrial biotech platforms. Higher-margin products will continue to emerge; it's simply easier for bulk chemicals with larger markets to absorb additional capacity from biobased alternatives. That means investors are left with traditional chemical companies such as Braskem or developmental industrial biotech firms such as Amyris and Solazyme. (Genomatica is not publicly traded -- it withdrew its IPO in 2012 -- although its licensing model comes with substantially less risk than scraping together the capital required to build and operate commercial scale biorefineries.)
The former group comes with less risk, lower profit margins, and a focus on bulk chemical production. The latter group comes with greater risk, the potential for incredible profit margins, and a healthy focus on specialty and niche chemicals. While there are some obvious risks associated with investing in Amyris or Solazyme in the early stages of development -- as witnessed by historical share prices for each -- I think the long-term trends are impossible to ignore. It's only a matter of time before products made from each platform infiltrate your home. If you can keep up with developments and snag each company at a reasonable price, why not welcome them into your portfolio, too?
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