Resource efficiency, how to invest in solutions

Ian Simm
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Following our first post where I outlined the key data behind our thinking on resource scarcity and resource efficiency I wanted to follow on by describing the main opportunities we see for investors, by sector, and how they can gain exposure to the themes and technologies.  We believe these will outperform in years to come. The drivers are fundamental and long term in nature.

Solutions to resource scarcity fall into two categories:

Increase supply:

  • Market response - increased price raises supply of scarce resources
  • Potential investment response - to allocate incremental capital to commodities, through expanded investment in resource equities

Increase efficiency:

  • Market response - higher price encourages development of innovative efficiency solutions and reduced use of resources
  • Potential investment response - invest in solutions to resource scarcity

Energy - rising oil prices have provided a strong impetus for efficiency

The energy sector is set for transformation and energy prices for most of the world's population will rise.  Investment globally is estimated to be US$1.5 trillion per annum over the next twenty years, of which 50% will be in the power sector.   Efficiency improvements in the sector are well established.  However we see three clear trends which lead to substantial investment opportunities.

  • Incremental efficiency improvements will gather momentum across many sectors (for example today's petrol and diesel engines can deliver up to 80 mpg but this should rise to 100 mpg within 15 years)
  • Rapid adoption of breakthrough technologies such as light emitting diodes (LEDs).  These consume 15% of the power of incandescent bulbs and last 50 x as long.  The LED market is expected to grow by 25% a year to 2020
  • Developing countries will leapfrog developed countries
    When faced with limited availability of fossil fuels developing countries are likely to encourage the adoption of the most energy efficient technologies

Water - the prevalence of water stress is increasing but the efficient use of water is a relatively new phenomenon

The opportunities to invest in water arise across three areas:

  • Companies involved in new asset creation
    The construction of new water supply and treatment infrastructure in emerging economies will be a dominant theme over the next decade
  • Existing assets need continual upgrading  as developed countries improve and extend their water infrastructure, particularly in areas of drought and flood risk
  • New technologies  are being rolled out in response to increasing regulation of the quality of water supplies.  These include membrane filtration, ultra violet light disinfection or using activated carbon

Food - 80 million more mouths to feed every year to 2050

This will require 15% more land but also vital inputs including agrichemicals, energy and water.

  • Improving productivity  will be vital.  Investment in seeds, crop protection and irrigation should all expand in the search for higher yields
  • We need to improve storage, transport and distribution  of food to the urban areas of high demand.  There are many investment opportunities within the supply chains and as these become more complex testing and traceability of food inputs is becoming a significant growth market
  • Consumers' tastes are changing, particularly with increased affluence in developed countries. This is giving rise to opportunities for companies with dominant market positions and brands

Materials - efficiency, recycling and smart materials

Increased consumption drives growth and this has accelerated as direct material usage per capita has increased as emerging market economies expand.  China is now the largest global end user of many raw materials. The efficient use of materials is now recognised as important as the efficient extraction of the primary materials themselves.

  • Improving primary materials extraction and processing yields
    In steel and chemicals production, industrial gases can be used to improve yields and scientific testing services in commodities sectors also offers efficiency savings
  • Increasingly efficient industrial processes
    There are a number of opportunities in new technologies such as automation equipment, sensors and controls to optimise the use of materials during manufacturing processes
  • Recycling and reuse
    These are increasingly important as an alternative to numerous raw materials
  • Smart materials
    The use of advanced materials can lower cost, fuel consumption and environmental impact across many industries

 

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