Profit from China's alternative to oil

Methanol is China's alternative fuel of choice. And with domestic demand growing by 15% to 20% a year, this unfashionable fuel is on the way to recovery, says Ewoin Gleeson. Here, he examines the sector, and picks one prime producer set to profit from the expanding Chinese market.

China's meteoric growth has come at a price. Farmers have scorched the hills surrounding Beijing black with chemicals. Shanghai is shrouded in lung-busting smog. But for China's leaders, there is also a major upside to the country's industrialisation by herding its population into densely packed megacities, China is increasingly reducing its dependence on oil. America, lumbered with long highways and gas guzzling cars, suffers every time the oil price resumes its climb. The average Chinese city worker, driving a single-gallon car, is frugal by comparison.

Better still, the Chinese learned another valuable lesson from the Americans two years ago. Back then, the president, George Bush, threw his weight behind corn-based ethanol as the country's alternative fuel of choice. Beijing watched closely as scores of Midwest farmers diverted crops to ethanol production. And the Chinese paid special attention when the price of corn quadrupled to $8 a bushel in the process. With too many mouths to feed, and concerned for China's food security, the Chinese have chosen an alternative fuel of their own methanol. As China recovers from the recent slump, a formidable recovery for this out-of-favour fuel is on the cards.

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Eoin came to MoneyWeek in 2006 having graduated with a MLitt in economics from Trinity College, Dublin. He taught economic history for two years at Trinity, while researching a thesis on how herd behaviour destroys financial markets.