Profit from the transport revolution
The planet's transport problems will not be solved by electric cars, but by 'reinventing the wheel', say Eoin Gleeson and Jody Clarke. Here, we look at four big changes in transport – and how to profit from them.
The planet's transport problems will not be solved by electric cars, but by 'reinventing the wheel', say Eoin Gleeson and Jody Clarke. Here, we look at four big changes in transport and how to profit from them.
In January last year, China supplanted America as the world's largest car market. The sale of 13.6 million cars and trucks across the country brought an end to an era of dominance that dates back to the Model T Ford. China is now officially a nation of petrolheads.
That's a bit of a problem. There are already four million private cars clogging the streets of Beijing, says Leo Lewis in The Times. "And each day 2,000 new drivers become part of the capital's grim crawl of traffic." The city is choked with smog.
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But then so are Mexico, Bangkok and Shanghai. Worldwide, transport is responsible for 14% of the carbon dioxide emitted each year, according to the MIT Technology Review. And with vehicle ownership in developing countries growing at a rate of 30% a year, we really have to find a way to start weaning ourselves off liquid hydrocarbons. Fast.
But there's the rub. We're not going to wean ourselves off liquid hydrocarbons anytime soon. Worldwide, governments are throwing huge bundles of cash at scientists in the hope they will develop the ultimate electric car or biofuel. This creates jobs. It may even lead to a breakthrough at some point. But it's unlikely to be enough.
Take biofuels. We already know that we don't have enough farmland to produce vast quantities of ethanol-based biofuels. And it will be years before we are filling our cars with more promising biomass fuels, such as wood or algae.
As for electric cars, they'll be even harder to scale up. It will take years to develop a lithium battery cheap enough to challenge conventional cars for price, notes Chuck Squatriglia in Wired. That's before you even consider the cost of sourcing critical metals, such as lithium and cobalt, from countries such as Bolivia and the Congo. Wealthy drivers will be able to buy a slick electric model such as the Tesla Roadster. But most won't.
The reality is that petrol, diesel and jet fuel will remain the key fuels for transportation over the next decade. They are cheap; they allow you to refuel fast; and they have the sort of high energy density (your bang per buck, basically) that's critical if you want to travel long distances.
So what we really need to do is learn how to use these fuels more wisely. "Advanced technology is going to happen slowly," says Daniel Sperling, director of the Institute for Transportation Studies. "The focus needs to be on making conventional technology more efficient." That means redesigning our transport systems so that we don't spend the next two decades crawling through smog-filled cities, waiting for a scientist to crack the perfect battery for an electric vehicle.
Making lighter planes
Nothing scares the airline industry like an escalating oil price. At $45 a barrel, airline executives are sitting pretty; the sun shines on the runway and garish advertisements are taken out in the broadsheets to announce Lowest Ever Fares. At $65 a barrel, things start to get testy; planes have to be mothballed. Airline chiefs lose sleep thinking about ways to squeeze a few extra pennies out of their passengers. And when crude hit $143 a barrel last year, it was pure murder for the airline industry. Ryanair grounded 10% of its fleet to cut down on fuel bills, and a host of budget carriers went to the wall.
So while Ryanair boss Michael O'Leary can tell the FT that he has no interest in "the environment and all that shite", he has every interest in flying planes that use as little fuel as possible. That's why the new generation of planes coming out of the factory doors are designed to be as light, quiet and fuel efficient as possible. And one metal is key to this design: titanium. It has the highest strength-to-weight ratio of all metals. It is also exceptionally resistant to corrosion. You'll find it in deepwater drills and the condenser tubing in nuclear power plants.
So it's little wonder that the price of titanium fell last year, sliding from $30 per pound to around $8.50 now, as Boeing delayed the launch of its 787 aircraft. But China and several Middle Eastern states are on airport-building sprees. With dozens of new routes opening up each year between Asia and the Gulf, fresh demand for state-of-the-art planes will make titanium an invaluable transport commodity. By 2020, airlines could cut fuel consumption by 30%-50% by redesigning their planes, according to Kevin Bullis in the MIT Tech Review. Pumping biofuels into their plane engines simply won't have the same payoff.
And last month's long-delayed maiden voyage of Boeing's 787 helped cheer titanium suppliers. Industry giant Titanium Metals (NYSE: TIE) is the only producer with major plants in the US and Europe the main markets for its products. Its smelting operations make up 20% of global capacity. The stock is up 44% since we tipped it in September. But when you consider that 15% of the Boeing 787's weight is titanium (up from 5% in previous models) you see the importance of this metal to the industry. The firm generates $80m in free cash flow each year and remains a good play on the titanium recovery, despite the recent run up.
Reinventing the car engine
Just like planes, biofuels aren't the most efficient way to cut back on fuel use in cars. Blending corn-based ethanol with your petrol will only save you 15% of the fuel in your tank. But it should be possible to cut the fuel consumption of a mid-size saloon car by up to 60% using existing technology, says Bullis. Showrooms are already filling up with cars boasting advanced turbocharging and fuel injection technology that summon extra power from smaller engines. In the US, Barack Obama has established exhaust limits that will force car and truck drivers to make vehicles that are 30% more fuel efficient than current models by 2016.
As for finding more practical electric cars, basic hybrids that use less robust electric motors with simple lead batteries look a good bet, says John Petersen on Alternative Energy Stocks. The benefit of lead acid batteries is that they're cheaper than lithium ones and are fully recyclable. They work well in start-stop hybrids cars that conserve energy by shutting down the engine at stop signs and traffic lights. The system is being used in new vehicles from Peugeot-Citroen, Daimler and Ford.
Lead battery producer Axion Power (OTC: AXPW) has gone from strength to strength since partnering with battery giant Exide Technologies. In December, it raised $26m through a share issue, giving it the working capital to grow capacity, says Peterson. The stock is small and risky, but it's among the best pure plays on alternative electric-car technology.
Climb on board trains and trucks
Another way to cut back on oil consumption is to increase our use of trains. Angry commuters hit the airwaves this month in Britain, as ticket prices saw their usual annual increases. But jostle with the crowds at St Pancras station any day of the week and it's clear that train travel is as popular as ever. For example, the Eurostar service, which departs from the 141-year-old station, saw passenger traffic rise by 9% in the third quarter of 2009. Rail freight traffic is up 3%, even as firms ship less in the downturn.
Firms such as Arriva are already feeling the benefits. The transport operator recorded passenger revenue growth of 7% in the first 11 months of 2009 on its Welsh rail service, while its cross-country rail franchise saw revenue growth of 2%. Abroad, its mainland Europe operations saw a 2.4% jump in revenues, rising to 5.8% when you take into account acquisitions it made throughout the year. Montreal-based Bombardier's train manufacturing division saw its revenues rise by $254m to $2.5bn in the third quarter of 2009. This is one sector riding the economic slowdown smoothly. But can it continue? The fundamentals suggest so. France, Japan and China are all updating their existing high-speed rail services, adding track and speed to their networks. The French AGV, for example, can travel 600 miles in just three hours and has a top speed of 224mph (compared to 173mph for its predecessor, the TGV).
In America, meanwhile, the Obama administration has pledged at least $8bn to aid the roll-out of a high speed network. It's a brave move in the car-obsessed country. However, with worries building about future oil reserves, the idea is gaining support. Rail proponents FourBillion.com estimate that building the 9,000 miles of high-speed corridors identified by the US Department of Transportation would save 125m barrels of oil per year and eliminate 20m lb of CO2 per mile per year. It would also be a boon for the beleaguered American manufacturing sector. It would, for instance, generate $23bn in economic benefits in the Midwest alone.
Of course, lobbyists such as FourBillion.com will find the good in anything they back, so it's worth taking the projections with a pinch of salt. Indeed, a drop-off in bulk US railcar shipments, which carry everything from commodities to industrial equipment, means that freight loads are at their lowest since 1989, according to the Association of American Railroads. However, you wouldn't really expect anything else, given the severity of the recession. In the longer run, if projections for continually rising oil prices are correct, then increased use of rail looks likely. Diesel railways are roughly eight times more energy-efficient than heavy diesel trucks, according to the Association for Peak Oil. And companies, if not worried about the environment, are certainly concerned about money.
So how can you profit? As solid plays on US rail go, they don't come any better than LB Foster (US: FSTR). Founded over 100 years ago to distribute steel rail for the coal industry, it now makes everything from rails and anchor bolts to steel piling and corrosion protection coatings. Revenues have taken a hit recently, falling 37% to $92.4m in the third quarter of 2009. But because of cost cutting at the company, the gross profit margin came in 19% higher over the same period. The weak economy means revenues will probably remain under pressure this year. But in areas where the US stimulus package has already been passed, the company is winning contracts thick and fast. For example, the transit business booked a record $10m in the third quarter, compared to $1.7m the year before, boosted by contracts for new subway and light transit systems in Chicago and Detroit. On a forward p/e of 20, it's not cheap, but it's one to hold for the long-term as the Americangovernment continues to pump money into the sector.
Cutting back congestion
Heavy goods vehicle traffic fell by 12% on British roads between 2008 and 2009, says the Department for Transport. But as anyone who commutes to work by car in Britain knows, congestion hasn't gone away. Frustrated commuters spend more than two days (49.5 hours) stuck at a standstill every day, according to last year's Kia Motors' Cleaner Driving Report. The report estimated that the average Briton will spend 91 days of their working life ground to a halt in a jam somewhere.
But there's hope for frustrated motorists and environmentalists for that matter. Global Positioning System (GPS) receivers with real-time traffic data can save drivers four days per year and cut emissions by 21%, according to a study conducted by NuStats, a social science research firm. How? Because this GPS system can monitor traffic flows and thus direct a driver away from traffic jams. It looked at three groups of drivers in Munich and Dsseldorf: those with no navigation, drivers with ordinary navigation and drivers with real-time traffic-enabled navigation. The results? The third group of drivers spent 18% less time on their trips than the other two groups. It goes on to estimate that British drivers with traffic-enabled navigation would save 2.5 days per year, and thus cut their CO2 emissions by 20%. American drivers would save four days per year.
Sure, this depends on drivers going out and equipping themselves with one of these gadgets. But soon, in Europe at least, they may have no choice. The European Commission is pushing ahead with plans to install an aircraft-style "black box" in every car by 2014. ECall, a system that would notify emergency services automatically in the event of an accident, could cut the death toll on Europe's roads (40,000 a year) by between 5% and 15%, the EC reckons. It will also ease up traffic jams, reducing congestion times by between 10% and 20%, saving €2bn to €4bn, they say. Sooner or later, it seems that every car will be connected.
So which firms stand to profit? TeleAtlas and Navteq are the main players in the area, but as subsidiaries of TomTom and Nokia respectively, they can't be invested in directly. However, there are some smaller players. Norway-based Q-Free ASA (Oslo: QFR) provides electronic toll collection systems across Europe. Essentially, these allow drivers to pay toll charges electronically, without stopping their vehicle. The rollout of its system in Norway means drivers can now roll through tolls at speeds of up to 80 km/h. Fredrick Thoresen at DnB Nor in Oslo says that demand for truck-tolling technology "to stop the free riders" (truckers who dodge paying their tolls) in central Europe, is driving growth at the firm.
The stock has risen strongly in the past year, but given its potential, the forward p/e of 14.9 looks reasonable. An alternative, which owns a 20.5% stake in Q-Free, is Austrian firm Kapsch (KTCG: AV), which also supplies traffic systems and electronic fee collection software. Kapsch operates as far away as South Africa and China, but has also started toll systems closer to home in countries such as the Czech Republic. It trades on a forward p/e of 12.6.
This article was originally published in MoneyWeek magazine issue number 469 on 15 January 2009, and was available exclusively to magazine subscribers. To read more articles like this, ensure you don't miss a thing, and get instant access to all our premium content, subscribe to MoneyWeek magazine now and get your first three issues free.
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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.