This industry underpins all global trade: here’s the best way to invest

In the history of humanity, it's never been more convenient to be a consumer than it is today.

Almost anything you could possibly want is available for delivery with just the click of a mouse (or poke of a finger, if you're using a tablet).

It's easy to forget that behind this high-tech faade, a very old-tech form of transport is responsible for getting the vast majority of goods from A to B. Shipping still accounts for 90% of global trade in goods by volume.

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But the shipping business is facing huge changes of its own. The continuing growth in global trade, combined with environmental concerns, means the pressure is on to find greener' ways to ship goods from one end of the world to another.

And one company is poised to do very well by providing a solution to this problem

Shipping is very green - but not green enough

Global trade is growing more rapidly than the world economy, having rallied quickly after the financial crash. In fact, it has already surpassed its previous peak. With a possible US-EU trade deal on the cards, it's clear that global trade will continue to grow. That means more demand for ships to move goods.

However, the shipping business has one big problem: it's not environmentally-friendly enough.

Don't get me wrong: shipping beats almost any other form of transport. Flying goods from A to B produces 30 to 47 times as many carbon emissions as moving them by boat. Shipping is even twice as carbon efficient as rail travel.

Trouble is, the sheer quantity of goods being moved around the world is so vast that this still adds up to an awful lot of pollution. The EU estimates that the industry accounts for 3% of global emissions, and 4% of those in the EU. It also accounts for 10% of sulphur dioxide emissions. This is a particular problem it causes smog, acid rain and has been linked with health problems.

So the pressure is on ship owners to improve things further. As a first step, the European Commission wants all ship owners to monitor their pollution levels by 2018. It is also pushing for big cuts in sulphur by 2015. And there are already restrictions on sulphur emissions from ships within 200 nautical miles of North America.

Beyond the question of pollution, there is another problem that may appeal more to the shipping industry's sense of self-interest. The cost of fuel for ships is strongly linked to the price of oil. With crude stuck at around $100 a barrel, finding an alternative source of power could boost shipping firms' bottom line.

A return to wind power

The most radical option being considered is harnessing the power of wind by bringing back sails. This might sound crazy, but there are actually solid reasons to do it. Ocean winds are very powerful. Even with the size and tonnage of contemporary ships, using sails could still have a huge impact on fuel usage.

Of course, we're not talking about a return to the clippers of the 19th century, much as it has a certain romantic appeal. Any modern sailing ship would be fully automated with none of the complicated rigging (and large crew) of its predecessors.

Australian company Solar Sailor has already built several small commercial boats that use sails coated with solar cells, allowing them to benefit from both the wind and sun. Kite Ship, meanwhile, is trying to push the idea of using giant kites to pull ships along.

However, the project that is furthest towards completion is a partnership between design firm B9 Shipping and British engineer Rolls-Royce. They are building a ship, capable of carrying 4,500 tons, which will be powered by a 180-foot mast and a back-up methane engine, which uses natural waste. The project team includes a former winner of The America's Cup yachting race.

Of course, while sail-assisted shipping could help cut pollution, it may not be practical for all routes. And there will always be times when the sea is becalmed, and artificial power is needed.

So the hunt is also on for a greener' shipping fuel. The Royal Academy of Engineering has set up a group to study the problem in depth. There are several promising options, ranging from nuclear-powered ships to those using synthetic fuels.

However, these will take many years to become viable. In the short run, the Academy's recommended option is the use of liquefied natural gas (LNG). It's "a known technology with standards already in place, and is cheaper and cleaner than diesel". And thanks to the fracking-led natural gas boom, there is a plentiful supply in the US.

(For more on the fracking boom, and how you could profit from it, you should check out my colleague David Stevenson's latest report for The Fleet Street Letter).

Again Rolls-Royce is in prime position to benefit from this, having spent the last five years developing this area. The environmental benefits of some of their latest projects could be huge. The recent conversion of a Norwegian merchant ship to using LNG, cut carbon dioxide consumption by 25% and cut out most nitrogen and sulphur emissions too.

Retrofitting vessels isn't simple, and it doesn't come cheap. But with the price of oil where it is now, the savings on fuel costs are so great that the conversion ends up paying for itself within a few years. As the technology improves, this payback period is likely to continue to shrink.

How to cash in on the transformation of shipping

Sadly, most of the companies involved in this area are privately owned (not to mention quite risky), so you can't buy into them. As a result, the best play on the transformation of tanker and container ship engines is our very own Rolls-Royce (LSE: RR).

It's hardly a pure play. But while Rolls-Royce is best-known as an aircraft engine manufacturer, marine is now its second-largest segment, accounting for one in five sales. If LNG-based engines take off, then this share will only grow further.

And the company is doing well overall. Sales are up 20% year-on-year. While it currently trades at a forward price/earnings ratio of 18, this is set to fall to 12.5 by 2015. The forward dividend yield is 1.7%. The stock is not cheap by any means, but it's one to drip feed some money into gradually.

The Fleet Street Letter is a regulated product issued by Fleet Street Publications.

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