This plastic stock just reported a 131% jump in sales

Bio-plastics is a niche sector in a huge industry. But it's a rapidly-growing niche. And this small-cap firm is seeing sales rocket, says Tom Bulford.

Two years ago Coca-Cola made a very brave decision. It announced that in the coming years it is planning to replace all of its plastic packaging with biodegradable material, starting with its global water brand Dasani.

And since then, companies such as Nestle, PepsiCo, Procter & Gamble and AT&T have followed suit in what is fast becoming a race to please increasingly environmentally-aware customers.

The result of all this is that bioplastics polymers derived from biological sources are rapidly winning market share over oil-based polymers. The market for bioplastics is forecast to grow by 32% by 2014. And that is big news for one penny share that could clean up in this rapidly-expanding industry.

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How the world got hooked on oil-based plastic

The first commercial plastic was developed in the 19th century. That first plastic, called Parkesine, after its English inventor Alexander Parkes, was in fact made from biological sources - gun cotton (a mixture of natural fibre and nitric acid) and castor oil. But oil-based plastics soon came to dominate.

The world is now hugely reliant on oil-based plastic. They are strong, light weight and until recently, quite cheap. Their uses now range from the shopping bag, packaging and children's toys to computer casings and car parts.

About 4% of the world's oil production is converted into plastic, and that is one of the drawbacks. Oil is increasingly expensive, and the production of one kilogramme of plastic requires 20 kilowatt hours of energy more than is needed to make an equivalent weight of steel.

So plastic production leaves a large carbon footprint. But the problem that attracts most attention is plastic's indestructibility. Once its useful life is over, how do we get rid of it? According to a recent research paper by Chris Goodall of Carbon Commmentary, 5% of the world's cumulative output of plastic since 1945 has ended up in the oceans, killing marine creatures that try to eat it.

Bioplastic is greener to make and greener to dispose of

Bioplastic can at least partially overcome these problems. Instead of using oil, bioplastic is made from biological sources such as sugar cane, potato starch or cellulose from trees.

Unlike oil, these can be replaced by fresh crops but still there are obvious objections. Could the land be better used for cultivating food? Proponents of bioplastic point out that there are parts of food crops the stalks for example that we do not eat anyway. In Brazil, for instance, bioplastic is made from sugar cane grown on poor soil that is not capable of supporting alternative crops.

Perhaps we exaggerate the problem. At present, the world produces about one million tonnes of bioplastic, less than 0.5% of world plastic output of 225 million tonnes per year. The crop feedstock is grown on an area of 300,000 acres, just 0.02% of the world's total naturally irrigated area available for cultivation. Even if half of the world's plastic were made from crops, this would take up only 3% of arable land.

In terms of carbon emissions, bioplastic has two advantages. As they grow, the feedstock crops sequester CO2. Also, bioplastic can be processed at about 140-180 centigrade, below the 300 required for oil-based plastics which uses less energy.

Waste disposal is another advantage of bioplastic. Conventional plastic can be recycled. A second solution has been an additive that speeds the decomposition of oil-based plastic. But this is controversial and Tesco has recently stopped using oxo-degradable plastic bags.

But bioplastic can be composted. For example, plastic sheeting used to cover vegetables can simply be left to dissolve into the soil. By using cutlery made out of bioplastic, restaurants and coffee shops can put all of their paper and plastic waste into the same bin, destined for the compost heap. Seattle, for example, insists that its restaurants use only bioplastic that degrades in the city's composting plant.

This plastic stock saw a 131% jump in sales

The biggest drawback for bioplastic remains cost. Even with today's high oil price, it still costs two to three times as much as oil-based plastic. But regulation and the corporate environmental conscience favour bioplastic.

It's a niche in the plastic sector, but it's a growing one. One AIM-quoted penny share, Biome (BIOM), saw a 131% growth in sales from its UK bioplastic division in the latest half-year. Chief executive Paul Mines describes the prospects as "very encouraging". It is not hard to see why.

This article is taken from Tom Bulford's free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.

Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by MoneyWeek Ltd.

Tom worked as a fund manager in the City of London and in Hong Kong for over 20 years. As a director with Schroder Investment Management International he was responsible for £2 billion of foreign clients' money, and launched what became Argentina's largest mutual fund. Now working from his home in Oxfordshire, Tom Bulford helps private investors with his premium tipping newsletter, Red Hot Biotech Alert.

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