3 Stocks that Will Ride the Wind Energy Boom

Last week we mentioned the scientific principle that when the scale of things increases, new and unexpected phenomena emerge. And we pointed out that this will have profound implications for investors in the resource sector.

Coincidentally, the November issue of Scientific American came out last week bearing the cover story, “A Plan for a Sustainable Future,” that unfortunately misses this point. Nonetheless, the article is an important read because it speaks to some exciting opportunities in companies developing alternative energy. And, even more important, despite its faults, the article does give us hope that our children may be able to live a good life on this planet. And, who knows, it may not be too late for us as well.

Let us explain...

WIND ENERGY: WILL IT STAY CHEAP FOR LONG?

The lead writer of the Scientific American article is Mark Z. Jacobson. If you've read any of my last several books, you should be familiar with this name. Jacobson is a professor of civil and environmental engineering at Stanford. I know him personally; we've sometimes lectured at the same conferences. He also has been interviewed twice for TCI.

Our interest in his work arose some eight years ago when he published an article in one of the world’s leading peer reviewed general science journals, Science, in which he argued persuasively that wind energy was a cheaper way of generating electricity than either coal or natural gas. He followed this up with another article suggesting that wind energy could be used (via electrolysis) to generate hydrogen fuel for trucks and automobiles that would be less expensive than gasoline.

Recently, wind has started to get more attention from governments around the world, since it is a proven alternative energy technology. We also think much can be said in favor of wind. It is certainly plentiful, clean, renewable, and apparently cost-effective (at present). However, because of the scale at which the world's energy supplies must be expanded, there's a lot more involved in wind power development than many of its proponents realize.

Jacobson's latest article proposes that 100% of the world's energy needs can be met with a combination of renewable energy sources. The biggest source would be wind, but solar, geothermal, and tidal energy would also play a role. While it may be theoretically possible for such a plan to work, we must consider that, in science, the answer to every problem always gives rise to further questions. Answers are always changing as knowledge expands and new problems emerge.

It may be true, for instance, that a small number of wind turbines built today might produce electricity cheaper than a coal-fired plant. But Jacobson's plan calls for 3.8 million wind turbines spread across the planet, each one large enough to produce 5 megawatts of power. It's hard to imagine a construction project on that scale that would not suffer from resource constraints.

For instance, let's take the most readily available commodity that would be used in making wind turbines: iron ore. Iron is one of the most common minerals in the earth's crust. Combined with nickel and other metals, iron is the major component of steel. Among all the major raw materials on the planet, iron is putatively the one the world is least likely to run short of.

But let's look a little closer.

Today, there are three major steel-exporting nations: India, Australia, and Brazil. Together they provide 70% of the world's exports of iron. Not surprisingly, China is the world's largest iron consumer and importer.

Apart from these three, most countries that produce iron ore use it entirely to satisfy domestic demand. They have no excess available to export. In fact, India has been hinting recently that it may need to stop exporting iron because its own consumption has been rising faster than production. That would leave us with just two iron exporters in the fairly near future.

Despite the economic recession, the iron market is expected to grow by 4 percent to 5 percent annually to support the construction taking place in the developing world and elsewhere. We think there is real question as to whether Australia and Brazil will be able to keep up under current conditions, never mind the proposed 20 percent or more additional demand for iron ore that Jacobson’s proposal would imply.

For one thing, though Brazil’s and Australia’s reserve base is a small fraction of the world's total iron ore reserves, it is particularly rich in iron and has a massive infrastructure that allows the iron to be transported to its desired markets. If we conservatively assume their currently stated reserves are accurate, and apply standard geological analysis, their iron production from existing reserves will likely peak within the decade – and perhaps within seven years or so if additional demand for turbines comes to the fore.

In order to continue to produce iron, they would have to develop reserves that are uneconomical today. At the very least, this means the price of iron ore must rise to new heights. This would add considerably to the cost of building wind turbines. The price of iron ore has, incidentally, been rising faster than the price of oil over the past decade.

However, there's no guarantee that enough new deposits could be developed fast enough to prevent wind turbines from becoming cost prohibitive. With India out of the picture, the world would have to turn to places like Russia and the Ukraine.

Frankly, we doubt these countries could deliver enough iron to meet the world's demand. For one thing, they would have to spend massive amounts of energy and resources (including steel) building the infrastructure to produce iron ore. Delivery would also be a problem. Building just one 5mw turbine takes over 1,000 tones of steel. Multiply that by 3.8 million turbines and you get some idea why nearly preternatural infrastructure and transportation costs are associated with the development of iron ore deposits.

So, while Jacobson gives us hope that the world could achieve a sustainable energy supply, the actual details will be fraught with snags. It will be a tremendous exercise in research and planning. After all, if even the most abundant raw materials could suffer from supply shortages, what about those essential resources that are considerably rarer?

Jacobson's plan (including its vision of renewable energy sources other than wind) would be limited by supplies of other minerals such as silver and rare earth minerals (which are called “rare” for a very good reason). Copper, too, would be required for all energy supply growth. Yet copper prices have also risen much faster than oil over the past 10 years.

Clearly, while all this spells a great challenge for the world, it is also creating some exciting opportunities for investors...

3 STOCKS THAT WILL RIDE THE WIND BOOM

Companies that produce iron ore should provide strong profits over the next few years as a result of the developing world's growing need. If nations start building windmills on the scale Jacobson proposes, the profits should be even higher. Currently, the top 2 iron miners are Vale (VALE) and BHP Billiton (BHP).

As for wind energy firms, we continue to like the largest wind company in the U.S., FPL. FPL has a lot of downside protection because of its utility business.

Naturally, many other companies will benefit as the world seeks greater energy supplies, but these three are an excellent place for investors to start.

Comments

[doubleguns:]

REE's are the BIG snag since they are a very rare resource with 95% of production presently in China alone and now China is cutting back on the amounts that they export.

No REE's means no magnets in the wind turbins. Until we solve this problem wind energy seems to be closing in on very strict limitations as to what number can be produced outside of China unless China is benevolent and ships out magnets instead of using them for their on needs.

Oct 27 09:48 AM

[raafat:]

i don

Oct 27 01:11 PM

[Alan Young:]

The author has a good point, but misses a couple of tricks.

For iron supply, there will be lots of recycling. Scrapped cargo ships which used to carry ore, for example (no joke!). Steel recycling specialists such as SCHN and SMS could do better than miners, since they produce more steel with less energy.

The other thing needed for large wind farms to be feasible is an updated buildout of the power transmission grid. That's another whole sector of stocks that are overdue for a rally.

@Doubleguns: certainly, China will ship magnets. They want the manufacturing business; that's why they don't want to export the raw materials.

Oct 27 01:22 PM

[Dr. Stephen...:]

Thanks Alan: The numbers I used were net of recycling. In other words, the supply that meets yearly demand includes recycling. And because recycling is much cheaper than new manufacturing it is a pretty safe assumption that we are recycling as much as possible - indeed last year I think we recycled over 100 percent of auto's sold. You are right about magnets and the grid. With the grid - believe it or not - there may be issues with copper.


On Oct 27 01:22 PM Alan Young wrote:

> The author has a good point, but misses a couple of tricks.
>
> For iron supply, there will be lots of recycling. Scrapped cargo
> ships which used to carry ore, for example (no joke!). Steel recycling
> specialists such as SCHN and SMS could do better than miners, since
> they produce more steel with less energy.
>
> The other thing needed for large wind farms to be feasible is an
> updated buildout of the power transmission grid. That's another whole
> sector of stocks that are overdue for a rally.
>
> @Doubleguns: certainly, China will ship magnets. They want the manufacturing
> business; that's why they don't want to export the raw materials.

Oct 27 01:37 PM

[bartpr:]

steel is used a the base for holding the blades. the blades are carbon fiber and a cured resin because steel would be too heavy. the size of the blades are huge compared to the base tower. the mass of the blades are many times that of the base mass. use of these blades requires significant increase in production of carbon fiber and the resin binder.
curing of the blades takes a long time because time required in the mold to avoid distortion.

actual user of glass fiber, carbon fiber, and binder resins.

Oct 27 02:19 PM

[Dr. Stephen...:]

Batpr: Many thanks for the info on fiber and resin binder. I knew these materials were used but was not aware of how much. That is really useful information.


On Oct 27 02:19 PM bartpr wrote:

> steel is used a the base for holding the blades. the blades are carbon
> fiber and a cured resin because steel would be too heavy. the size
> of the blades are huge compared to the base tower. the mass of the
> blades are many times that of the base mass. use of these blades
> requires significant increase in production of carbon fiber and the
> resin binder.
> curing of the blades takes a long time because time required in the
> mold to avoid distortion.
>
> actual user of glass fiber, carbon fiber, and binder resins.

Oct 27 02:34 PM

[Windsun33:]

You are assuming that there will actually BE a boom in wind, and I don't see it happening in the near future, mainly due to NIMBY and BANANA.
....
NIMBY (Not In My Backyard) and BANANA (Build Absolutely Nothing Anywhere Near Anyone)

Oct 27 03:49 PM

[Douglas Hvi...:]

For the towers, look at Accoya. A dutch company (Accsys) has developed a method to treat wood for much greater strength and durability. In the US, Titan Wood is their subsidiary. Accoya wood competes with steel and concrete for large structures. The wood is bulkier than steel for the same strength, but a tower is hollow due to the need for stiffness. By just having the walls thicker, you can get the same basic results.

Also, a company named Sanderson Engine Development has an improved mechanism, allowing better hydraulic pumps, air motors, etc. This would allow the heavy generators to be at the bottom, with a lighter mechanism at the top. I believe it is in development stage for one wind turbine at present.

Not saying it would be easy, saying it is possible.

Oct 27 05:43 PM

[Dr. Stephen...:]

Douglas: thanks for the info. We are going to need a lot of creativity to solve the problem. Are the companies you mentioned public as I cannot find them on Bloomberg. Many thanks


On Oct 27 05:43 PM Douglas Hvistendahl wrote:

> For the towers, look at Accoya. A dutch company (Accsys) has developed
> a method to treat wood for much greater strength and durability.
> In the US, Titan Wood is their subsidiary. Accoya wood competes with
> steel and concrete for large structures. The wood is bulkier than
> steel for the same strength, but a tower is hollow due to the need
> for stiffness. By just having the walls thicker, you can get the
> same basic results.
>
> Also, a company named Sanderson Engine Development has an improved
> mechanism, allowing better hydraulic pumps, air motors, etc. This
> would allow the heavy generators to be at the bottom, with a lighter
> mechanism at the top. I believe it is in development stage for one
> wind turbine at present.
>
> Not saying it would be easy, saying it is possible.

Oct 27 05:55 PM

[jerrydd:]

Sorry but that plan isn't very good. I love wind and have built them, tidal power myself along with EV's. But wind can't be more than about 30% of the grid because they are too variable.

H2 is a joke as it's only 25% or so storing electric. We can't afford that when batteries are far more eff at 90% and far less costly.

Far better is a combo of mostly home size wind, CSP solar, CHP/biomass/wood pellets, PV plus some big wind. Home size is far more cost effective needing little grid. Also because it's many units spread out they average out.

River/tidal kinetic hydro which the US, Europe has enough resource to completely replace coal, nuke, plus geothermal are good baseline.

Then EV batteries in reverse supporting the grid, charged off peak and utility battery banks along with pumped air, pumped hydro, waste biomass and large CSP with heat storage to handle peak loading.

All this saves most of the long distance grid and more important, copper. Nor would it hurt to use some eff NG for hybrid semi's and peak power.

That is the low cost, eff way to do our future electric and much of the transport needs.

Rare earths, like lithium, are just not that rare. Some electronics metals are but there are substitutes and not used in RE. Just so little market until recently, they haven't been mined. Several US mines for both are being reopened and opened now. We have plenty.

Oct 27 10:43 PM

[bartpr:]

wind and solar are two not in my backyard sources, agreed. there is plenty of space to utilize these sources. once a location is decided transmission lines must be installed to connect to the grid. both are variable energy sources. right now whatever energy is generated it is only at times when wind is there and for solar when the sun is out.
in order to optimize the energy available batteries can store the excess until it is needed. at this time battery storage is not used because to amount of energy generated is small compared to the
conventional sources. when these alternatives sources become significant batteries will be used. there are opportunities in small companies that have the technology already developed to accommodate big storage and extended discharge times. zbb has a flow type battery that can handle huge charges and discharge.
axpw.ob has a lead carbon electrode battery that is superior to lead only. i am not going to discuss the tech aspects. those interested can look it up.

utilities have these under test. patience is reqd here because the need for battery storage has not yet developed. when alternative energy becomes significant, storage will be reqd.

i have a small investment is each. not trying to make it big. these are spec plays and very long term holdings.

in another vein the energy users of this country dont care now about how much is wasted because coal and ng is plentiful. i have interests in energy recovery technology and no one cares about how much energy is exhausted in industry. exhaust stack recovery is going nowhere. sales have been low for years. oboma is concerned about energy savings. maybe the energy act will make energy recovery more of an economic issue. the more recovered the less emissions. etc.

Oct 28 08:40 AM

[Douglas Hvi...:]

<i>Are the companies you mentioned public as I cannot find them on Bloomberg.</i>

The Accoya companies are not public. I suggest a search on the name. They sell in railroad car (or semi) size lots at present.

There is a new windmill variation that reduces the amount of material used in the blades for a given amount of wind capture by using multiple blade sets along a shaft. Look at www.selsam.com/. At present, it is only available in small sizes, but it should be scalable. The basic thing is that if you just increase blade sizes, volume goes up as a high power of size. By arranging multiple sets per shaft, you divide by the number of sets.

Here in North Dakota, the situation for wind is IMBY. Ranchers and farmers like having an extra income stream. The amount of actual space used is small, even including access roads, since the towers need to be a large distance from each other to prevent cutting off of the wind. The problem here is transmission capacity. There has been development in the hills west of us, since there is a high power transmission line from Garrison past Aberdeen, and wind quality is level 5. I'd like to see towers on my own quarter, but it is in a low area (one of the few areas in ND that is only level 3), so is unlikely to be wanted soon.

Oct 28 09:20 AM

[toobad41:]

FPL last year had positive effects from the American Recovery & Reinvestment Act, which allowed the company to take value of Federal wind-power production tax credits in the form of cash. However the company is down 31% from last year and will be down this year and next. Florida has also been one of the hardest hit states in this recession.

Oct 28 09:35 AM

[La Marque:]

Wind and solar are going to become mainstream, no matter what. John Petersen on Seeking Alpha has been saying for a while that the battery makers C&D and Exide will be winners in this area because the wind and solar farm developers are going to have to have storage to make up for the variability of the source. American Electric Power has said that it is planning to install batteries in neighborhoods to take up the slack in peak periods.

As far as iron and other materials for everything, I invested in Waste Management Inc WMI and Commercial Metals CMC. They are both profitable and pay dividends.

Oct 28 10:07 AM

[La Marque:]

FPL is one of the major investors in the Texas wind market which now leads the nation and is still growing. Texas has the second highest electricity rates in the U.S.


On Oct 28 09:35 AM toobad41 wrote:

> FPL last year had positive effects from the American Recovery &amp;
> Reinvestment Act, which allowed the company to take value of Federal
> wind-power production tax credits in the form of cash. However the
> company is down 31% from last year and will be down this year and
> next. Florida has also been one of the hardest hit states in this
> recession.

Oct 28 10:09 AM

[jerrydd:]

Todd. I live in Fla and that they are down only means they have a large upside and pay good dividends. They have a lot of wind in many US markets, I think they are the biggest, and just installed the largest US solar farm near me. I think next yr they will do very well as our real estate gets better as it is starting too. Fla is very cheap now and many boomers are retiring so the only way is up.

As fossil fuels rise in price while wind is stable those with a lot of wind production are going to reap the benefits.

Exide is a badly run company selling low quality products in a low margin business, lead batteries. It value is low for those reasons and not likely to do better. John has a thing, invested in, for carbon lead batteries of which after many yrs still none are available to buy with little market even if they were. Investing in them is not wise.
In EV's, other apps, Exide batteries last 50% as long and known as the Yugo of battery producers.


On Oct 28 09:35 AM toobad41 wrote:

> FPL last year had positive effects from the American Recovery &amp;
> Reinvestment Act, which allowed the company to take value of Federal
> wind-power production tax credits in the form of cash. However the
> company is down 31% from last year and will be down this year and
> next. Florida has also been one of the hardest hit states in this
> recession.

Oct 28 11:00 AM

[tc1:]

Intereting article and comments here. It really is an amazing time as (finally!) the venture capital and govt spending is moving into renewable energy in a big way.

While reading your article, Stephen, it hit me that there's a micro-cap company, Axion Holdings Int'l (AXIH.OB) that recently made a splash when its stockprice skyrocketed 150% on a squib about it in BusinessWeek. The U.S. Army is becoming very interested in AXIH.OB b/c, in a process discovered by Rutgers Univ. scientists, it recycles plastic wastes into building materials for bridges, i-beams, railroad ties, marine pilings, etc., that are stronger, less resistant to corrosion, less maintenance and thus lower cost than steel, wood or cement. Army experts want to replace their bridges with this stuff.

If AXIH.OB were able to produce a replacement for the steel in wind-turbines, we'd have a real win-win situation, quite viable for the mass building of the wind turbines that your friend Jacobson envisions.

A big plus would be that the materials provided by AXIH.OB would come from plastic recycled sources and thus would not involve the terrible toll on the environment required by new mining for iron and other metals.

Disclosure: long AXIH.OB

Oct 28 11:08 AM

[William Dav...:]

Your right about Iron ore as the Oil and Gas industry will also need large quantities to open up the remaining reserves in offshore in deep water off Brazil, GOM and eventually Greenland and the Arctic.

What I think you have missed is that most of the Wind is remote places as well and will need vast expansion of the electricity grid, particular for the more reliable off shore wind that is now developing in the North Sea. That will require Super smart grids, linked using HDVC, so industry leaders like ABB, Siemens and meter companies like Itron

Oct 28 01:36 PM

[Wildebeest:]

Surprised by no mention of Rio Tinto, the #3 iron ore producer. The agreement reached between BHP and Rio, after the failure of the hostile bid for Rio, is projected to reap 5 bill on costs savings shared between the two in their Pilbara, Australia iron ore mines.

More and more magnetite will be consumed in the future. This will add $10-20 per tonne to the production cost but yields a higher quality product so some of the cost is recovered in premium pricing. The problem is, as I understand it, steel mills cannot use readily switch between hematite and magnetite. They have to be built and designed for one or the other. What we are starting to see is relationships between wannabee magnetite producers and Chinese steel mills in which the steel co builds magnetite mills and long term off-take agreements are entered into. Advantage to the steel mill is diversification away from the BHP/Vale/Rio triopoly. Advantage to the magnetite wannabee is chinese funding.

Gindalbie metals being a perfect example of this. (disclaimer: long gindalbie)

Oct 28 02:00 PM

[Pericles:]

I agree with the "NIMBY" concept, but the best location for wind farms in the U.S. is the Mid-west/U.S (Pickens explains this well on pickensplan.com) which is pretty rural. I am from Chicago and recently noticed a large number of wind turbines popped up between Chicago and Indy off I65 (in corn fields - probably a good incremental source of income for farmers). With this said, the distribution of that energy could be a problem????


On Oct 27 03:49 PM Windsun33 wrote:

> You are assuming that there will actually BE a boom in wind, and
> I don't see it happening in the near future, mainly due to NIMBY
> and BANANA.
> ....
> NIMBY (Not In My Backyard) and BANANA (Build Absolutely Nothing Anywhere
> Near Anyone)

Oct 29 10:47 AM