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Knowledge@Wharton has an excellent article on the growing pollution problem in China. There is also a recent report that China is failing to meet its environment targets. The media is picking up on this and I think Beijing will do everything it can do before the Olympics to fix it. Let me summarize the key points of the article before I move on to picking companies that could benefit by helping the Chinese in overcoming some of their environmental issues:

What’s wrong

• According to the World Bank, 16 cities in the world with the worst air pollution are located in China.chinese pollution
• The country’s Ministry of Science and Technology has estimated that 50,000 newborn babies a year die from the effects of air pollution.
• China’s emissions of carbon dioxide, the most important global warming gas, are expected to surpass those of the United States in 2009, according to the International Energy Agency.
• At a recent Marathon, the pollution Index read 149 (Anything over 100 is considered unhealthy).
• “Eric W. Orts, professor of legal studies and business ethics at Wharton, says that pollution, if left unchecked, will drag down China’s economic growth and result in huge healthcare costs. In addition, China’s pollution will, over time, erode its competitive position in the global economy.”
• Pollution in Beijing could be a major issue for the Olympics in 2008 if left unchecked.

What China is doing

• The city of Beijing has relocated, or plans to relocate, more than 100 chemical, steel and pharmaceutical factories outside the city and replace 300,000 polluting taxis and buses with lesser-polluting vehicles.
• It is seeking to replace coal furnaces with natural gas furnaces and rushing builders to finish construction well before the Olympic games so that dust from the building projects has a chance to settle.
• There has been some progress but its all relative. In 1998, Beijing recorded only 100 so-called “Blue Sky” days with acceptable pollution. By 2005, the capital had tallied 244 Blue Sky days.

I am going to highlight two stocks that I think can help China overcome its environmental issues. Yes, I do own both of these stocks and I think both of these companies can help China in the short time they have left before the 2008 Olympics.

1. Fuel Tech Inc. (FTEK): Fuel Tech, Inc., engages in the development, commercialization, and application of technologies for air pollution control, process optimization, and engineering services worldwide. Earlier this week, the company was awarded $2.8 Million NOxOUT ULTRA Contract by China. China has vast coal reserves and depends on coal for 70% of its power.

This $2.8 million order calls for the installation of a NOxOUT ULTRA system at Beijing Jingneng Thermal Power Co.’s Shijingshan Power Plant, in support of four 200 megawatt coal-fired boilers to be retrofitted with selective catalytic reduction [SCR] systems for NOx control. Project completion is scheduled for the first quarter of 2008, in advance of the 2008 Summer Olympics. President and CEO, John F. Norris Jr., added, “With China diligently preparing for the Olympics, efforts to reduce air pollution are taking center stage in Beijing and other Olympic venues.” Mr. Norris further added, “To the extent SCR systems are utilized to achieve deep cuts in NOx emissions, Fuel Tech’s NOxOUT ULTRA approach should be viewed as a leading technology candidate for other Chinese power plants, many of which are sited in or near high-population cities, naturally or culturally preserved precincts, major waterways, harbors or islands. Moreover, because this project is located in China’s capital city, Beijing, we believe this announcement will likely influence decisions made by other power plants operating in the PRC.”

Fuel Tech is not only a great China play but also a great domestic play. Currently, Fuel-Tech equipment is used by less than 2% of the more than 1,500 coal-fired plants in the United States. So there is plenty of growth left in the United States as well.

Fuel Tech is based in the United States, is profitable and is near its 52-week high.

ftek

2. Suntech Power Holdings (STP): Suntech Power is a Chinese Solar company that produces solar cells and modules. It’s one of the biggest pure play solar companies in the world. It’s also profitable and better then any of the recently IPO’d Chinese Solar stocks. The company has already won the contract to provide 130KW solar energy system for Beijing’s Bird’s Nest Stadium for the Olympics.

China also recently announced plans to build the world's largest solar plant. The 100 megawatt [mw] project would cost approximately 6.03 billion yuan ($766 million) and construction would take five years. Although this is pure speculation, I think Suntech Power could play a major role in this solar plant. They are the biggest solar cell manufacturer in China and the CEO is the richest person in mainland China. I believe China will install more solar panels before theBeijing Olympics even if its just to improve its image. (It is said that the pollution in the city is so bad that the sun’s rays barely reach down and thus hinder the effectiveness of solar panels.) Suntech Power also has long-term silicon contracts in place to be able to supply this project.

stp

There are a number of other companies that can benefit from Chinese spending to fix its air quality. General Electric Company (GE) will also play a role on many fronts. They can help with Nuclear Plants, Coal Plants and Wind Turbines. Another Wind Energy play would be American Semiconductor (AMSC) which I have been closely following for the last few weeks.

Disclosure: I am long STP and FTEK.

Sean Rein of the China Market Research Group also wrote an article on this subject recently and it points out some more companies to watch.

Source: Chinese Pollution Plays