Sustainability Innovators Have Surprises In Store For Energy, Automotive, And Mining

Includes: CARZ, XME
by: Wal van Lierop


Sustainable industrial innovation in the private sector, collectively labeled the Fourth Industrial Revolution, is beginning to affect hydrocarbon, automotive, and mining stocks.

Renewables are no longer “alternative energy.” Wind and solar are producing electricity below grid prices.

In the automotive industry, nano-structured steel is challenging aluminum. This will lead to less energy-intensive production and more fuel efficient vehicles.

In mining, the introduction of “Internet of Things” (IoT) software and sensors will reduce waste rock movement and cut the industry’s consumption of diesel.

The common denominator in sustainable industrial innovation is carbon. Changing one variable in energy, automotive, or mining can reduce carbon emissions on a massive scale.

As a venture capital investor, I focus on technologies that drive the Fourth Industrial Revolution. These technologies emerge from breakthroughs in physics, chemistry, biology, and other natural sciences. They fuse scientific discoveries with the latest information technologies in an interdisciplinary fashion. Sustainable industrial innovation has begun to affect the hydrocarbon, automotive, and mining companies you trade today. I can't give you stock tips, but I will discuss what the Fourth Industrial Revolution means for these sectors.

Misconceptions about "green tech" (a loaded term) often lead investors to underestimate the relationship between sustainable industrial innovation and public market activity. Energy-related sustainable industrial innovation is at least a $12 trillion investment opportunity over the next 20 years. It won't necessarily upend companies with large carbon footprints. In the short term, sustainable innovators will help these companies become more carbon and cost efficient.

Most financial institutions have missed out on sustainable industrial innovation because risk management departments have run the show since the Great Recession. They fear reliving cleantech busts like Solyndra, which lost $1.5 billion for private investors and the U.S. government. Yet they forgive the $8.3 billion that Shell (RDS.A) (NYSE:RDS.B) wrote down from painful exits in the Arctic and Canadian oil sands in just one quarter of 2015. There is a double standard for sustainability technologies.

With these blind spots addressed, we can tackle the crux of this discussion. What does the Fourth Industrial Revolution mean for the hydrocarbon, automotive, and mining companies? What are risks and opportunities for investors?

Today, most major financial institutions have 25 to 30 percent of their holdings in fossil fuels. If they invested in Exxon Mobil (XOM) during the 1970s, they earned a phenomenal return. But those same institutions are divesting from fossil fuels on moral and financial grounds. Indeed, institutions worth $2.6 trillion have committed to divest entirely in 2015. In March, the $815 million Rockefeller Family Foundation joined this movement. That is no small shift given that their fortune comes from Standard Oil, the forefather of every major U.S. oil and gas company.

Despite these commitments, financial institutions won't divest overnight. Still, by 2020, institutions will likely cut to 20 percent holdings in fossil fuels. They realize that their investments risk becoming stranded assets if hydrocarbon companies fail to take the war on carbon seriously.

So, where will that five to ten percent be reallocated? The stock market is low and nervous, bond markets are negative, real estate is overvalued, and resources are down. I expect that companies representing the Fourth Industrial Revolution will absorb much of this cash on the sidelines. Reallocation will accelerate the arrival of sustainable industrial technology.

At the same time, the fossil fuel industry will increasingly play defense against renewables. Few people realize that renewables are beginning to dip below grid prices. A new wind farm in Morocco generates electricity at USD 3¢ per kilowatt hour. In Dubai, the newest solar installation delivers at 2.99¢ per kilowatt hour. Either Fortune 500 energy companies will take this challenge seriously, or they'll risk joining Peabody Energy (BTUUQ) in bankruptcy. It is becoming ridiculous to call renewables "alternative energy."

Sustainable industrial innovation in the automotive industry will affect both the hydrocarbon industry and automotive suppliers. Aluminum is becoming the de facto metal for car bodies, but it has limited crash resistance, it's difficult to fix, and it's expensive. Aluminum now faces a challenge from nano-structured steel, which is lighter, cheaper to make, less energy-intensive (cold-stamped), more recyclable, and stronger. Nano-structured steel will make automobile production less energy-demanding, and it will give vehicles better gas mileage. That will have ramifications for financial institutions and energy companies that double down on fossil fuels.

The Fourth Industrial Revolution will also deplete energy consumption in the mining industry. The hyped "Internet of Things" [IoT] will pay off as mining operations implement IoT software and sensors that reduce movement of waste rock. That alone can achieve $20 to $200 million worth of additional value on an annual basis depending on the mine. Part of that will come from reduced use of hydrocarbons (particularly diesel), which power the equipment that handles waste rock.

Sustainable industrial innovations have a common denominator: energy. More established innovations, like carbon capture and enhanced oil recovery (EOR), make the fossil fuel industry itself more energy efficient. More futuristic innovations, like nuclear fusion, could make fossil fuels obsolete.

For investors, the first key to the Fourth Industrial Revolution is to spot the private innovations that will affect public companies. The second key is to anticipate the spillover effects of these innovations. Changing just one variable (e.g., aluminum to nano-structured steel) can affect multiple industries. The third key is timing. The Fourth Industrial Revolution will leave stranded assets in its wake. Investors and financial institutions must act now.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.