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Is China for You? Part II: the resources and investor perspective

| July 25, 2011

A two-part series looking at China, as Chinese cleantech investment continues to surge and surge

Cleantech is going big in China, so big that’s it progress can be measured by the day and week, rather than the month and year.

Last week, earlier in the week we had a $200M IPO filing by China Industrial Biotech.

On Friday, the Yangzhou Municipal Government and Hudson Clean Energy Partners announced an MOU to jointly establish a RMB Fund to invest in China’s rapidly growing clean energy markets. Yangzhou represents a population of 4.6 million, situated between Shanghai and Nanjing, with a $34 billion municipal GDP.

The drivers for biofuels and cleantech as a whole? According to the 2010 China Statistical Yearbook, from 2005 to 2009 the gross domestic product of China grew at a compound annual growth rate of 16.5% and the domestic consumption of China grew at a compound annual growth rate of 13.0%.

China is rapidly approaching the point where it will become the largest importer of oil, and its rapidly increasing demand for oil and industrial chemicals is a concern for every Chinese leader focused on maintaining growth.

Our China series

On Friday, we looked at the Cathay IPO, the 10th major industrial biotech filing of the Green Equity Bull Market of 2010-11, as a basis for understanding the market from the industrial point of view.

In part two of our series on China, today we feature an in-depth interview with Jonathan Glen, partner in Shanghai-based Diverso Management, and look at China’s market from the investor point of view, including Diverso’s decision, among its many clean-tech investments, to strongly back TMO Renewables as a play for the Chinese cellulosic ethanol market.

BD: A little background on Diverso?

JG: We started out 8 years ago in Shanghai, focused on China, with a sustainable theme. China has food and energy security issues, and the Diverso venture fund looked at innovation and technology as a solution.

China’s situation, resources and perspective

BD: What does China’s situation look like?

JG: China’s gasoline demand is growing 10 percent per year, and has overtake the US in fuel imports, of which 50 percent come from the Middle East, so there’s the energy security issue.

BD: Resources, from a bio point of view.

JG: There are 1 billion tonnes of muni and ag waste available per year, and there’s value in unlocking the spread between the current value of that waste, and the heat value.

BD: There’s widespread interest around the world – Australia, the EU, the US – in negative cost feedstock from municipal solid waste – is that the focus right now?

JG: Right now, the Chinese government is more interested in agricultural waste, but there’s a lot a demand to find resolution to problems with landfills. For now, though, primarily the focus is on cassava stalk in the south, and corn stover and wheat stalks in the north.

China’s bio opportunity

BD: Timelines?

JG: The timeline is driven by policy change in China. There are no 1st generation licenses going out in biofuels, its been banned, effectively, because of food security. Currently, there’s a 10 million metric tonne target by 2020.
currently in China, production is not even .5 MT now. That target is close to E10 at current consumption, but the country won’t even be e5 by then, with rising demand.

BD: How does that translate into project completions?

JG: 300 plants are needed by 2020, and we have to start pretty soon. The Chinese like to hit and exceed targets. For example, with solar there was a 1.8 GW target, and China took it to 20 GW, and now talking about 50 GW.

BD: Won’t that run into the same financing barriers as in the West?

JG: China doesn’t have the problem of project financing. The banks will finance for environmental as well as project reasons, and agriculture gets a lot of support.

China and investment in sustainable agriculture

BD: What about concerns about maintaining a sustained focus on agricultural investment? There has been a great deal of policy uncertainty, and stop-and-start, around the world.

JG: There are a lot of reasons for why food and agriculture will become more important. The potential for crop disaster or disease is out there, for one. But, over the last 20-30 years, the regulatory barriers to innovation within agriculture have been very strong, very anti-gmo.

BD: You see that changing?

JG: It’s been very much on a non-scientific and emotional level, and people are starting to ask, for example, when the UN is going to foster more innovation. You see, the risks are that food prices will escalate on the back of speculation, and with that risk we will eventually come to a time, we have to, where the regulatory barriers will fall one by one.

BD: Which technologies do you think will change first, in terms of a more enlightened policy?

JG: Water take-up is huge. We are looking at irrigation technologies, too, ourselves.

BD: China’s role?

JG: Well, we are definitely not the Chinese government nor advising them, but speaking as an observer and participant, the Chinese government is not going to be waiting for the UN to take the lead. China has 25 percent of population and 5 percent of the arable land – it’s almost the opposite of the figures for the US.

BD: How do the growers see this, is there resistance there?

JG: There are quite a lot of farmers in China, but the holding are small.  Most of them have no more than 1000 square meters, between 1 and 1.5 mu, and a mu is 670 square meters. Right now, 80 percent of their waste is left to rot. To get some value, you don’t have much land to work with, you have to look for value. With the cost of incinerating waste, we using almost as much energy as we are getting out. So biofuels address the problem of how how you unlock value and improve lives. That’s popular.

Looking at TMO Renewables and China

BD: Your entry into biofuels, via the investment in TMO, how did that happen?

JG: We looked at the biofuels for some time, but felt the refining margins were too tight. We looked at
biodiesel, ethanol, a range of enzyme-based solutions. We invested in TMO because it made a lot of sense, both in terms of cost and how it approached cellulosic feedstock.

BD: Why TMO’s technology?

JG: Among cellulosic technologies, we looked at acid hydrolysis, which has been around for a while, the Russians used it in WWII to create fuel supplies for their tanks. The problems we saw: the cost is high and we saw pollution concerns. With enzymatic hydrolysis, we saw the search on for the magic enzyme, but so much of the work ends up being very specific to feedstock.

BD: So you looked towards the companies with microorganisms?

JG: Yes, Mascoma is using a similar type of technology, that helps them break down C5 C6 sugars. We liked what we saw at TMO, because instead of focusing on better enzymes, they had a thermophile, with a wide ranging appetite. The company is run by ex-oilman and chemical engineer, and has a tech team with success in bio.

BD: Progress with TMO to date?

JG: We invested in the company in 2008 and early 2009, and TNO have built a production pilot, generating
4000 tons per year, with the whole plant set up in a pharma-like fashion, to collect a lot of data. And then, we have set up a team to help the chinese government quantify the benefits.

BD: Next step in scale-up?

JG: We are working with COFCO, and are in the middle of testing programs which we will finish this year. The plan is design and build, starting next year.

BD: Expanding TMO beyond China?

JG: Our own focus is China, but of course we are highly supportive of the company as a whole, and in terms of expansion, broadening the investor group will be key. But not every investor is the right one. We see it as very hard, if not impossible, to invest in 5-year cycles, where it’s hard not to push the companies to run before they can walk.

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