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Investing in biofuels and biobased Intermediates

| January 9, 2013

Find investing in fuelmakers, or feedstocks not exactly your cup of tea? Why not look at the powerful, rising tide in intermediates?

Crude oil, ethanol, corn, sugar prices, or soybean prices. They’re up, down and all around — and known to cause distress for the lay investor. Not to mention the mighty analysts of Wall Street who routinely tear out their hair trying to accurately forecast the trends in commodities.

If there’s anything harder than figuring out the future path of a commodity — then it would have to be a commodity made from a commodity — such as gasoline made from crude oil, or ethanol made from corn or sugarcane, or biodiesel made from soy, canola or palm.

intermediates

Accordingly, many investors sit on the sidelines when it comes to renewable fuels, despite the overall rosy outlook on long-term demand in a world that needs more liquid fuel and fewer carbon emissions.

So, where’s the astute investor to go – whether an institutional buyer or a strategic investor, or small retail investor. A powerful option are biobased intermediates.

What exactly are they? As the name suggests, they are products made from renewable sources that are not sold directly into the end-user market but are, instead, sold to other manufacturers who refine, upgrade, blend, ferment or catalytically convert them into end-user products.

(Note: some manufacturers have multi-step processes – for example, they make syngas from wood and then catalytically convert that syngas into an end product, such as ethanol. Thought the syngas in this example is an intermediate product – for the purposes of this article we are looking only at intermediates that can be commercially sold and distributed)

Why intermediates work?

The two most important aspects of investing in intermediates both relate to hedging your investment. One hedge lies in the fact that intermediates can be used in a host of products.

To use an example – fuel ethanol has growth challenges because the product is running out of blending opportunities with gasoline.

But Amyris’ biofene molecule can be used to make a wide variety of health, fuel, chemicals, fragrances or flavorings products. Ensyn’s RTP product is used in barbecue sauce flavorings as well as producing a fuel intermediate. Facing shortfalls in fuel? Make more barbecue sauce.

The second hedge lies in the fact that many – though not all – makers of intermediates also make a wide range of other products. Cargill, through its NatureWorks subsidiary, can make a lot of Ingeo-branded polylactic acid — but it also makes a huge array of, well, just about anything else that can be made out of soybeans or corn. From fructose to car steering wheel components, there’s a hedge in the protection of multiple products and markets that some intermediates makers offer.

3 types of intermediates

In the biobased world, there are three main types of intermediates.

Fermentable sugars. These can be extracted from traditional crops, such as corn, sugarcane or cassava; alternatively, they can be extracted from forest residues (sawdust, forest slash, trimmings), crop residues (such as corn stover, sugarcane bagasse, or palm fruit waste), or municipal solid waste. Or, extracted from energy crops such as switchgrass, miscanthus or fast-growing wood biomass (e.g. hybrid poplar)

Upgradable bio-oils. These can include pyrolysis oils. These are made by heating up biomass in the absence of oxygen (so it doesn’t catch fire), and given the right process conditions and catalysts, out comes a combination of natural gas, bio-oil and a terra prete fertilizer. The bio-oil can be burned directly in a boiler, but is not suitable as transportation fuel (for some of the same reasons that auto engines use gasoline or diesel instead of crude oil). However, modified refineries can handle bio-oils as a crude oil alternative, and can use them as a feedstock to make their usual array of fuels and chemicals.

Intermediate resins and chemicals – drop-in equivalents or novel replacement molecules. There are lots of intermediates in the chemicals arena. A classic example – the resins used to make plastics. But on the chemicals side – there are intermediates used to make paints, solvents, lacquers, thinners, de-icers, lubricants and many, many products. An example, Avantium’s YXY process, used to make an intermediate that is used in the production of clear plastic bottles. But there are hundreds of options.

The dividing line in biobased is between novel molecules and drop-in replacements, So, for example, Verdezyne is making a biobased adipic acid that is a direct replacement for fossil-basid adipic. Same goes for Rivertop’s glucaric acid, Myriant’s biosuccinic, for example.

On the novel molecule side there is, for example, Amyris’s Biofene. And Avantium is touting the molecules is makes in its YXY process as substitutes for, to use an example, current fossil-based incumbents used in clear plastics.

Who’s making intermediates?

In our Biofuels Digest Index portfolio of 30 stocks, the following companies make biobased intermediates (in the sense that we are using it here in BioInvest Digest)

ADM (ADM)
Algae.Tec (AEB.AX)
Amyris (AMRS)
BlueFire Renewables (BFRE)
Codexis (CDXS)
DSM (DSM)
DuPont (DD)
Gevo (GEVO)
KiOR (KIOR)
Novozymes (NZMB)
Rentech (RTK)
Syntroleum (SYNM)
Solazyme (SZYM)

In the 30 Hottest Companies in Renewable Chemicals and 50 Hottest Companies in Bioenergy, here are some privately-held companies – and all of them will be raising capital full-time right now as they reach for commercial-scale and deployment.

LanzaTech
ZeaChem
LS9
Virent
Enerkem
Renmatix

Virdia
Elevance Renewavle Sciences
Cobalt Technologies
SG Biofuels
Ensyn
OPX Biotechnologies
Myriant
BioAmber
Avantium
Segetis
Verdezyne

More of the Hot 30 and Hot 50 may expand their offering to include intermediates as markets develop.

What’s a viability point for an intermediate?

Clearly, intermediates have to create opportunities for their customers — and that means fitting within their basic feedstock cost parameters. Here’s what that generally means — the average cellulosic venture can afford to spend around $0.90 per gallon on fuel feedstocks — total.

Now it takes about 12 pounds of sugar to make a gallon of fuel — so, you need a renewable sugar at 10 cents per pound, or less, for that channel to be viable.

Keep in mind, chemicals markets are more forgiving and early-stage pricing can be sharply higher than the pricing that is needed at-scale. For chemical markets, where the molecule prices about gasoline or diesel (for instance a $5 chemical vs a $3 fuel), you can apportion some of that difference to the feedstock.

Bottom line, if the intermediate is going to cost $1 per gallon or more — you’re likely to be headed for the chemicals markets, as the fuel refining customer simply has too much capex and opex of his own to absorb.

The bottom line

There’s no reason to stay out of a growing market just because you don;t feel comfortable with commodity-from-a-commodity risk. Look for intermediates, instead, that give you the hedge you need, to match the edge that you want and renewable can bring.

For specific information on companies and the intermediates they make, check out our series of 5-Minute Guides, here.

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Category: The Business Case

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