A new generation of renewable-chemical startups could soon begin breaking the industrial behemoths' grip on the sector.
Volatile oil prices could allow bio-based chemical-makers like Gevo and Solazyme Inc. to make inroads on their well-established competition, Dow Chemical Co. and DuPont Co. , says John Quealy, analyst with Canaccord Genuity.
“Renewable chemicals can be considered to de-risk the chemical supply chain from persistently high petroleum costs,” he says, in a report on the renewable chemicals industry earlier this year.
In that report, he initiated coverage of both Gevo and Solazyme with “buy” recommendations.
The firm is repurposing an existing ethanol plant in Luverne, Minn., to ramp up production. The plant can produce 18 million gallons of isobutanol annually.
The global chemicals market is massive — worth about $3 trillion annually, according to trade group The American Chemistry Council — and its products are involved in 95 percent of all manufacturing.
Within the U.S. alone, the group says the chemical industry contributes nearly $720 billion annually to the economy.
Most of that production is in petrochemicals, which consume 24 percent of the economy's crude oil, according to the Department of Energy.
But renewable chemicals aren’t simply greener products shoehorned into the petrochemical industry's operational strategy.
Many are “drop-in” replacements for their petroleum counterparts, chemically similar enough to swap in for oil-refined products, with no effect on performance or efficiency for the end user.
Gevo president and COO Chris Ryan says his firm’s green isobutanol has been tested and approved by major car engine manufacturers, like General Motors and small engine firms like Briggs & Stratton.
However, longer-term effects of bio-based chemicals are still unknown, says analyst Thomas Hor of Connective Capital, a hedge fund interested in green-investing themes.
“‘Drop-in’ is very loosely thrown around,” he says, of the concept of swapping green chemicals for petrochemicals.
Hor says deeper certification testing will be required, but “once these hurdles are cleared, they [green chemicals] should be on their way.”
Green vs. Greener
Still, being similar to petrochemicals creates big opportunities, including displacing other green products that aren’t “drop-in.”
Isobutanol is a critical component in plastics, but Gevo’s bio-based product’s biggest use could be replacing ethanol in blended transportation fuels.
Though ethanol is used as a substitute to petroleum, making the fuel “greener," it’s also a powerful solvent, causing damage in storage and transportation systems.
Gevo's product, however, doesn't pose that risk, says company president Ryan.
“We’ve got the nod from the pipeline (operators) to say there’s no reason it can’t go into pipelines,” he says.
In the end, chemicals are a commodity business, and Gevo’s Ryan knows being green isn’t enough — cost is very importat to customers.
“It comes down to a value proposition that makes economic sense,” he says. “‘Green’ is the icing on the cake.”
Connective Capital’s Hor says Gevo management assumes the company will need two to three plants to achieve profitability — a calculation likely based on oil prices and Gevo’s own agri-crop input costs.
While there are a lot of variables on the road to profitability, Hor emphasizes that “there is potential if the firms execute as planned.”
Whether the feedstock is corn or crude oil, startups in the chemicals sector know they’re competing with heavyweights.
Giants like Dow know that renewable chemicals could “represent a hedge or potential arbitrage against persistently high and volatile petroleum costs,” says Canaccord’s Quealy.
According to research firm MarketsandMarkets, the renewable chemicals space could be worth $76 billion by 2015 annually, still a small percentage of the overall chemicals business.
So the big firms “will still own these markets, in our view,” Quealy adds.
But the chemicals market pie is so big, even small bites can fill up a small firm’s coffers.
Connective Capital’s Hor says a firm like Gevo “would claim that the size of their addressable market is $10 billion plus,” while others in the sector could plumb even larger markets.
“We’ve got huge markets ahead of us,” says Ryan. “We’re pretty optimistic about our business.”