The Investment Hidden By Layers of Chinese Air Pollution

Greetings from chilly Pittsburgh. Oh well. It’s getting cold, but at least the air here is clean and breathable, which is a far cry from what’s going on in China.

Have you seen the news reports about the awful air pollution across China? Yes, I know. With all its breakneck growth over the past 25 years or so, the words ‘air pollution’ and China are almost one and the same. Still, right now, the air in China is unusually bad – even for China!

Hold that thought, while you consider another point…

Chinese growth has created huge investment opportunities in recent years. But now we’re at a critical point in the ‘China story’, where Chinese air pollution is investable, too. I’ll discuss this in a moment. First, however, let’s take a look at how bad things are in air of the Middle Kingdom.


China’s Air Pollution

Bad means BAD! For example, earlier this year the giant city of Beijing was lost in a thick ‘pea soup’ of smog which reduced visibility to just a few feet in many instances.

Traffic accidents were common, because drivers couldn’t see where they were going. Beijing’s nearly new world-class airport delayed flights due to low visibility from pollution.

Back then, an air monitor atop the US Embassy in Beijing recorded an astonishing 755-reading for air pollution, on a scale that the usually goes no higher than 500.

Indeed, according to the US Environmental Protection Agency, the ‘safe’ limit for air on this same scale is 25! So a reading of 755 is almost apocalyptical, certainly if you need to breathe air in order to live.

Today a similar story is unfolding in the city of Harbin, China.

Visibility this week, for instance, is down to 50 meters in some parts of the city – that’s like standing on the 50-yard line of a football field and not being able to see the goal posts! Tough week to be a field goal kicker, I guess. All jokes aside, though, this is a serious situation.

Along these lines, I’ve heard similar stories to what we saw in Beijing; hospitals have been inundated with people complaining about lung ailments. Schools cancelled outdoor activities. Stores sold out of face-masks, and even industrial-grade gas-masks and filters. It’s been just as bad, or worse, in a multitude of other cities across China.


The Suffocating Siege of Chinese Cities

This year air pollution is so bad, in fact, that the usually taciturn Chinese leadership is permitting public discussion about the issue, in that ‘we’ve got to do something’ sort of way.

No less than the hard-line Communist party mouthpiece People’s Daily newspaper asked, in a front page editorial, ‘How can we get out of this suffocating siege of pollution?

The one-party Chinese political system has another, intriguing yet characteristic, manner of spurring debate. The big-shots trot out retired ‘gray hairs’ to make certain points.

For example, in an interview earlier this year with the South China Morning Post, Qu Geping, China’s Minister of Environmental Protection between 1987 and 1993, stated ‘I have to admit that (national and local) governments have done far from enough to rein in the wild pursuit of economic growth, and failed to avoid some of the worst pollution scenarios we, as policymakers, had predicted.

This is about as close to admitting a mistake as China’s top-down government will ever come. So…are we looking at a sort of ‘Silent Spring’ moment in Beijing and Harbin? What does this mean to outsiders, as well as to investors?


The Answer Is NOT Blowing In the Wind

Let’s peer just a bit further behind the Great Wall. Why, exactly, is the air so bad in China? Well the wind isn’t blowing the air pollution out to sea, and over towards Korea and Japan, which is the usual pathway of nature. And don’t chuckle at that idea.

Chinese air pollution casts a ‘global shadow’, according to several years’ worth of science reporting in the New York Times. Here in North America, air monitoring stations up and down the west coast – California to British Columbia – routinely trigger alarms when clouds of Chinese pollution arrive, essentially intact, after a trans-Pacific journey.

At least 30% of the air pollution on the US west coast is attributable directly to ‘imported’ Chinese clouds of gunk, according to Chemical & Engineering News.

But blowing China’s air pollution out to sea, and over to California, is a ‘non-solution’ to a critical problem – and a temporary one, at that. The key is to find the origins of China’s air pollution problem. China needs to go to the source.

Uncontrolled Exhaust

The worst of China’s air pollution, just now, is comprised of fine particulates. It’s the small stuff that forms into smog, gets into peoples’ lungs and causes all manner of other health and safety problems.

What’s the origin? While some of it stems from coal-fired power plants, a lot of the really bad material in China’s air comes from uncontrolled diesel exhaust. This exhaust spews from the tailpipes of literally millions of trucks and other diesel vehicles that ply China’s roads, as well as innumerable electrical generators that back-up China’s unreliable power grid.

As I dug into the news accounts of the air pollution crisis in China earlier this year, I found a few (very few!) references to the widespread lack of catalytic converters on most Chinese trucks and stationary diesel generators.

According to one account, from the Associated Press, emission control devices can add up to $3,200 to the price of a truck or large generator. According to John Zeng, of the research firm LMC Automotive, Ltd., ‘It’s not a problem of technology. It’s more about consumer affordability. Increasing the emissions standard greatly increases the cost.

Look back over the past quarter century of development in China. China was a ‘poor’ country, in that its economic starting point was very low on the development ladder. It’s no wonder that vehicle and generator buyers didn’t want to spend what they consider ‘extra’ money, up front, for pollution control equipment.

This kind of micro-economic choice may have made sense for the individual buyer, over the past 25 years or so. But when you add it all up, and calculate the long-term, macro-effect? Now China has millions of vehicles that lack catalytic controls. It’s no wonder that China’s air is so fouled.

China has reached its pollution tipping point. The Chinese are going to have to do something before they choke to death.


What’s Missing from the Diesels?

If you’re a long time reader, then you likely have an idea where this is going. What’s the key part of that $3,200 ‘extra’ price for emission control? It’s the catalytic converter. In particular, it’s the cost of platinum and/or palladium metal that catalyzes the chemical reactions and dramatically reduces exhaust emissions.

For this write-up, we won’t look for ways to invest in diesel engine builders, or catalytic converter manufacturers. Heck, we already have a big part of the answer right in front of us.

That is, they key to success is to invest in the basic resource – platinum and palladium. Without these scarce metals, no one can manufacture a catalytic converter. So platinum and palladium are essential metals for these attachments to diesel engines.

There’s reason to believe that the Chinese will start requiring more emission control devices on all new trucks and generators, if not requiring retro-fit to older models. And what will this do to demand for platinum and palladium? It’s going to rise, and prices will strengthen.

The bottom line is that we’re looking at an entire nation – China – awakening to the problems of air pollution. The engineering solution is that China must solve its problems by increasing the use of catalytic converters on its fleet of diesel engines. This can only be good for platinum and palladium demand and pricing, going forward.

Invest in emission control by investing in platinum and palladium.

That’s all for now. Best wishes…


Byron King
for Markets and Money

Publisher’s Note: The Investment Hidden By Layers of Chinese Smog originally appeared in Markets and Money USA

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Byron King currently serves as an attorney in Pittsburgh, Pennsylvania. He received his Juris Doctor from the University of Pittsburgh School of Law in 1981 and is a cum laude graduate of Harvard University. Byron is also co-editor of Outstanding Investments.

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