A wacky but wise Wall Street wag used to tell his clients, “After living standards in the third world improve, people will want to live longer.” That is bullish for healthcare stocks but also, less obviously, for a broad range of industrial companies. With the help of air quality readings transmitted from the American Embassy in Beijing, it has become apparent to China’s citizens and politicians that the city’s air quality is off-the-charts bad.
How bad is it? Bad enough that airlines are cancelling flights into Beijing. Bad enough that, according to The Wall Street Journal, “low visibility conditions in the eastern province of Zhejiang prevented locals from noticing that a furniture factory had been on fire for four hours.” Bad enough that sales of air purifiers (which can cost a few thousand dollars) tripled in a couple of months. And bad enough that China’s outgoing Premier Wen Jiabao proclaimed “We should take certain and effective measures to accelerate industrial restructuring, and push forward energy conservation and emissions reductions.” China’s incoming premier has echoed those sentiments.
In China, what the Premier wants, the Premier gets – fast. Local politicians will start to be graded on the level of pollution in their city. So China will invest tens of billions of dollars rebuilding and upgrading its vast industrial infrastructure to reduce energy consumption, cut emissions, closely monitor pollution, etc. etc. There will probably be a shift from coal to natural gas and nuclear power. Vehicle emission standards will rise. Dirty old power plants and factories will be shut down sooner than was previously planned. Aside from letting its citizens lead longer and healthier lives, there is another reason why this investment makes sense for China. Its economy is driven by capital investment, but building more steel and aluminum mills would simply create excess capacity in a sluggish global economy. Pollution reduction is a politically popular investment that will sustain economic growth without creating gluts.
All of which is very positive for industrial companies in the U.S. and Europe with advanced technology that China will need to upgrade its infrastructure. It is a bit difficult to find “leveraged plays” on the theme because most large industrial companies are diversified across a broad array of businesses and do not have a large share of revenue in China. Nevertheless this theme is positive in one way or another for most of the large diversified industrial companies, and there are certain firms with significant exposure to China and other emerging markets. Instrumentation companies also benefit. On the Q4 earnings conference call a Thermo Fisher executive said “in applied markets, however, we’re still seeing pockets of strength, including high demand for our air quality and particulate monitors in China, as an example.”
Another implication has to do with “global warming.” As we have noted before, China and other emerging nations such as India and Indonesia, not the U.S., are adding most of the new CO2 to earth’s atmosphere. They are not about to make huge investments to cut CO2 emissions to “address climate change” that might occur fifty years from now when they face the much more urgent problem of reducing high levels of particulates that endanger the health of their citizens right now. Al Gore and Tom Friedman can dream on about a global push to cut CO2 emissions. It ain’t going to happen.
Copyright 2013 Thomas Doerflinger. All Rights Reserved.
