Mike · @teamonfuego
5th May 2018 from TwitLonger
CATALYST: Ballast Water Regulations will have big impact on some stocks
The International Maritime Organization (IMO) and the U.S. Coast Guard (USCG) are starting to implement and enforce ballast water (BW) regulations. What is ballast water? It is water carried in ships' ballast tanks to improve stability and balance. Cruise ships, large tankers, and bulk cargo carriers use a huge amount of ballast water, which is often taken on in the coastal waters in one region after ships discharge wastewater or unload cargo, and discharged at the next port of call, wherever more cargo is loaded.
The problem is ballast water discharge can have serious negative economic and ecological impacts. For example, the zebra mussel, which is native to the Caspian and Black Seas, arrived in Lake St. Clair in the ballast water of a transatlantic freighter in 1988. Within 10 years it had spread to all of the five neighbouring Great Lakes. The economic cost of this introduction has been estimated by the U.S. Fish and Wildlife Service at about $5 billion. Studies suggest that the economic impact of ballast discharge on the US is $6 Billion per year.
Here's a good article on the Zebra mussels:
https://www.lakeproinc.com/zebra-mussels-first-appeared-lake-st-clair/
As a result, the IMO attempted to put regulations in place in 2004 to fix this issue, but the can has been kicked down the road for 13 years. BW Treatment Systems (BWTS) are an imminent requirement by The IMO to prevent this harmful discharge. Laws were put in place in 2012/13 in the US on any vessels built in 2014 or later and the IMO just entered into force with regulations for the rest of the world. Based on the phase-in schedule, between now and 2024 about 60,000 ships will need to spend an average of $1 million to $2 million each to purchase and install ballast water management systems (BWMS). This is resulting in eye popping predictions about enormous growth in global BWMS markets to well over $100 billion. One global market intelligence report projects these markets “will grow at a compound annual rate of 39.4% starting in 2018 and reach $395.65 billion by 2026.” (SOURCE: https://www.maritime-executive.com/editorials/ballast-water-treatment-regulation-should-be-revised#gs.WjKUla4)
Systems are required in place starting in 2019 and they need approval from the USCG or Alternate Management Systems (AMS). AMS acceptance by the U.S. Coast Guard is a temporary designation given to BWTS approved by a foreign administration. It enables BWTS to be used on vessels for a period of up to 5 years, while the treatment system undergoes approval testing to U.S. Coast Guard standards.
This theme will play out over the next 5 to 10 years and its a big one...representing hundreds of billions of dollars in retrofits for the shipping industry. The manufacturers of the BW systems and any accessories (handheld detection devices, etc) will be big winners.
Manufacturers of these BWT Systems. Bigger players include:
$VEOEY > Veolia in France. Big company doing $27 Billion in sales / $13B market cap. Might not move the needle a ton but worth a shot. Pays big dividend 4%. Has a lot of debt, though.
$ALFVY > Alfa Laval. Another large company in Switzerland doing $4 Billion in sales / $10B mkt cap. Should move the needle more with these guys than Veolia. Solid cash flow, pays 1.5% dividend. Decent balance sheet.
If you want to go small and take a flyer, try Euro Tech Holdings $CLWT. They just introduced a handheld monitor in Dec 2017 and their BWTS was approved in China (http://www.pactasia.com/site/newsdetail/122). Balance sheet is pristine: $9M cash, $0 debt, trades at cash levels.
Go small with Euro Tech and just beware of the volatility and the fact that its a China stock. Some people still have a stigma with them. Go big (Velia, Alfa Laval) and it might not move the needle a ton. Either way, this is a big deal for the shipping industry and should generate a lot of revenues for the ballast water treatment companies.