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Where is Fuel Tech going?



March 15, 2013 – Comments (0)

Fuel Tech, which sells pollution control equipment to coal plants, was once one of my best ideas. Coal, especially coal with high impurities, leaves slag when burned in power plants. Slag can reduce efficiency, and it normally takes downtime to remove. Fuel Tech had proprietary chemicals that significantly reduced slag build up, and it also sold NOx reduction equipment (which helps with smog). It looked like the company would be able to make inroads in China and India by partnering with Itochu, a Japanese company that does business in China. And of course air quality is terrible in China, so you would think there would be a large market for this technology.

Unfortunately, this thesis has not yet panned out. US utilities have been slow to adopt this equipment. In fact, there are worries that coal is in a long term decline. In addition, the company simply has not been able to make significant headway in China. Fuel Tech's CEO has experience in the utility space, but this has not helped the company convince utilities to adopt its technology. In addition, some EPA rules that would have required utilities to reduce SOx and NOx emissions are stuck in the courts. And, as I said, investors may be thinking that coal is in decline anyway. 

I continue to hold a small position, although I'm sitting on a very large capital loss. I figure that at this point, Fuel Tech is like an infinitely dated call option. The company had a net cash position as of 2011, so it has ample liquidity. Coal is not going away entirely. I wish it would, actually, but that simply is not practical, and Fuel Tech should have market for quite some time to mitigate pollution from coal utilities.

In the US, the company needs to convince utilities to adopt its technology and it needs regulators to deliver. In China, I have no idea what the company needs to do to break in. Doing business in China is reportedly fraught (I'm ethnically Chinese, so while I haven't done business there myself, I can say this). It could never break in, or it could have its technology stolen. Their partnership with a Japanese firm may not really have helped them, as there is longstanding political tension between the Japanese and the Chinese.

Either way, the worst case is that I lose $600 and the best case is that I gain $600 or more.  

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