Forever Chemicals - PFAS

PURE Asset Management

July 2023

The jungle drums are beating louder as the calls for increased regulation of Per- and polyfluoroalkyl substances (PFAS) become clamorous, and class action lawyers gear-up for their next big opportunity. This comes more than two decades after internal documents revealed that DuPont had known of a link between PFAS and cancer in 1997, and was aware of the potential health risks as far back as the 1960s.

Corporate settlements,  regulatory changes and journalist investigations are proliferating, broadening public awareness of the risks associated with PFAS. Suggestions that these chemicals are the 'asbestos' of the current generation, are a clarion call for strengthened regulation, and the Environmental Protection Agency (EPA) in the US has responded aggressively.

What are PFAS?

PFAS are man-made chemicals that have been used extensively in industry and household products since the 1940's. Non-stick cookware, food packaging, cosmetics, water repellents and fire retardants illustrate the proliferation of these forever chemicals, which don't break down and can accumulate over time. Exposure is difficult to avoid, with ingestion the primary transmission mechanism. 

What are the risks of PFAS?

While scientists continue to learn about the human impacts of PFAS, recent studies have suggested that exposures may lead to the following health effects:

• Increased cholesterol levels;
• Changes in liver enzymes;
• Lowered Immunity;
• Lower infant birth weights;
• Increased risk of blood pressure; and 
• Increased risk of kidney or testicular cancer.

What is being done about it?

In short, plenty. Over the past five years, corporate America has been under attack for its historical negligent use of these chemicals. This ranges from products sold, to how waste has been disposed, and the downstream consequences presented to humans as a result. While the pun is ironic, the 'downstream' issue facing society today is the prevalence of PFAS in municipal drinking water. 

Corporate litigation has been building momentum, with Dupont the first to settle a class action in 2015, made infamous by the Dark Water movie - a must watch for anyone interested in the subject. 

Together with two other defendants, Dupont also recently settled another US$1.2bn claim with water utilities, and in recent weeks, US conglomerate 3M agreed to a US$10.3bn structured payout to water utilities. Analysts at Morningstar, a research firm, estimate that 3M's total liabilities could grow to as much as $30bn as state, foreign and personal injury claims are factored in.

Source: https://news.bloomberglaw.com/pfas-project/companies-face-billions-in-damages-as-pfas-lawsuits-flood-courts

The scale of the 3M settlement is likely to set a dangerous precedent for this US$28bn revenue industry, with the company just one of 12 major participants, including Merck, Bayer, BASF and Honeywell. Like Dupont, 3M appears to have known and covered up the risks for decades.

Litigation cases have heightened awareness, and regulatory bodies are rapidly responding. Given its importance to society, initial focus has centred on municipal drinking water. 

Many US states, predominantly those on the east and west coasts, have independently moved to regulate acceptable levels of PFAS in drinking water. While a step in the right direction, the Environmental Protection Agency (EPA), with a Federal mandate, has now become engaged, embarking on a radical change to regulations.

The EPA has proposed a revised US national drinking water standard. With formal implementation expected in late 2023, these stringent measures target six common PFAS, with tolerable limits all but eliminating any trace in drinking water. 

"The previous guideline, set in 2016, set a limit of 70 parts per trillion (ppt) for both PFOS and PFOA in drinking water. The new advisories decrease that by more than a thousandfold. The new limit for PFOS is 0.02 ppt; for PFOA, it's 0.004 ppt. Essentially, the EPA wants the limits to be as close as possible to zero as a growing body of research has shown how toxic these compounds are."

Source: https://www.hsph.harvard.edu/news/features/stricter-federal-guidelines-on-forever-chemicals-in-drinking-water-pose-challenges/

Coupled with the availability of US$2bn in Bipartisan Infrastructure Law Funding, all municipal water utilities in the USA must now adopt measures which ensure compliance. 

The proposed rules require public water systems to: 

1. Monitor for PFAS;
2. Notify the public of PFAS levels; and
3. Reduce PFAS levels until they meet standards.

In meeting the levels proposed, the EPA has previously provided guidance on how best to achieve compliance. This has focussed on three measures, namely:

1. Activated Carbon
2. Ion Exchange Treatment
3. High Pressure Membranes

The most commonly used method, and primary recommendation of the EPA as a solution to combat liquid-phase chemical removal, is through filtering using Granular Activated Carbon (GAC). 

Investment opportunity

Unlike asbestos, where profits were derived from shorting companies selling asbestos products, activated carbon appears to offer a profitable long thesis. Pricing has moved aggressively in recent periods, with industry leader Calgon Carbon announcing price rises of 15-40% across its product range in December 2022. 

At PURE, we are investing in this thematic via an exposure to ASX listed company, Carbonxt (CG1.ASX). CG1 has historically focussed on air-phase solutions through powdered and pelletised products. A recent 50/50 joint venture agreement with Kentucky Carbon Processing (KCP) is facilitating the Company's entry into the liquid-phase market. 

Carbonxt's aim is to meet demand from water utilities via the production of GAC, or a superior pelletised product. The Company can produce GAC but also has aspirations to introduce a specialised pellet product that achieves the same results with less pressure drop. In simple terms, this decreases electricity consumption for water utilities, lowering their cost of production. 

Not only is market demand underpinned by regulatory change, but new supply is both long-dated and costly. 

Calgon Carbon announced a 25ktpa expansion at its Mississippi plant in 2020 at a cost of US$185m. We understand this came online in 2022. Carbonxt is expecting saleable product from the JV facility in 1H2024, with an initial 10ktpa delivered at a capital cost of just US$20m. The JV parties believe this can be doubled to 20ktpa for a modest additional outlay. 

Carbonxt's entry into the liquid-phase market appears well timed. The Company estimates that the current Activated Carbon market for the liquid phase is c.US$600m per annum, but the American Waterworks Association estimates the annual cost to comply with the regulations in its current form is US$3.8bn.

Source: https://www.awwa.org/Portals/0/AWWA/Government/2023030756BVFinalTechnicalMemoradum.pdf?ver=2023-03-14-102450-257

Funds operated by this manager:

PURE Income & Growth Fund, PURE Resources Fund

Market Commentary - June

Glenmore Asset Management

June 2023

Funds operated by this manager:

Glenmore Australian Equities Fund

Hedge Clippings | 21 July 2023

Following last week's widely anticipated news that RBA Governor Philip Lowe would be replaced by Michele Bullock, the flurry of media coverage has died down as it quickly became apparent that the governor's baton would pass pretty seamlessly.  Dr. Bullock has worked with or alongside her predecessor for close to 40 years, including most recently as his deputy. One would assume their thoughts and opinions on the economy, inflation, and the bank's role in fulfilling its task are or have been pretty similar.

In spite of all the criticism leveled at Lowe for his now famous "slip" of making a forecast on future interest rates, he was more committed to a less aggressive hiking regime than his overseas counterparts when achieving his "narrow path" objective, as opposed to Jerome Powell's "whatever it takes" approach in the US. If anything, Bullock's speech in late June, focusing on the RBA's other mandate, that of maintaining full employment, suggested she might take a more aggressive approach if needed, but which we doubt will be necessary.

This week's surprisingly strong May employment numbers, which added 33,000 people to the workforce, and saw unemployment remain at an almost unprecedented level of 3.5%, and 64.5% of the population employed, led various economists to revise their expectations and suggest another rate rise in August. Next week's CPI numbers, (due on Wednesday), Labour Force (Thursday), and June PPI, along with June Retail Trade, (both due on Friday), should hopefully clarify their arguments one way or another. Inflation appears to be easing in the US, with June's number of just 3% the lowest since March 2001, while even in the UK inflation has shown signs of abating, albeit from higher levels.

Lowe has only two more RBA board meetings to chair, and he'd love to leave Martin Place with rates paused, and his narrow path maintained, prior to handing over to Bullock to complete the task he started.

Not that there aren't still inflationary risks over and above the strong labour market. Russia's renewed ban on Ukranian grain exports, and the effects on food prices of the record heat across much of the northern hemisphere, are yet to play out.

(If there's one ironic outcome of this week's record temperature of 45C + degrees in Spain, while in England it struggled to reach 21C, it must be the reverse migration of thousands of Brits fleeing the Spanish heat, to bask in the cool and damp of a typical English summer!)

Of course, they may not be quite so happy if the rain spreads north to Manchester, and saves the Australian cricket team from a serious baz-balling defeat. While on the subject of sport, congratulations and good luck to the Matildas, as the women's game has raised awareness of and interest in, the game of soccer (sorry "football") in a way that the men's equivalent has ever managed to achieve.

And while off on a tangent, yesterday marked the 54th anniversary of Neil Armstrong's historic landing on the moon and his now famous "one giant leap for mankind" quote. Some of you/us can remember the day clearly, while for many it's ancient history. That's life!

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