Why the market has been getting this theme all wrong (and 4 stocks to actually play it)

In this interview, Ellerston's Bill Pridham provides an in-depth guide to the circular economy.
Ally Selby

Livewire Markets

If you're like me, you probably assumed the circular economy was just a fancy word for recycling. Many of us are already recycling our plastics, glass bottles, paper and cardboard, and are using reusable water bottles and coffee cups. What more can we do? 

But according to Ellerston Capital's Bill Pridham, the circular economy is so much more than that. And, as it would turn out, is an exciting investment thematic to boot. 

Recent research from KPMG shows that a circular economy in food, transport and the built environment could provide a $23 billion boost to Australia's GDP by 2025. By 2047-48, it estimates the benefit could rise to a present value of $210 billion in GDP and an additional 17,000 jobs for Australians. 

That's just Australia. Now imagine this on a global scale. 

In this Expert Insights interview, Pridham explains what the circular economy actually is, and outlines the difference between this thematic and decarbonisation (and the interplay of the two). 

Plus, he also names four exciting positions within his portfolio that play into this thematic. 

Note: This interview took place on Thursday 13 April 2023. You can watch the video or read an edited transcript below. 

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Ellerston Capital manages a concentrated global equity portfolio with a mid/small cap bias based on their highest conviction ideas from a filtered universe of sustainable securities. To learn more, please visit their website.

Edited Transcript 

LW: What is the circular economy?

Bill Pridham: When you think about the circular economy and why it's been misunderstood, I think it comes down to the fact that a lot of people just think of it as recycling. However, there's much more to the circular economy than just recycling. There's also re-manufacturing and repair, and that's one area that I think the market misunderstands. When you think of our society over decades, what we do is we take things from the earth, we make things from that, and then we typically throw them away. It's a "take, make and waste" society that we've had for generations. What the circular economy does is address that.

What's the difference between the circular economy and decarbonisation?

When you think of the circular economy with decarbonisation and consumption as well. I'm going to get very technical here, it's about the stuff. We have stuff that can degrade, bio-degradables, such as wood and food. And stuff that doesn't degrade such as plastics and metal. Those are the two different angles in terms of what can you do with the circular economy.

When you think of the stuff that can degrade, a company like Graphic Packaging (NYSE: GPK). They can repurpose and recycle cardboard five to seven times into your consumer staple products. That takes that out of the landfill and helps with that consumption angle of it. On the other side, with metals and plastics, it's best to keep things in use.

You think of your mobile phone. That you can rip it down for parts, which is fine, but the value of your phone is in its functionality. You want to keep that phone in use as long as you possibly can. Repurpose it, repair it, and get it back out rather than tear it down for parts. That helps with decarbonisation. That reduces energy consumption in a number of ways. We don't have to repair that. We don't have to repurpose it. We can just take it, repair it, and put it back into operation rather than strip it down for parts. So the consumption side is about rejuvenating existing biodegradable products. And on the decarbonisation side, it's both doing things smarter and keeping those products in use for a long period of time.

Why is the circular economy an important investment thematic today?

I think why the circular economy is getting even more important, and unfortunately, the Russia-Ukraine war really put a spotlight on our supply of product. You think of all the goods that came from Ukraine, which we never knew about before. And that's creating a real big focus on making our system smarter, let's make sure we can know where it's coming from, but use it in a more efficient and effective way.

Can you take us through some examples?

Firstly, when I touched on Graphic Packaging with the repurposing of cardboard into end products, it can do that five to seven times. But you can only do that five to seven times. After that, it's got to go into the landfill. That will go into the landfill and also food goes into the landfill. It creates biodegradable waste in a landfill.

We have a company called GFL Environmental (TSE: GFL). It's the fourth-largest waste management business in North America. And now they're creating renewable natural gas from their landfills. This is an angle of taking a waste that's biodegrading and turning it into a product that can be monetised for them.

When you think of products, when you think of mobile phones, you think of computers and servers. We have a company called Iron Mountain (NYSE: IRM). One of their divisions is asset lifestyle co-management. They'll go into a customer, take all their IT equipment, strip it down, repurpose it, repair it, and re-sell it for them. And it creates a massive earnings opportunity for them as well. There are a couple of angles there in terms of how companies are doing that from a circular economy point of view.

And on the repair and re-manufacturing side, this is where I think it's going to be the most exciting over a long period of time because the things we use are getting smarter. You think of predictive maintenance, so engines. Let's say your engine breaks down, wouldn't it be better to know when it was going to break down?

And now, we have the capability to do that with a company like a PTC (NASDAQ: PTC), which we own. They create "digital twins". They can have sensors inside your engine. They can tell you when a gear or some sort of function might be breaking down. And you can predict when that's going to happen and you can repair it before that happens. Clearly, downtime is a lot less. And you may have to repair fewer parts as well. It helps with that decarbonisation.

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Ally Selby
Content Editor
Livewire Markets

Ally Selby is a content editor at Livewire Markets, joining the team at the end of 2020. She loves all things investing, financial literacy and content creation, having previously worked for the likes of Financial Standard, Pedestrian Group, Your...

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