The SmallCap Catalyst Newsletter - Volume 6 #15, August 25, 2008
The Next Stage of the Commodity Boom
Yesterday we were talking to the guy who brings our firewood each year. He was very aware of the credit crisis, the malfeasance of multiple financial institutions, the overextension into debt of the government and citizens of the USA and the threat of ongoing recession or worse. A cheerful guy who is very willing to work, he has a practical plan if the world drops into a depression. Our point: knowledge of these major financial problems has trickled into every corner of our society; everybody knows about them. Our questions: is this the reverse situation of when Joseph Kennedy sold all his stock just before the 1929 crash because his shoeshine boy was giving him stock tips? In other words, is it time to buy? Or has our firewood guy made a realistic appraisal of the current situation and is it time to hunker down and protect oneself?
Meanwhile, as the investing community rightly ponders this most important of questions, a revolutionary shift is taking place in the emerging presence of governments in the commodities markets. Countries are showing increasing awareness of shortages and depletion of reserves in key commodities and elements. They are concerned with security of supply, maintenance of national independence and, ultimately, brandishing of power. This may, in the long run, substantially affect the price of commodities. That’s because governments are effectively positioning themselves to withhold commodities from sale in order to supply their own country with that commodity, curry favor with another country that they are selling to, or gain power in an increasingly tense world.
A striking example of this trend is the recent change of the USA from a seller to a buyer of certain key commodities. The US Defense National Stockpile Center (DNSC) has stated they will suspend sales of the following metals: Platinum, Iridium, Tantalum carbide powder, Niobium, Tin and Zinc. They will reduce quantities for sale of Chromium, Ferrochrome, Ferromanganese, Germanium, Tungsten, Beryllium and Cobalt. Further, the US military is lobbying for adding large volumes of titanium to the stockpile for new military aircraft programs. This could double the US military’s use of titanium over the next decade, increasing its share of global titanium demand to 16%! The DNSC is the grandfather of all such strategic stockpile programs and was the inspiration for the US Strategic Petroleum Reserve.
Of course, in other parts of the world strategic materials have long been stockpiled to protect local industry from price volatility and supply interruptions, unlike in the US where stockpiles have been a source of revenue for the government. We think, though, that the US is just catching up to a world where examples of the strategic hoarding or manipulation of commodities for a variety of reasons are increasing exponentially. As we noted in a May 21 newsletter, “Rice recently tripled because of producer countries wanting to keep the price low for their citizens (they banned exports and glutted their markets).” Recently it was announced that Russia is taking over management of its grain exports, perhaps to increase its clout on the international stage. It has long been speculated that as its internal demand increases China will ultimately stop supplying the world with certain commodities, such as rare earth elements, that are only produced in China to any significant extent.
Perhaps you have already thought about this issue. Once you start looking, examples are everywhere.
What does this mean for investors? Materials that are withheld from sale should see increased prices. And we think investor emphasis will shift from a fascination with the price of commodities to an increasing interest in owning companies that actually possess these commodities in secure jurisdictions. That is, they will want to own real companies with real stuff in them that will not vanish by political “magic”.
How does this fit with the concerns of our firewood guy (and the increasingly aware investor population and world citizenry)? While we are quaking in our boots and focused on the credit crisis the new reality of incipient governmental domination of the commodities markets presents a striking opportunity. We do not know exactly how this will play out, though we suspect that one of the consequences will be that commodities that nobody ever heard about or cared about, like the rare earth elements, used extensively in the new hybrid vehicles and a vast variety of modern applications, tantalum, used in the fasteners for the new Boeing 787!, or germanium, used in advanced computer chips or night vision goggles, will suddenly leap into center stage because their supply has been truncated. This may be the way that the commodities boom will evolve and transform. |
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