The Commodity Investor Q&A
With Matt Badiali
March 26 , 2008
Q: I recently read that we will soon be facing a helium shortage. Is that true, and what impact will it have on us? – J.P.
A: This question got my attention because I'd never heard about a helium shortage. But here's what I dug up...
Historically, the U.S. has been the world's largest producer of the helium. And we do have a federal helium reserve in a depleted natural gas field outside Amarillo, Texas. The reserve was created in 1960 and holds more than 20 billion cubic feet, or three years of global supply. The U.S. government plans on selling off the reserves by 2015.
In the meantime, industrial demand for helium is skyrocketing. Helium is used to produce computer chips, optical fibers, flat-panel displays, laser welding, and cooling magnets in MRI machines.
Magnetic Resonance Imaging (or MRI) uses 20% of the helium produced. Liquid helium is the coldest substance on earth, at
-452 Fahrenheit. The machines need liquid helium to cool the magnets used to create the images.
Of course, while MRI's are the largest consumer, they aren't the most visible. The helium balloon industry uses 8% of all the helium produced. But now the industry can't get enough helium, so balloons are actually being rationed at some party stores.
While demand is in part to blame, the global helium shortage is more a result of supply restrictions. Helium comes from the radioactive decay of uranium and thorium and becomes trapped in the same formations as the natural gas. So all commercial helium comes as a byproduct of natural gas production. And new plants in Algeria and Qatar haven't come on stream as quickly as planned.
You might think that now's a great time to get in on helium... but there's a lot of helium in natural gas fields, and no one producer is set to cash in. As soon as the upcoming natural gas production comes online, the shortage will ease and prices will fall.
Q: Is it better to own the commodity itself or invest in the producer? – J.V.
A: When you own a commodity (directly or through an ETF), you're essentially making a bet that the spot price of that commodity is headed higher.
When you own a producer, you're making the same call... but things get more complicated: The market prices producers based on how much of a commodity they control. And then all sorts of other elements get factored in, which can give sharp investors an edge. Let's look at an example:
In July 2006, I told readers of my S&A Oil Report to buy Chevron. In three years, the price of oil rose from $28 to $74, a 160% gain. I thought it meant Chevron's huge oil reserves were worth that much more, too. However, over that same period, Chevron's shares only went up a measly 24%.
The market thought oil's rise wasn't sustainable, and was valuing Chevron based on cheaper oil prices. We bought at about $62 a share and watched the company climb to a peak of $95.50 over the next 18 months as the market realized oil wasn't going to slide back to $40 a barrel.
So it's true, you don't have to wade through stacks of annual reports to buy a commodity itself. But you can't take advantage of the market's mistakes unless you buy a good producer at a great price.
Good investing,
Matt Badiali
