A Single Way to Play Virtually Every Sphere of the Energy Market

The Daily Reckoning Presents:
Whiskey & Gunpowder Special Report:
A Single Way to Play Virtually Every Sphere of the Energy Market

As CO2 cap legislations are passed, like the one the Governator just passed in California, we will begin to see more nuclear power plants as well as renewable forms of energy production.

But all of this news on carbon caps, and clean energy laws is nothing new to you, so I won’t bore you with legislation details.  I can promise you that although I’m all for renewable energy, we haven’t seen the end of the carbon fuels era.  Instead we have somewhat of an overlap while making the transition between green/nuclear energy and carbon based energy.  It’s this transition that presents itself with an awesome opportunity in a market that allows us to play all of these forms of energy with one single play.

The carbon cap that Gov. Schwarzenegger passed has eliminated 15 carbon-based power plants in the surrounding states that were set to come online and supply energy to the California power grid.  It just wasn’t going to be economical for them to complete production anymore, but California is a huge consumer of energy.

Put it this way, if California were an independent country, its economy would be the 6th largest in the world.  So regardless of whether 15 power plants or 30 power plants are shut down because of carbon cap laws, Californians are still going to use their air-conditioning units, lights, and televisions.  The power has to come from somewhere, or we can expect to see massive brown and/or blackouts.

And according to the governor’s legislation this energy WILL BE green.  But how green?

Nuclear energy, and the market for processed uranium (U3O8) has become the center of attention as of recent.  It is a cost effect form of energy with virtually no carbon emissions.  The disposal of used fuel rods can be a sore spot for your local environmentalists.  These have to be enclosed and disposed of in geological locations that will go untapped for thousands of years in order to contain the nuclear waste.  The other implication is nuclear energy’s negative political image.  This market still carries the implications brought on by Three Mile Island and Chernobyl even though the technology and knowledge that goes along with preventing these mishaps has grown exponentially.  You know not to underestimate the power/money of political stupidity.

There are still technological limitations with energy created from the earth’s natural forces.  Solar is only operational during the day, and when the overcast is limited.  The wind isn’t always around to keep the mills turning.  All though geothermal, in my opinion, is the most optimal form of generating energy in an earth friendly manor; it has been slow in grabbing the public attention.

It’s for those exact reasons, that our coal, oil, and natural gas power plants aren’t going anywhere.  A system of tradable carbon credits might be developed and used more extensively, but your guess is as good as mine as to when that will happen, dear reader.  I just know that brown energy is here to stay, at least for a while.

So which carbon based power plants are cleaner and more efficient?  Honestly, I don’t really know.

Coal liquefaction and other clean-coal technology make it cleaner to burn, but less economical.  Don’t forget that the coal lobby is working hard in Washington.  Some of its supporters are rail companies and the Navy.  The Navy has already made some B-52s coal liquefaction ready, and they are working on technology that would allow coal liquefaction to be used as jet fuel.  I imagine that the coal lobby backed by the U.S. Navy would hold some sway in Washington.

Natural gas is also a cleaner burning fuel source, but how long will nat gas prices remain moderate?  Key legislation has been passed in Alaska, allowing for the environmentally sensitive exploration in areas where there are possibly trillions of cubic feet of natural gas.  The problem is that the gas, unless another massive pipeline is built, it isn’t economical to extract.

As for oil, the whole story of peak oil is beginning to be more common talk around the local watering holes.  I don’t need to get into the details about it, because our in house oil expert, Byron King, had written to you about the implications of this notion

It seems that greener power might just cost more green dollars.

What’s the Solution

Again, my primitive thought process isn’t very good at weighing pros and cons.  I do know that fossil fuel energy emits CO2 as a byproduct, renewable energy is behind the curve in getting online, and nuclear power plants have some innate risks to them.  Basically mitigation, as a result of peak oil, is approximately 10-15 years behind the curve resulting in an attempt to bring on as much power from diverse sources in a very brief period of time.

So I’m not going to sit and tell you that one form of power is better then another.  What I do know is that it will be a combination of all these forms of energy that will keep the lights going, that’s definite.  The problem is that world population is growing, and countries like China, India, and Brazil are industrializing at an extreme pace with millions of people that will be coming on to the already over taxed world power grid.

So whats the point?  As an investor myself, the point that I’m trying to uncover (and hopefully to you dear reader) is how to protect my investments.  And that’s what brought me to this conclusion…

There is one market that allows you to take advantage of the growing demand in ALL of these forms of energy. The Industrial Metal that Nobody can Pronounce.

The name of the game is molybdenum (muh-lib-duh-nuh m) , or just moly for short.  For your sake, and mine as well I looked up the pronunciation.

This metal has several interesting characteristics that make its usage intricate in several forms of energy creation.

Molybdenum has the 6th highest melting point of any element.  It is highly corrosive resistant and doesn’t expand, contract, harden or soften under extreme temperature changes.  In fact, of all the commercially used metals, moly has the lowest heating expansion.  Ex. Moly is used in making stainless steel; hence the corrosion resistance and lifespan of your shiny ratchet set.

Moly is added to steel and cast iron to make metal alloys and super alloys that are much greater in strength.  It can be found in anything from airplanes and cars to construction beams and filaments.  This metal has tons of application and better yet is used in almost every aspect in the world of energy.

Molybdenum’s Applications in the World of Energy

Like I said, moly is used to make high strength metal alloys.  It can be found in almost every modern drill.  It greatly increases the strength of the drill and can limit technical mishaps reducing costs.  In that sense, moly is needed in every aspect from drilling exploratory holes in an oil and natural gas field, to drilling the production and injection wells that go into getting a geothermal power plant up and running.

You can also find moly in the coalfield.  If it’s a longwall mining operation, it can be found in the shearers used to extract the coal and the conveyers used to transport it.  In an open-pit, truck and shovel operation, moly is again used in both the extraction and transportation process.

The corrosion resistance combined with temperature insensitivity makes moly very important in the production of oil/natural gas pipelines.  The Alaskan pipeline consists of half-inch metal alloy that could handle up to 25,000 pounds of PSI and temperatures of negative 70 degrees Fahrenheit.  You could find up to 7% moly in that 800 miles of pipeline.  Without moly, you definitely wouldn’t be getting an above +99% reliability rate, which delivers the U.S. with approximately 775,000 barrels of oil per day.

Molybdenum is also used as a hydroproccessing catalyst in petroleum production.  In English, moly is used to remove sulfur and nitrogen in making light sweet crude.  This is very important as the quality of oil is diminishing more as ‘the low hanging fruit’ in the oil world has already been picked.  Canadian oil sands, and the tar oil from Venezuela are examples of oil that contain high levels of external elements that need to be purged in order to create light sweet crude oil.

Molybdenum can be found in every modern turbine used in a power plant.  All power plants, except wind and water, directly use heat to turn a turbine.  In the highly abusive environment of a turbine, strength, corrosion resistance and heat insensitivity, make moly the perfect industrial metal for power plant turbines.  It greatly increases the lifespan; hence reducing the cost of the power plant

In a geothermal power plant, moly can be found in the back pressure turbine or the condenser and pumps that re-injects the fluids back into the earth.  In wind energy, moly is used in the actual structure of the windmill and can be found in everything from the bearings to the generator.  In hydroelectricity, again moly can be used in the turbines and generators.

Molybdenum’s contributions to the world of nuclear energy are by far the most significant.  Without molybdenum, the nuclear world would be set back at least 20 years.  Newly developed high performance stainless steel (HPSS) contains up to 7.5% moly.  I cannot stress the importance enough of HPSS to the world of nuclear energy.  This alloy can more than triple the life of aging fleet condenser tubes.  Fleet condensers, which are rather large, are used in the heat transfer process.

Brass, copper, and nickel, made up the alloys previously used in fleet condenser tubes.  Although these alloys were efficient in conducting heat, their lifespan was only 8 years.  HPSS conductors were brought into play about 30 years ago.  As of right now, the longest HPSS conductor has remained in service for over 26 years and is still going strong today.

Older copper alloy fleet condenser tubes had corrosion issues.  This affected the power plant in a couple of ways.  It allowed for the build of corrosive materials reducing the efficiency of the power plant.  Also, the corrosion rendered weak spots in the fleet condenser tube, which could then result in holes.  This was just not acceptable, because chemicals like sodium and chloride could leak and damage other vital parts of the reactor.  Corrosion resistance leading to less build up of undesirable substances increased the capacity of reactors by up to 20%.

The importance of molybdenum in nuclear energy is undeniable.  But it is also used in harvesting EVERY other form of energy.  Moly is the only way you can play these markets all at once.

Just because moly is vital to these markets doesn’t necessarily mean that there’s a bull market in this industrial metal.  But do you really think I would have chattered on and on about moly if the supply and demand picture didn’t look positive for investors?

Supply and Demand of Molybdenum

Supply for molybdenum faces a similar conundrum to that of oil.  Although there is current mine production significant enough to meet demand, refiners, or roasters, are expected to run into a shortfall.  Guesses on when this shortfall, depending on demand, is estimated to come somewhere between 2009-2015.  Yes that’s kind of a large range, but let me tell you where that number comes from.

A roaster is similar to a refinery in that it processes the moly into a fine powder, pellets, or any other form refined moly used in the industrial world.  Total world moly roaster capacity can currently put out at an annual rate of 320 million pounds.  That 320 million pounds also barely meets global demand.  There isn’t much more roasting capacity left.  The problem is that there is no one actively permitting for the production of any new roasters here in the United States, and roaster production looks grim on a global level as well.

The exact date is impossible to predict, but a roaster shortage is definitely on its way.  The data above is based on one very important assumption.  The assumption is that mines will also be able to increase their output.  Western demand looks to increase by around 3% annually, while the demand of China and the C.I.S. are looking at a demand increase of around 10% annually.

Globally demand is expected to increase at around 4.5% per annum.  Unless moly mine production picks up at a rapid pace, shortfalls of the silvery metal are expected to arrive at around 2009.  Note that we are talking about mine production and not roaster capacity anymore.

This increasing demand can be attributed to two main factors.  Hydroprocessing catalysts are becoming essential in today’s market for crude oil.  The other contributing factor is the increase in nuclear reactors that are planned for production.  There are 48 nuclear reactors to be built by 2013, and approximately 100 that are to be built by 2020.

The International Molybdenum Association (IMOA) says that an average reactor contains about 520,000 feet of stainless steel alloy.  Some larger reactors contain over 1 million feet of stainless steel alloy.  With the metal alloy containing up to 8% moly, well you can do the math.

If you don’t believe me when I tell you a molybdenum crunch is on the way, would you believe China?  Your answer should be yes.  China currently produces around 20% of global production.  The IPO of a Chinese molybdenum ETF, China Molybdenum (very creative), jumped 59% after its open on Hong Kong’s Hang Seng Index.  Oh yeah, did I mention that China passed an export quota for moly on June 18?  If global supply is able to keep up with global demand, which I sincerely doubt, we’re still looking at China beginning to hoard the 1/5 of global production that currently produce.

Molybdenum has to supply the growing growth in all energy markets.  More and more people are industrializing in the developing countries.  That requires energy, and I expect that energy to arrive from numerous sources.   The supply and demand picture represents us with a double-edged dagger:  Roaster shortages are unable to keep up with growing demand.  Mine production is unable to keep up with growing demand.  I see both of these scenarios as very likely, but only one is necessary to send the price of molybdenum to new highs.  As one or both of these scenarios, expect China and the countries in the C.I.S. to limit and eventually negate exports, only throwing gasoline on the already blazing fire…

For more Whiskey and Gunpowder articles that cover the energy arena, visit these links:

5/31/2007 – Letter to the Editor: A Man in the StreetBy Byron King

4/13/2007 – Corridors of PowerBy Byron King

3/21/2007 – Energy and Private Equity, Part IIBy Byron King

Additional Molybdenum Resources:

International Molybdenum Association

Molybdenum Statistics and Information


Molybdenum Price Charts

Molybdenum’s Diversity Keep’s Demand Firm

Energy and Oil by Bryon King