Agora Financial’s Rude Awakening

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Dubai, United Arab Emirates

• $200 oil: on the hunt for stupid presidents,
• The best pure way to play solar,
• Chavez actually gets one right and plenty more…

Joel Bowman, reporting from the UAE…

On Tuesday, Hugo Chavez used a pre-OPEC Summit press conference in the
Venezuelan capital of Caracas to declare that oil would likely double if the
U.S. attacks his buddies over in Iran.

The very next day, Secretary-General Abdullah Al-Badri told a press
conference in Saudi Arabia, the world’s largest producer of oil, that he saw
no reason for oil to even hit $100. (He also declined U.S. requests to ramp
up production of the sticky goo to meet rising demand and falling inventory
levels…but that’s for another discussion.)

So, who’s right? Will oil shoot to $200 bucks? Or will it drop back down to a
level we are more comfortable with? We have no real way of knowing for sure,
but we suspect, for once, Hugo the Boss may be right.

$200 oil is bad news…but the myriad renewables that become economically
viable above even $100 is better news. The best news, however, is that most
of the companies tapping test tubes in the renewables research lab are still
yet to really get going. They are the mavericks on the fringe of an inchoate
industry that could take off with a single decision from any stupid
president.

Given that the world is littered with trigger-happy rogue leaders right now,
the possibility of something coming awry in the global production line seems
all but a foregone conclusion.

So how can you position yourself for a post-$100 oil world? Well, you can
check out Byron King’s Energy & Scarcity Investor report on the “slow
volcano” below, for one. Then there’s the solar play guest columnist Nick
Jones presents in the column below. Then there’s the second-hand bicycle shop
on the corner where you can get a cheap ride if you bet on oil heading south
again in a big way.

Take your pick…

—- Byron King’s Energy & Scarcity Investor —-

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Silicon Rally
By Nick Jones

Investing in companies that refine silicon may be the very best way to
participate in the solar energy boom.

Silicon is not a rare element. In fact, it is the second most abundant metal
on Earth. 25.7% of the Earth’s crust is made of silicon. And yet, refined
silicon is in very short supply, thanks to the booming solar energy industry.

The process of refining silicon is rather expensive. First, all impurities
must be purged. The oxygen is removed from the silicon through a reaction
with carbon. This process is usually done by adding some form of coal and
then heating the product in a special furnace at temperatures of 2,700-3,600
degrees Fahrenheit. The resulting grade of silicon is approximately 98% pure.

To make semiconductor-grade silicon, the element needs to still undergo some
processing. It needs to be combined with HCl, removing some additional
impurities such as aluminum and iron. The final step takes the SiHCl3 and
reacts it with hydrogen for 200-300 hours at 2,000 degrees Fahrenheit to
produce a very pure form of silicon.

The pure silicon is formed into rods measuring two meters in length and 30
centimeters in diameter. These rods are then sliced 0.5 millimeters thick,
and you have your silicon wafer, which is the final product used for PV
cells.

It’s very easy to see why the energy input costs of creating semiconductor-
grade silicon are very expensive. But not only is this process itself very
expensive, it is also very expensive to increase refiner capacity.

Let’s take the German silicon refiner, Wacker Chemie, for example. It has
undertaken a project to expand its refining capacity from 5,500 tons to 9,000
tons. The price tag on this project? Over $270 million. The high cost of
refining and adding additional refining capacity can deter companies from
embarking on new silicon ventures, and that is exactly what has happened.

It would take a large demand shock to push the prices of silicon to high
enough levels to make it economical for refiners to bring more capacity
online.

This is the fundamental idea behind a commodity super-cycle. In a commodity
super-cycle, getting additional supply online to meet growing demand takes
time and money. The market needs to be assessed, funds need to be raised,
permits need to be obtained, and finally, the project needs to be started and
completed. The time lag consists of a supply shortage met by higher prices.
The shortage and price increase can also be judged or predicted by the size
of the demand shock. And the demand shock for silicon is one of great
significance.

The obvious question that follows is why is this demand shock going to be so
noteworthy? It’s very simple. Where renewable energy goes, the footsteps of
government subsidies can be heard close behind.

As proven with ethanol, government money can make a bull market out of
nothing. But what happens when the market is actually economical on its own,
but is then combined with taxpayer money? You get an enormous demand shock.

Consider California, for example. California has recently announced the
largest solar energy potential program in U.S. history. Its Public Utilities
Commission has set up an 11-year plan that could supply up to 2.3 million
Californians with solar power. With this increase in solar power, California
alone will produce an estimated 3,000 megawatts of solar energy! That would
make California alone the third largest user of solar energy in the world,
behind Germany and Japan. There are many other similar forms of legislation
that are either already passed or in the process right now. We are seeing the
green wave take hold around the globe.

The United Nations recently passed an amendment to the international treaty
on climate change called the Kyoto Protocol (KP).

As of 2006, 169 countries had agreed to the Kyoto Protocol. The idea of the
KP is to reduce greenhouse gas (GHG) emissions. The 169 countries that agreed
to the KP account for 55% of total GHG emissions. Annex 1 – or developed –
countries are expected to reduce their GHG emissions by 5% from their 1990
levels. The date set for the reduction standards varies from 2008-2012. Some
countries, like those in the European Union, will have to reduce their
emissions by 15% from their current levels, due to the growth in GHG
emissions from 1990.

Although this amendment isn’t solar specific, those 169 countries will be
using solar energy to meet the above-mentioned GHG emission standards.
Silicon is used in cell phones, computers, and MP3 players, but its greatest
use is definitely in the solar market. Solar energy currently makes up
approximately 50% of the demand for silicon, and that number is rapidly
increasing.

Let’s look at some numbers regarding the growth in solar energy. From 2000-
2004, the number of annual PV cell installations nearly quadrupled. In that
same period, the price of silicon went from $9 per kilogram to nearly $30 per
kilogram.

The market for solar-grade silicon currently is estimated to be around $2.3
billion per year. By 2010, PV installations are expected to quadruple again
and the market for solar-grade silicon is expected to rise to $10.4 billion.
With solar taking up a higher and higher percentage of the silicon market,
you can expect to see an even stronger correlation between the growth in the
solar market and the price increase in silicon.

I would like to look at a hypothetical situation regarding the market for
silicon: PV installations quadrupled from 2000-2004. The price increase in
silicon over that same period was 230%. The interesting thing is that in
2000, there was excess refiner capacity. The increase in demand was met by
spare refiner capacity, and still a 230% increase in price followed. What
happens when PV installations quadruple again, but this time spare refiner
capacity isn’t able meet the growing demand?

Your guess is as good as mine as to what the actual price will bring. But I
would imagine that the shortage in silicon due to a skyrocketing demand in
the solar market and a refining capacity with minimum wiggle room will result
in some spectacular price action in the silicon market.

Silicon refiners are set to experience the greatest gains in the solar
market. PV producers will be forced to pay higher input costs to produce
their modules because of silicon shortages. With government subsidies and tax
breaks, they will be more than willing to pay these higher prices, allowing
for the price of silicon to continue its bull run. Although the profit for
solar producers will be hurt by higher silicon prices, the refiners will be
in a position to experience tremendous gains. Playing the solar market from a
commodities perspective is the best and safest way to profit off the solar
energy boom.

One of the refiners producing solar-grade silicon that I think is set to
profit from the coming bull market for silicon is Tokuyama Corporation
(Tokyo: 4043). Tokuyama is mainly traded Tokyo, but you can also trade it
here on the U.S. over-the-counter market under the symbol TKYMF. As the price
of refined silicon continues to soar, look for Tokuyama’s stock price to
share the bounty.

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Rude Endnote: Yesterday we learned that Chuck Prince, the disgraced former
CEO of Citigroup, has pulled the plug on his visit to our hometown of Dubai.
Prince was due to give the keynote address at the Dubai International Finance
Center Week, starting this weekend.

Drats! We were going to solicit questions from the Rude audience to ask ol’
Chuck at the press conference after the show. Sorry folks, looks like that
one got away.

Cheers,

Joel Bowman
Rude Awakening