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• A backdoor way to play the boom in metals,
• An investment theme you’ll never hear on CNBC,
• Taking acid to the bank while the bankers are on acid, and more…

Eric Fry, reporting from Laguna Beach, California…

Who knew that the price of sulfuric acid would quintuple while the price of almost every bank stock in the land would collapse? And who knew that the ongoing bull market in natural resources would shower much larger fortunes on the producers of anonymous commodities like bismuth and molybdenum, than on the producers of marquee commodities like gold and oil?

But that’s exactly what has come to pass…beryllium soars while Bank of America plummets.

And yet, perversely, the faltering financial sector attracts infinitely more admirers than the dazzling “unknown commodities” sector. If you tune in to CNBC for even 15 minutes, you’re certain to hear at least one “journalist” breathlessly declaring, “The worst if over for the financial sector!” And you’re certain to hear a guest “analyst” explain that “smaller-then-expected” billion-dollar write-downs are a “positive sign.”

But you’re much less certain to hear anyone on CNBC mention anything about the skyrocketing prices of all the anonymous commodities that make the world go round. You won’t hear a peep about high-flying metals like chromium, cobalt or manganese. You won’t hear a whisper about how these “minor metals” are logging major advances. And you certainly will not hear anyone on CNBC cheer the “larger-then-expected” profits of the companies that produce little-known chemicals and metals.

Your editors here at the Rude Awakening will not cheer these occurrences either, but we will examine them. When we see a commodity that doubles or triples or quintuples in price, we imagine that somebody, somewhere must be making an extra dollar.

Maybe they’ll share that dollar with us…if we buy their stock.

In the column below, Chris Mayer, editor of Mayer’s Special Situations, offers some fascinating insights about sulfuric acid. We realize this humble industrial fluid is much less sexy than a Goldman Sachs or a Citigroup, but it is also much less toxic…as Chris explains below…

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Acid Rocks
By Chris Mayer

Interesting how certain investment threads come together…

I read recently that copper producers are complaining about the skyrocketing costs of sulfuric acid. A few days later, I read about Mosaic, a fertilizer company — about how the rising cost of sulfuric acid could impact its profit margins. Then last week, I came across a piece about how the cost of treating water is “going through the roof.” The main culprit is, once again, the rising price of sulfuric acid.

One water utility rep said: “As sulfuric acid prices increase, so do the products that contain this ingredient…The U.S. has imported the majority of sulfuric acid from China in the past, but recently, China has slowed the trade of sulfuric acid to the U.S., because its own demand is greater than what China can produce for both the U.S. and itself.” In short, demand is swamping supply. Sulfuric acid prices in March hit a record high of $329/ton, according to Purchasingdata.com, after trading at $90/ton as recently as October.

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Sulfuric acid shortages? Hmmm…Well, time to take a look at this, think I.

“Sulfuric acid is one of those unheralded lubricants that keep the gears of the industrial economy spinning,” says Chemical and Engineering News. “Although less in the limelight than petrochemicals such as ethylene or polyethylene, it is in fact the largest volume chemical in the world.”

We use sulfuric acid in mining to extract copper, nickel and uranium. We use it in steel production and in making fertilizers. We use it to refine oil and treat wastewater. It goes into the plastics we make and a bunch of other things. The biofuel boom has also kicked off a big increase in the demand for sulfuric acid. In fact, some 60% of the sulfuric acid ends up in agriculture. The surge in ethanol production is a double whammy for sulfuric acid. First, all that corn needs fertilizers. And second, the ethanol facilities themselves also use sulfuric acid in their own processing. A typical ethanol facility requires 2,000-4,000 tons of sulfuric acid per year.

Then there is that great demand pull from China and India. Traditionally, these two countries produced more than enough for themselves and exported the rest. But now their own rapid industrialization has turned the tables. They’ve switched from being exporters to importers of sulfuric acid.

The boom in metals such as copper and nickel also drives the demand for sulfuric acid. Smelting operations typically throw off sulfuric acid as a byproduct. But even here, metals companies need more than they can produce.

Supply is also tight. As with many commodities, there was a long period when sulfuric acid prices went nowhere. This led to a decrease in production facilities. I found one example of a closure as late as November 2006, when GenTek shut down a sulfuric acid facility due to “adverse market conditions.”

There also seems to be little new capacity on tap. Industrial Info Resources, in Sugar Land, Texas, tracks this sort of thing. According to IIR, of the $89 million invested in sulfuric projects in the U.S. in 2007, most of the funds went toward planned maintenance, rather than expanded capacity.

It also turns out that not only is supply tight, but there are all kinds of transportation bottlenecks in delivery - such as a shortage of rail cars. Key Compton, president of a sulfuric acid producer in Texas, said toward the end of last year that customers soon “may be paying prices for sulfuric acid that they’ve never seen before.”

So how can you play it?

Well, there are a number of producers of sulfuric acid. Most are big chemical companies that you wouldn’t buy if you only wanted exposure to sulfuric acid. Owning them is like buying Home Depot because you think it sells a great lawn mower. The only “pure play” on the idea I could find is a little company called Chemtrade Logistics in Canada, one of the world’s largest suppliers of sulfuric acid. It trades in Toronto under the ticker symbol CHE. You can find a quote on Yahoo using CHE-UN.TO.

It’s a Canadian income trust and pays a monthly distribution of about 10 cents. Based on a price of $11.44, that’s a yield of 10.5%. The company appears to be in good financial condition and throws off a lot of cash flow, much of which investors pocket in the distribution.

It’s not a sexy business, but it looks like an interesting play on what seems at least a temporary scarcity of a key chemical. Chemtrade is not a one-trick pony. It also produces liquid sulfur dioxide and sodium hydrosulfite. The company also sells into a wide range of end markets, so you’re not tied to the fortunes of any single sector. The company has an excellent presentation of its business, complete with slides, on its Web site.
 
Since I have not completed my research on either Chemtrade or on the overall sulfuric acid industry, I did not recommend Chemtrade to the subscribers of my investment service, Mayer’s Special Situations. But since this sector is red-hot at the moment and appealing on many levels, I decided to share the insights I’ve gleaned so far. I plan to do more research on the idea and keep an eye on it.

I would advise all investors to do the same. The skyrocketing price of sulfuric acid shows how interrelated the world’s commodity markets and economies have become. And these interrelationships can produce investment opportunities at light-speed. Agriculture, energy, metals…they’re all part of one big story – one big rapidly evolving story.

Don’t miss it.

[Joel's Note: For Chris, it is interesting how investment threads come together. For his readers, it’s profitable…as well as interesting.

When Chris connected the dots on the water boom, for example, his readers walked away with triple-digit gains on one company and a heads-up on three others. Take a look at how Chris uncovered the “water thread” and find out how you can still grab a slice of the action as these companies shoot up right here.

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Rude Endnote: To show some love for a couple of other commodities that aren’t getting any mainstream attention, check out our recent Metal Head columns right here.

If you have some other investment thread you feel is not getting the attention it deserves, you can email us at the address below.

Until tomorrow…

Cheers,

Joel Bowman