Some months ago, a friend suggested that I look into the helium market. I couldn’t get too excited, but as a helium shortage is making headlines again, I think it would be useful to explain why.
The basic story is that in 1925, the US government established a strategic helium reserve near Amarillo, Texas. This reached one billion cubic meters of helium by 1995, a quantity far exceeding that needed to give free birthday balloons to every American citizen for life. So they started selling it off, and even talked about privatizing the operation entirely.
Why does the US even have a helium reserve in the first place? It started out being for airships, not party balloons. Then helium came into use as a coolant for nuclear reactors and MRI machines, among many other important uses. Helium, it turns out, really is a valuable commodity.
Best of all from a speculator’s perspective, is that the helium reserve has been drawn down for years. The latest government auction prices are a good 35% above those of the year before.
Time to jump in?
Not so quick…
In the first place, the “dwindling supply” story has been around since at least 2008, when some early birds sounded the alarm. This makes me skeptical that the current uptick is an investable trend, despite recent headlines.
Also, as you can tell from the words “government auction,” this is not a large and liquid (or gaseous, as the case may be) international market. There’s no recognized spot price. And I’m pretty sure the US reserve is nowhere near depleted. The government could flood the market at any time, causing prices to plunge. If there’s ever even a hint that MRI machines can’t get the helium they need, I’m sure the president would order the national reserve to slash prices.
Even worse is that helium is not rare. It’s the second element on the periodic table, right after hydrogen. Amounts far too vast to comprehend were created right along with hydrogen not long after the universe itself came into existence.
Okay, it’s extremely light, so much of the helium near the surface of the earth has escaped, but it’s still not hard to find. In fact, it’s a common byproduct of natural gas fields. That’s never a good thing for a commodity. There’s no “moat,” as Warren Buffett would say. And byproduct producers can keep supplying the market even if prices drop low enough to drive primary producers out of business.
One helium expert I saw interviewed earlier this year says that the dwindling supply story is true, but there’s no surging demand to go with it. It’s not a real crunch. And there are plenty of gas fields that could produce helium if it became worth the cost of capital to bother capturing it.
Finally, most of the helium sold today is through larger companies with many sources of revenue like Praxair. That means that even if helium prices were to take off (until high prices became the cure for high prices), it wouldn’t make much difference to the most direct beneficiaries.
The only pure plays seem to be junior explorers. I have indeed been pitched by one, which seems to have a great project. I haven’t been there to kick the rocks, so I don’t want to guess how likely they are to succeed, but the story looks good. It’s my disinterest in helium as a commodity that holds me back.
In short, helium is an abundant byproduct commodity. Headline-fueled hype may drive prices higher, and some early birds might profit. But fear of missing out is never my reason for speculating on anything. This is not for me.
That’s my take,
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Monday, September 23, 6:22pm, EDT, 2019