We’ve got a great Daily Dispatch for you today. We’ll start things off with a Casey’s Chart on housing, then Chief Metals Strategist Louis James stops by to talk about rare earth elements, and we’ll finish things off with Chief Energy Strategist Marin Katusa’s article on China and a new age in energy. Please enjoy.
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As we predicted, new home sales tumbled in May to a revised seasonally adjusted annual rate of 267,000, the slowest pace on record dating back to 1963. New home sales rose to a seasonally adjusted annual sales pace of 330,000 in June – but don’t be surprised if this figure is revised downward next month as has been standard practice the past few months. Even with the rosy figure for June, it’s still 16.7% below the same month of last year and the second slowest pace on record.
The new homebuyer tax credit expired on April 30, so a rush to qualify for this credit pushed home sales forward. The next few months of data will likely reflect this rush in April with lower sales volume and prices for new homes. Clearly the housing market is not out of the woods yet.
By Louis James
A number of subscribers have written to ask why we haven't taken the plunge on the rare earth element (REE) plays that have been making so much news lately.
Actually, we did, in our Casey's Investment Alert service, well before the REE bubble inflated last year, and having made a bunch of money and taken profits, we still have some risk-free chips placed on our favorite REE play. This was a very high-risk move, made because the company in question also had a strong gold story. If the market hadn't gone gaga over REEs when it did – for no reasons anyone could have predicted with any high degree of confidence – we'd have likely taken a loss on that bet.
The critical point here is that the market for REE juniors took off because a writer made a big splash publicizing the REE market, not because of some sudden and real change in the underlying supply and demand in that market. Many companies in the sector shot up two, three, even five times, without anything changing in their fundamentals.
That worked out great for those of us already invested, but once a "flavor of the day" inflates a bubble, it's time to take profits, not buy.
That said, there has now been a seismic shift in the REE market, in the form of the Chinese, source of over 90% of the world's REEs, cutting their exports by 72% recently. Here's a link to a story on this.
So, with the REE plays having sold off since the bubble peaked last year, is now finally time to buy?
Maybe. Or maybe not.
First, note that in spite of the major shift in the market the Chinese have created, popular REE stocks, like RES, AVL, and CCE, have not gone through the roof.
Second, the highest-profile REE play out there at the moment is the new IPO of Molycorp (NYSE.MCP), which has the past-producing Mountain Pass project in California. And yet, the company had to reprice the IPO at a lower level, and the shares have not taken off, as of this writing.
These are clear signs that REE plays really were in a flavor-of-the-day bubble, but more importantly regarding the junior explorers, as far as I can tell, none of them can say yet how much it will actually cost them to produce a pound or kilo of the metals they propose to produce. If this were off-the-shelf technology we were talking about, we might go with reasonable estimates from similar projects, but it's not. Ranging from technical factors such as crystal size to the specific mix of metals in each deposit, these minerals are each unique, meaning there is no simple, economic production process. Until these guys can say what it will cost them to produce what they have, we cannot say that what they have has any value at all.
That doesn't mean that they will all fail to figure out their processes, just that until they do, we're likely to remain on the sidelines.
Further, who can really say why the Chinese did what they did? There could be several reasons, with actual depletion of reserves being only one, and perhaps not the most likely. They could just be testing the market, to see how elastic demand is. It could be even more Machiavellian, with the Chinese holding the ability to flood the market as an ace up their sleeve, for purposes of their own.
In the final analysis, the markets for these high-tech metals are tiny, opaque, and highly subject to manipulation – not to mention vulnerable to the next leg down for the global economy, which we here at Casey Research do still expect to begin in the quarters ahead.
That's not to say we'd never buy another REE play, but the deal would have to be so cheap, it'd almost have to amount to a "can't lose" type proposition.
We are looking.
Meanwhile, be cautious. Remember that when "everyone" is talking about something, it's usually time to sell, not buy – which is what the market seems to be doing in response to the most recent round of talk.
[Casey’s International Speculator subscribers can confirm that Louis knows what he’s talking about: after all, every single stock he recommended in 2009 was a winner. Read more details here…]
By Marin Katusa
Stop the presses. The United States is no longer the world’s biggest consumer of energy.
After topping the energy consumption charts for more than a century, the U.S. has been left behind as China leapfrogged past. According to the International Energy Association’s (IEA) latest report, China burned its way through 2,252 million tonnes of oil equivalent last year – about 4% more than the U.S.
(The oil-equivalent measure is a bundle of all forms of energy consumed, including crude, coal, nuclear, natural gas, and renewable resources.)
That’s an astonishing turnaround, according to IEA chief economist Fatih Birol, who noted that as recently as 2000, the U.S. consumed twice as much energy as China.
Energy Consumption Trends of China and the United States 1965 – 2009
Source: BP Statistical Review of World Energy, 2010
It’s no longer 1973, when President Nixon could declare that our status as top energy consumer was “good. That means we are the richest, strongest people in the world.” Today, bragging about winning the energy-eating competition doesn’t gain you any brownie points. Which is probably why Chinese authorities were quick to reject the IEA data as “unreliable,” choosing instead to focus on their intention to sink about 5 trillion RMB (about US$750 billion) into renewable energy projects.
Despite the denials, a new age in the history of energy has begun, and the implications are enormous. China may not want to accept the honors, but the reality is that it’s now the most important player on energy’s demand side.
According to the IEA report, China will be investing more than $4 trillion over the next 20 years to ensure there are no power or fuel shortages, and that there is enough energy to keep feeding its economy. Thus the ever-increasing number of ships steaming out from Canadian and Australian ports: all are bound for Beijing, all loaded with precious energy supplies.
Whether it’s coal, gas, uranium, or oil, China’s import numbers are only heading one way – up. Here’s a brief overview.
The wealth of Western nations was built on the back of coal, and China plans to be no different.
King Coal, cheap and plentiful in China, accounts for 70% of all energy consumed. Most of that goes to meet the burgeoning demand for power, and with US$30 billion just invested into improving the national electrical grid, we’re not going to see coal taking a backseat anytime soon.
China also needs metallurgical (coking) coal for producing steel – the backbone of an economy. As the construction boom continues, corporations will be crying out for it. But with no higher-grade reserves of its own, China is buying up whatever is in the market, sending coal prices skywards.
Beijing continues its relentless courting of oil-rich countries across the globe. Its national oil companies (NOCs) offer debt forgiveness, development packages, infrastructure improvements, and, yes, bribes, in exchange for secure oil contracts, especially in Africa. The net overseas production from the three Chinese NOCs for 2010 will be a record-breaking 1 million barrels a day... that’s enough to fuel all of Australia!
Not content with just acquiring oil assets outright, Chinese NOCs are also tying up partnerships with other oil companies. In fact, the three Chinese NOCs accounted for nearly 20% of all global deal values in the first quarter of 2010.
Nor has China ignored North America. It’s heavily invested in the oil sands of northern Canada. This huge reserve is likely to become the most important source of U.S. oil, and China is making sure its finger is very firmly in the pie.
The U.S. still remains the number one consumer of crude. But over the past three years, China has accounted for at least a third of world demand growth in crude. And with a projected 45% increase in demand in the next five years, Chinese NOCs won’t be hitting the brakes anytime soon.
China is throwing itself onto the clean and green bandwagon as well. And the cleaner-burning alternative to oil is its cousin, liquefied natural gas (LNG).
Expectations are for a hike of almost 50% in Chinese demand for LNG by 2020. This year alone, China is expected to boost its LNG imports by about 65%, from 5.5 million tonnes in 2009.
No surprise that China is wedging its foot very firmly into the vast gas reserves of Kazakhstan, Uzbekistan, and Tajikistan. A 1,100-mile-long pipeline has just been completed to link Chinese factories and power plants to Central Asia.
Unconventional gas deposits – like shale gas – will also have a role to play. The country’s shale gas reserves are estimated to be about 26 trillion cubic meters.
As China wakes up to the potential of this energy source, it’s also waking up to the fact that the technology to unlock it is in North America. So planes full of well-heeled Chinese investors are heading on over to woo North American producers.
If you’re a small-capitalization firm, with the potential to lower costs and risks, improve project returns and tap opportunities that are otherwise beyond reach, you’re in demand.
Nuclear power is coming to China in a big way. The country is set to purchase up to 5,000 metric tonnes of uranium this year – more than twice what it needs.
But consider that by the year 2020, China will have at least 60 nuclear reactors up and humming across the country, throwing off 85 gigawatts of output and demanding 20,000 tonnes of fuel per year. That’s nearly 40% of the 50,572 tonnes mined globally in 2009.
Now the hoarding makes more sense.
The result: After a three-year lull, uranium prices are spiking up. Analysts at RBC Capital Markets have predicted a 32% spike in prices for next year – for a uranium company, this is Christmas come early. And while the bull market of 2006 saw at least 27 new uranium mines opening up across the world, it’s not going to be enough. Yellowcake is back, and it’ll be glowing red this time around.
China might not wish to be called the world’s biggest energy consumer, but it’s a fact, and its edge will continue to grow. The process of explosive economic development is like feeding teenagers – they’re never full. And while China continues on this tear to eat up the world’s coal, oil, uranium, and gas, there are some great opportunities unfolding.
Which producers are favorites to supply China?
Which companies are most attractive to Chinese investors, and to the NOCs?
When will uranium prices jump by 200% again?
We’ve put a lot of effort into charting China’s moves on the energy game board, and things are getting exciting. If you’re an investor, this is the perfect time to boost your portfolio with some carefully chosen stocks that will make the trend your friend. Try Casey’s Energy Opportunities for only $39 a year – and with our 3-month money-back guarantee. Read more here.
Chris again. Thanks, Louis and Marin. And thank you, dear reader, for spending some time with us today and for subscribing to a Casey Research service. I’ve got a ton of other work that requires my attention, but before I go, I must mention that for personal portfolio reasons, a member of the Casey team plans to lighten his load of SLW, FRG, XRA, and AXU.
Now I must run. Until tomorrow…
Casey Research, LLC