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.

As one water utility rep said:

As sulfuric acid prices increase, so do the products that contain this ingredient. The U.S. has also seen a shortage in supply of sulfuric acid. 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 per ton, according to Purchasingdata.com, after trading at $90 per ton as recently as October.

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

“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 to treat wastewater. It goes into the plastics we make, and a bunch of other things.

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The biofuel boom has 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 on 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 what they needed. 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 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 own because you want exposure to sulfuric acid. Owning them is like buying Home Depot because you think it sells a great lawn mower.

There are a few tiny players here that I’m currently researching for my readers. But since this sector is red-hot at the moment and appealing on many levels, I’m sharing the insights I’ve gleaned so far. 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. I’ve written about my favorite opportunities in these pages before. (You can read my energy idea here and my metals idea here.)

Agriculture, energy, metals… they’re all threads in one big story – one big, rapidly evolving story.

Good investing,

Chris Mayer

Editor’s note: Chris Mayer is the editor of Capital & Crisis, a monthly advisory we consider required reading at DailyWealth. With Chris’ research, you can always count on contrarian investment ideas you won’t read about anywhere else. Click here to learn more about Capital & Crisis and how Chris has compiled one of the most amazing track records in the business. We think a subscription is one of the best investment deals available today.

Source: You’ve Never, Ever Considered This Agriculture Investment…

But the quest for better returns comes with greater uncertainty. That’s why investors have developed so many tools to take the edge off the potential surprises stocks can spring on them… from fundamentals like P/E ratios to technicals like trend lines. Not surprisingly, the academics in finance have worked on the problem, too. And boy do they have a deal for you. This one involves our new best friend, volatility. We’ve had two unusual tools for looking at volatility—Average True Range and Zigzag. Now we’ll look at the one that gets all the press and even went to college.

Suppose you had to choose one stock from several to buy, but you weren’t allowed to know anything about the companies. You aren’t allowed to ask about any of their strategies for growth or to find out whether they have enough cash flow and current assets to cover the bills. You don’t know their profit margins or even what business they are in.

Well fear not, oh lucky you. You can use the academic version of volatility to measure your risk. It’s called beta, and nothing could be more uncomplicated than this. It’s a miracle anything so understandable even got published, but it did and finance schools from coast to coast have embraced it.

Here’s the drill: If the beta is high, the stock is risky, though it could pay off well but there’s a lot of danger. If beta’s low, the stock will probably just hum along. The return may be market average or modest, but the risk is low.

So far, we’ve looked at volatility you can see with your eyes, volatility you can measure in dollars and sense (ATR). And volatility you can describe in percentage (Zigzag). The academic’s beta version is volatility measured yet another way—in comparison to the market. Usually, they use the S&P 500 as a stand-in for the market.

This measure assumes the market has a value of 1.0. Any stock that moves in tandem with the market, about the same amount also has a 1.0 beta.

If it moves twice as much, beta goes up to 2.0.

If it moves 20% less than the market, the beta falls under 1.0, to 0.8.

You get the idea. It can also be negative. If a stock moves half as much as the market, but in the opposite direction, the beta is -0.5. Most stocks fall between .5 and 2.5, with more of them clustered toward the higher end of the scale.

So now you know exactly how to find a safe stock. Yes, sir! You go buy yourself some Enron in 2000. You know it’s super safe because Enron only had a beta of 0.47.

Here’s your low beta— Enron 2000:

This is known as using damned lying statistics.So what if Enron is going to drop from $89 to 60 cents and you could have just looked at the actual facts of the business like cash flow instead of beta and avoided all that pain? As Warren Buffett has said, this is the kind of common sense that’s OK in practice, but it will never work out in theory.

Using beta-volatility as a measure of risk would lead you to a strange version of safety today as well. You might buy Warner Chilcott (beta 0.6), iParty (0.6) or Amcon Distributing (-0.5) or Education Realty Trust (0.2)—all companies with massive debt, poor growth and small to no profits. Any of those could be winners on some planet, but to call them low risk is like calling LeBron James medium-big.

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 percent 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 Nov. 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.”

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Subprime mortgages and defaulting bank loans are not problems contained to their own section of the economy. These are problems that affect the entire economy in serious and possibly devastating ways.

Think of it as a chain reaction that could lead to a stock market apocalypse. Once one are fails, the rest will be sure to follow.

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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 percent. 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.

Regards,
Chris Mayer

For Whiskey and Gunpowder April 25, 2008

P.S.: In my service, Mayer’s Special Situations, I’m constantly on the lookout for plays just like this one. These kinds of investment threads are certainly interesting, but not nearly as much as the gains you can make once you spot the right one. Everyone’s looking for a place to put their money these days, and my readers have already found several good plays you simply won’t hear about in the mainstream. Click here to see what plays I’m working on now that should generate far better returns than the overall stock market.