Ever since the American Congress introduced subsidies to boost biofuels two years ago, people have been counting the cost of the decision. As farmers in the Midwest swapped grain for corn, food prices already climbing amid rising demand in Asia were driven up around the world. In China, the rising cost of animal feed has forced up pork prices. In Bangladesh, the soaring cost of cooking oil has left people relying on a single meal per day.
But now the chickens are coming home to roost. Biofuel production has ignited the price of one raw material that is crucial to US industry sulphuric acid. Each time an ethanol plant goes into operation, another 2,000 tonnes of the the acid's rapidly dwindling supply disappears. Construction, car manufacturing, agriculture all are feeling the pinch as the price of the chemical has soared to $329/tonne, from just $90/tonne in October. As Chemical and Engineering News put it, "sulphuric acid is one of those unheralded lubricants that keep the gears of the industrial economy spinning". That puts producers in a position of enviable power.
The main use for sulphuric acid is in agriculture. Roughly 60% of the total produced goes into the production of phosphate fertilisers. There is huge demand for phosphates in the Far East as Asia cries out for fertilisers to boost food production in the face of desertification and urban growth. In the past, China and India produced more than enough to satisfy demand at home. But rapid industrialisation has meant they are now heavy importers of the chemical. Sulphuric acid will be a crucial catalyst needed as Asian farmers adopt the high-yield, technology-heavy processes that revolutionised crop production in the West during the 1970s.
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Sulphuric acid is equally vital for the construction plans that China and India have laid out. The copper used to lay pipelines, the nickel used to structure the skyscrapers, all have been coated with sulphuric acid while being processed. Mining the copper and nickel in the first place requires sulphuric acid to leach the ore from raw deposits. Refining oil, treating wastewater, producing car batteries the number of industries dependant on the chemical is staggering.
But despite the recent leap in demand, there is little or no new capacity to tap, says chemicals analyst Trey Hamblet of Industrial Information Resources. With the price at $90, there was little reason to boost capacity and many producers simply gave up. Those left have been cautious about a big build-out now that things have changed. Of about $89m set to be spent by the industry in America this year, the "vast majority" will go on maintenance, not adding production, Hamblet tells Purchasingdata.com.
This is all good news for producers. In a matter of months, the chemical has gone from being an obscure byproduct of the oil and gas industry to a billion-dollar commodity. Demand for metals such as copper and nickel may soften, but there would have to be a major restructuring of industrial processes for the chemical's recent gains to evaporate. As Chris Mayer points out, "agriculture, energy, metals, they're all part of one big story one rapidly evolving story". We have a look at one Canadian firm set to benefit in the box below.
The best bet in the sulphuric acid sector
One of the largest worldwide suppliers of sulphuric acid and one of the few pure plays on demand for the chemical is Chemtrade Logistics Income Fund (TSE:CHE.UN).
Set up as a Canadian income trust (such trusts are similar to real-estate investment trusts in that they have to pay out the majority of their income as dividends to investors), Chemtrade produces and supplies sulphur products, including liquid sulphur dioxide, sodium hydrosulphite and sulphur itself.
The stock is a good play on the scarcity of the chemical, says Chris Mayer in The Daily Reckoning "it is in a good financial condition and throws off a lot of cash, much of which investors pocket in the distribution". Last year, Chemtrade recorded a huge jump in earnings to $20.7m from $3.8m the year before, partly due to the rising price for sulphuric acid. While the spot price of sulphur as an input has also risen, the company has maintained healthy profit margins on its chief product.
The price of sulphur is also expected to moderate next year as more supplies become available, further bolstering margins. The stock pays a monthly distribution of ten cents, which works out at a yield of 10% at current prices. The shares are valued on a forward p/e of 13.
Eoin came to Money Week in 2006 having graduated with a MLitt in economics from Trinity College, Dublin. He taught economic history for two years at Trinity, while researching a thesis on how herd behaviour destroys financial markets.
Eoin acts as managing editor of MoneyWeek's newsletters.
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