Monday, December 27, 2010

Looming Peak Coal in South Africa and the World

South Africa is about to reach Peak Coal, or has already passed it. Mean while the world will reach Peak Coal soon, said Cal Tech scientist David Rutledge. Mr. Rutledge surveyed coal production history of major producing counries all the way back to 1880, and applied the math model pioneered by King Hubbert, who accurately predicted the 1971 Peak Oil production in the USA, using his math model. Rutledge concluded that previous estimates of global coal reserves were outdated and too optimistic. He believes that there were roughly 662 billion tons of ultimate recoverable coal reserve on earth, among which 59%, or 400 billion tons, still remain underground. To put the numbers in prospect, the world produces and consumes about 7 billion tons of coal a year. China is responsible for about half of that number, or about 3.5 billion tons.

South Africa produces 242 million tons of coal last year. David Rutledge predicts that South Africa's production will peak in 2011 at 253 million tons a year. Peak Coal in South Africa has huge implication to the global economy and to the supply/demand of a critical natural resource that the world can not be without, especially as we move towards alternative energy solutions. South Africa is responsible for 85% of the world's platinum production and 40% of palladium, two noble metals used extensively as catalysts to cut air pollution from automobile emissions, and as catalysts to produce synthetic fuels and used in fuel cells, among other things.

Peak Coal in South Africa also means Peak PGM for the world, just as the world has an increasing demand of PGM metals for the environmental and alternative energy needs.

I discussed previously that mining of Platinum Group Metals (PGM), platinum, palladium and rhodium etc., is extremely energy intensive. Based on reports available from South African PGM mining companies like Anglo Platinum (AGPPY.PK), it costs roughly 1x10^10 joules of energy to produce just one troy ounce of PGM metals. That is the direct energy cost. If you include the indirect energy cost, the energy required to build and replace the mining equipments, build and maintain the mine and provide for the mining workers etc, the total energy cost to mine one ounce of platinum or palladium could be five times higher, or roughly 5x10^10 joules.

The 5x10^10 joules total energy cost to produce one ounce of platinum or palladium is equivalent to 13,890 kwh of electricity, or 7.64 metric tons of coal, or 30 barrels of crude oil, or 160,000 cubic feet of natural gas, or 0.556 miligrams of mass. At their recent prices in the US market, these energy commodities would be worth $472 in electricity, or $955 in coal, $655 in natural gas, or $2730 in crude oil. (Calculated using $0.034 per kwh electricity, $125 per ton of coal, $4.09 per thousand cubic feet of natural gas, and $91 per barrel oil.)

Remember in early 2008, electricity shortage almost knocked out the electricity grid in South Africa. The PGM and other mining industry was forced to shut down for 5 days, causing a market panic that sent platinum price to $2300/oz and palladium to near $600/oz.

Has ESKOM, the nation's semi-governmental electricity company, fixed the electricity supply problem in that country? Not by a long stretch! So far ESKOM has not even touched ground to start building any new power plant, even though there has been lots of talks. They promised in 2008 to quickly return three mothballed coal fired power plants back to service in a few months, but the first of the three mothballed power plant did not return to service until October, 2010.

The problem is that ESKOM is financially crippled due to the low electricity tariff in South Africa. Based on their latest annual report, ESKOM burned 122.7 million tons of coal and generated 215940 GWH of electricity, or roughly 0.57 kilograms of coal to generate each kwh of electricity.
Cost of electricity generation was 0.282 rands per kwh, half of which is fuel, mostly coal cost. So ESKOM paid roughly 250 rands per ton for coal, or US$25 per ton, using last year's exchange rate. Current international coal price runs as high as US$125 per ton. Imagine what kind of craps (discard coal) ESKOM burns to generate electricity as they could only pay a fraction of the going market price of coal!

ESKOM is vulnerable to lose its domestic coal supply to international buyers who have insatiable demands and who can pay much higher prices. Look at India with an economy growing at 8% and who faces peak hour electricity shortage of 14%, and who will boost coal import from 80 to 100 million tons next year. The increased will mostly come from South Africa. China is also approaching peak coal. China begins coal import from South Africa just as Asia tops Europe to become South African coal's biggest buyer. China experiences such acute coal shortage in major cities recently that they inadvertently cut power supply to critical oil refineries, resulting in a diesel shortage that crippled the truck transportation, leading to skyrocketing vegetable prices while some produces are left rotting in the fields unharvested.

Let's look at South Africa's coal again. Last year's 242M tons of coal production was mostly used by ESKOM (123-million tonnes), Sasol (40-million tonnes) and export (66-million tonnes). ESKOM's expansion program can use an extra 50M tons while Sasol's new project requires an extra 20M tons annually. And we are also talking about insatiable international demands from India, China and Europe. There is no way South Africa can meet all these coal demands.

Some one has to yield! Who is least capable of affording high coal price, namely, ESKOM, must yield! ESKOM must drastically cut electricity supply and aggressively boost electricity price to stay in business and keep the country's electric grid up and running.

We are not talking about events a few years down the road. These events are rapidly unfolding in front of our eyes now. I have been monitoring coal price and see how it rallied from $90/ton in August, 2010 to now $125/ton, a 40% surge in just 4 months.

What's the implication if ESKOM has to take those drastic measures? The country's energy intensive PGM mining industry will crumble! Simply put, platinum and palladium will have to be produced at much higher cost. The production volume has to be cut dramatically. The PGM mining companies will demand much higher metal prices to compensate for the increased cost to stay in business.

That, of course is bad news for the world, but music to the ears of wise investors who put their money in physical precious metals, palladium and platinum. These two metals, particularly palladium, are the ultimate alternative energy investments as I discussed.

Full disclosure: The author is heavily invested in palladium and owns large long positions in North America's only palladium mining company, Stillwater Mining (SWC) and North American Palladium (PAL). The author is also heavily invested in coal mining company PCX and is looking to buy other coal mining stocks.

Wednesday, December 8, 2010

Norilsk Nickel's Strategic Moves and Palladium Super Bull

Russia's Norilsk Nickel, the world's single largest nickel producer who is also responsible for 45% of the world's palladium mine production, made two big strategic moves, one of which escaped everyone's attention except for mine, and another one caused every one's attention but still caught me by a big surprise.

The surprise move is that Norilsk Nickel actually meant it when they said early in the year that they were going to sell their stake in Stillwater Mining (SWC), the only US based palladium and platinum mine, an extremely important strategic asset that Norilsk Nickel acquired in 2004, after going through the trouble of getting two superpower presidents involved in the negotiation, among other things. I could not believe Norilsk Nickel will sell their SWC stake, because Norilsk Nickel and SWC combined gives them the monopoly power of controling more than half of the world's palladium supply. But they did just sell their SWC stake. They acquired their SWC stake for US$100M cash and 877K ounces of palladium, valued at today's market value, their investment did not bring them much profit after all.

What made the Russians change their strategic mind regarding palladium, at a time when palladium price looks spiralling higher by the day? They no longer consider themselves a key palladium supplier to the world in the future?

The Russian riddle is solved when I noticed another less noticed, but much more significant strategic move made by Norilsk Nickel. The story goes back to 2007 when Norilsk Nickel outbid Xstrata to acquire LionOre in an all cash offer worth more than US$6.5B. At the time analysts could not understand why Norilsk Nickel paid such high price for a mining company of limited mineral reserves. The answer became clear only recently, long after the LionOre acquisition, in a Bloomberg news story:

Norilsk Nickel Plans $20 Billion Program to Boost Arctic Output

New Technology

“We’re considering switching from pyro-metallurgy to hydro-metallurgy based on Activox technology,” Muravyov said. Within a year, the company will test whether the technology, which Norilsk bought in 2007 as part of its $6.5 billion LionOre acquisition, will be suitable for Arctic ores. Activox uses chemicals to dissolve nickel from concentrate and then produce the pure metal.

“The cost of applying Activox in Norilsk still needs to be evaluated,” Muravyov said. Installing the technology at all of Norilsk Nickel’s facilities, at a cost of as much as $10 billion, would allow the company to “remove all ecological problems and cut electricity and gas consumption,” he said.

I suddenly had an eureka moment: The Activox Process, originally owned by LionOre, was the real reason for Norilsk acquisition. Norilsk Nickel mine, being one of the top ten most polluted places on earth due to sulphur dioxide and heavy metal emission from the smelters, and facing deteriorating nickel ore grade in coming years, desperately needs this new chemicals based metal producing technology that cuts pollution and production cost drastically.

Except for one catch. Platinum and palladium are very stable and extremely chemical inert metals. Therefore unlike nickel and copper which are easily dis-solved, these two precious metals are virtually impossible to be leached from the mineral ores, using any chemical solution. A demonstration chart of the Activox Process confirms my intuition. The lower left corner of the flow chart indicates that the leach residue, containing the precious metals, are either simply disposed, or be send to alternative precious metal recovery process.

After base metals are extracted, the leach residue would contain virtually all of the original material from the mineral ores: rocks, sands, dirts grinded into fine powder, and wet with all the nasty chemicals mixed in during leaching. It probably contains no more than a few part per million precious metal content. Once again those precious metals: palladium and platinum, are chemically inert and can not be extracted efficiently using any chemical solution. The only way to process them is to use high temperature smelters, which bring back all the air pollution problem and high energy cost, problems that Norilsk wanted to solve in the first place, moving away from smelter based pyrometallurgy towards Activox Process based hydrometallurgy.

The unescapable conclusion is that Norilsk Nickel will become just a low cost nickel and copper producer, and will cease to produce palladium and platinum as byproducts, once they adopt the Activox Process!!! This is true unless palladium and platinum prices are driven to such high levels that it makes economical sense to try to recover the trace amount of precious metals contained in the leach residue despite of the high processing cost!

A technical paper discussing the Activox Process running at the Norilsk Nickel owned Tati plant in Botzwana, written by experts of that plant, confirms my conclusion. The 16 pages technical paper contains not a single word mentioning of either palladium or platinum:

Solvent extraction design consideration for the Tati Activox® plant

This shocking development is very bullish for palladium and is a very good news to fellow palladium investors. We are talking about 45% of the world's supply of palladium removed when Norilsk ceases to produce byproduct PGM metals. Of course, I do not expect this paradigm shift to occur overnight. But shouldn't it be time that precious metal investors leverage the opportunity to hoard the palladium metal and ride the palladium super bull up to the moon, and mean while industry users like GM (GM), FORD (F) and TOYOTA (TM) need to start panic now and build their strategic palladium inventories before it is too late. If 4% of shortage was enough to drive rhodium price from $300-ish to $11000 per ounce, I don't know how high palladium price can go to if we have more than 50% shortage in the global supply!!!

Maybe, just maybe, the recent remarkable surge of palladium price indicates that some investors out there have already figured out what the Activox Process means to Norilsk Nickel and to global palladium supply, and are already quietly loading up while keeping their lips sealed.

Full disclosure: The author has studied global palladium market for a few years and is heavily invested in physical palladium metal, as well as in stocks of the world's only primary palladium mining companies: SWC and PAL. The author has no position in Norilsk Nickel (NILSY.PK).

Wednesday, November 10, 2010

Grave Warnings to Precious Metal Investors - Buyer Beware!

I am a palladium bug, not a silver bug or gold bug. Although I do like silver and gold and I like all precious metal investments. My favorite remains palladium. But regardless what precious metal you like best, I urge all precious metal investors to own ONLY physical metals and stocks of their favorite precious metal mining companies.

I strongly discourage owning any Exchange Traded Funds, ETFs that invest only on future contracts or other paper instruments. I cited UNG and USO as perfect bad examples. At a point of time UNG was once the second largest long position in my portfolio, right after SWC. I still can not help but pad myself on my back for promptly realizing the fundamental problem with a paper based "commodity" ETF such as UNG, and sold without hesitation. Had I held UNG till this day I would have been much poorer. Unfortunately such ETF funds continue to make many unsuspect investors poorer by the day. So I urge every investor to carefully read why paper based ETFs do not work.

I do expect that 99% of the people will attack my view point that paper ETFs will not work. I don't mind as I know 99% of the people simply could not grasp the concept until they have lost all their money. I will be very happy if 1% of people feel that I have helped them to avoid costly mistakes and to make smart investment decisions.

Like advocators Jim Sinclair and Ted Butler, I always encourage people to directly own physical precious metals. I do not trust the physical gold ETF, GLD, and the physical silver ETF, SLV. Like some other folks I expressed skeptism whether these funds actually hold the physical precious metals as they claimed. These ETF funds were hosted by entities known to be hostile to precious metal investors and known to have large short positions in silver so why should people trust them? At one point I went so far as scrutinizing the almost 10,000 pages long silver bars list posted by iShares Silver Trust (SLV), and discovered plenty of red flags.

But what I just discovered may shock the raw core out of every SLV investors' shells. If you read the following and you still feel comfortable investing in SLV, and do not feel a need to scrutinize the fund a little bit more yourself, then maybe you are too numb to even invest money in the dangerous marketplace of today, and it is probably a good thing you lose money, if indeed this is exposed to be one of the biggest scam of our time.

This is a nuclear bomb I am dropping, so before I continue let me make a few things clear for my own legal protection. I am a US Citizen with constitutional right to free speech, and conscious forces me to speak out. I do not have a short position in SLV and stands for no monetary gain out of this disclosure. I am a supporter of precious metal investments and want to see higher silver price. I have no vested interest against any entity involved, other than that I insist seeing honesty and integrity of all involved parties.

That said, I have noticed that iShare recently hired an independent auditor to inspect the silver bars in their vault, and issue audit certificates such as this most recent one. I urge you to follow the link to immediately download a copy of the inspection certificate and save it on your computer, lest it disappear soon! The auditor, Inspectorate International Limited, is a very reputable commodity inspector for 150 years in the business. Very good! I welcome iShare's move to hire a reputable auditor to look at their silver bars and disclose it to the public. If you trust Inspectorate, and they visited iShare vaults and come back to tell us they see all the silver bars stored in the vaults, then it should put all skeptism at rest and people should feel safe to invest in SLV shares, right?

Not so fast! Not so dandy fast and easy, I say folks! Look at this Audit Certificate once again. It's only two pages. Print it out, friend. But Inspectorate is a big company and it just so happens that the same Mr. Paul Alston, a nice and respectable English gentlemen, was also hired to do audit for, and issued audit reports like this, this, this, this and most recently this.

Do you see anything unusual, folks, when you compare the two pages SLV audit report and the 14+ pages GoldMoney audit reports, alleged done by the same Mr. Paul Alston?

1. SLV has a two page lousy report that says almost nothing, while GoldMoney has much more elaborate reports detailing every aspect of the inspection process, including such seemingly unimportant information like the brand of the sale used for weighing, even though SLV has way much more silver to be inspected.

2.Inspectorate issued a paper audit certificate to GoldMoney and they have to use an awkward optical scanner to scan the image of the paper certificate and post on the web. More awkwardly, the brits use a paper size narrower than standard American letter size, thus the scanning exposes the ugly paper edge, telling the size of the margin to the edge of the paper. Wouldn't it be nice to do like what iShare did, create a nice and clean electronic PDF document, leaving no trace of the paper, and just digitally embed the Inspectorate logo, and an image of Mr. Paul Alston's signature? Except that anybody with a computer can do it. It's not hard to find a sample image of Mr. Paul Alston's signature off the web, right? (Don't try it at home, kids!)

3.Unfortunately Bank of New York Mellon is in America and speaks a different kind of English than the one spoken by Mr. Paul Alston, a nice British gentleman. And the vaults are supposed to be in England. They forgot such unimportant details and let a lousy American created that Inspectorate Report. Congradulations on getting the paper size to be the correct A4 size, but they need to work on small details, for example Inspectorate would not begin the sentence with "The Bank of New York" as the sentence subject and would not use the ® mark when referring to third party names, and the British would refer a date as 7th of July, 2010, not in the lousy American style July 7, 2010. I encourage them to really spend some time studying how Inspectorate issue their audit certificates. They should have done that before they post it.

I will stop here and let people draw their own conclusions. But I do NOT for a single bit believe that Mr. Paul Alston himself personally counted and inspected 308,542 pieces of silver bars, and sampled and measured each one bar out of each pallet of 30 bars all by himself and his gangs, and issued that SLV audit certificate and signed his name on it. Not a bit at all.

Full Disclosure: The author is fully invested in mining stock SWC, PAL and precious metal palladium. The author also holds physical silver and silver mining stocks like SSRI, CDE and HL, but has no position in ETF funds GLD, SLV, UNG and USO.

Sunday, October 24, 2010

Peak Oil, Alternative Energy and Platinum Group Metals

The world's attention is increasingly turning towards alternative energy as the reality of Peak Oil is sinking in, even though the public discussion of Peak Oil is still only just wispering, with majority of investors unware of the looming global crisis.

Fossil fuels are cheap and convenient: they are easily produced, and the fuels themselves serve two purposes at the same time: They are both energy source, and energy storage. When you fill up your car with 15 gallons of gasoline, you acquires both the energy needed to drive your car a few hundred miles, as well as ways to store the energy: the energy is stored in the gasoline until it is burned in the internal combustion engine.

Any alternative energy development must address these two issues as well: energy source, and energy storage. Alternative energy sources we talk about, like solar, wind, ocean wave, nuclear, addresses only the problem of energy source, but not the energy storage.

While scientists are making some progress in developing high energy density batteries, the basic physics is that energy density in any battery could never come even close to the chemical energy density in either hydrogen, or carbohydrate fuels. The best energy storage solution we can find is to synthesize carbohydrate fuels using energy derived from solar, wind, nuclear or coal fired power plants. Such synthesized carbohydrate fuel can then be transported using the existing infrastructure before they can be utilized. Finally, fuel cell batteries can extract energy from the carbohydrates and turn it into electricity energy, at an efficiency much higher than simply burning them in a combustion engine.

So this is the alternative energy recipe scientists have given us:

  1. First electricity is generated from alternative energy sources like solar, wind, ocean wave, nuclear, hydropower, etc.

  2. Second electricity is used to synthesize carbohydrate fuels, allowing the stored energy to be easily transported and utilized.

  3. Third fuel cells are used to generate electricity from carbohydrate fuels to provide end energy usage, like driving a vehicle or other electricity driven machines.

Do you realize that for steps 2 and 3 to be possible, a category of rare and expensive precious metals are need. You need the so called PGMs (Platinum Group Metals), namely platinum and palladium. These two metals serve as catalysts in synthesizing cabohydrate fuels. They also serve as catalysts in fuel cell batteries.

Among the two PGM metals, palladium is probably even more important. Palladium is very unique in its extreme affinity to hydrogen: one volume of palladium is capable of absorbing 900 times the volume of hydrogen. Such extreme affinity to hydrogen makes palladium an ideal catalyst in any chemical process that involves hydrogen, including, of course, the chemical process to synthesize carbohydrate fuels, or the chemical process to turn carbohydrate fuel into water, carbon dioxide and electricity, as it happens in fuel cells. There is no shortage of efforts by scientists to look for alternatives to the expensive platinum and palladium, in the last one hundred years. Unfortunately no practical substitute could be found so far.

No wonder when President Bush advocated hydrogen economy in a State of the Union address in 2003, some one reminded us that you can NOT have a hydrogen economy without palladium, and that the USA is lucky to have one of the world's only two primary palladium mines: the Stillwater Mine (SWC) in Montana. The other palladium mine is North American Palladium (PAL). Read "The Russians Are Coming" by Mother Jones.

Recently there is an investor mania in the sector of rare earth metals, just like the one in solar energy a few years ago, due to recent news that China is limiting production and export of rare earth metals. The rare earth metals mania is not without a good reason. The alternative energy development is a huge investment theme due to Peak Oil. In the alternative energy development, you need efficient electric motors to turn mechanical energy (like wind power or hydropower) into electricity and turn electricity into mechanical power (like in a hybrid car), and you need high energy density batteries to store the electricity energy. The high density batteries need rare earth metals. To make the strong magnets needed to build electric motors, you need rare earth metals. Not to mention the advanced electronics technology need rare earth metal as well. No wonder the whole world panicked when China begin to cut back rare earth metals expert quotas, and there is an investor mania to rush into potential rare earth mining plays like MCP, REE, AVARF.PK and UURAF.PK these days.

But let me be clear: rare earth metals are not rare at all. China could not cut the world off on rare earth metals even if she wants to. There are plenty of rare earth resources else where in the world that can be developed. They just won't be cheap.

But here are these two other metals that are truely rare, and that all alternative energy technology more critically depend on, and which China has zero domestic sources. China runs the danger of being cut off by the world on these two critical metals if there is a resource war.

Those two metals, as I just mentioned, are palladium and platinum. Supply of these two metals concentrate in just a few spots in the world: Russia's Norilsk Nickel (NILSY.PK) mine, South Africa PGM mines, and these two palladium mines in North America: SWC and PAL. Price of platinum but even more so that of palladium, have been surging up relentlessly due to strong supply/demand fundamentals. China, Japan and other nations without their domestic sources of these two metals, better begin to think about accumulate their strategic reserved of these two critical strategic industry and war time metals.

Likewise, investors would do much better hoarding physical palladium metal bullions, than hoarding a basket of 2 dozen different rare earth metals and not knowing which one will do best in the near future.

In the next two articles I will talking about how effects of resource peaking in two countries will impact global supply of platinum and palladium catastrophically, causing market panick in the near future, sending prices of these two metals surging to unimaginable high levels:

Peak Coal in South African and the Global PGM Supply

-How South Africa is running out of coal. How booming India coal demand will deplete South Africa's coal supply. And how these will impact South Africa's electricity supply and therefore constraint that country's platinum and palladium supply.

Peak Nickel in Russia and the Russian Checkmate on Palladium

-The Russian checkmate on global palladium supply are in two aspects: First the end of Russia strategic palladium stockpile sale, due to the stockpile depletion. Second, palladium production of Russia's Norilk Nickel (NILSY.PK) mine declines dramatically, as ore grade deteriorates. Third, More shockingly, Norilsk Nickel is now considering the more cost effective Activox Process technology, which it acquired by spending US$6.5B to acquire LionOres a few years ago. The Activox Process will dramatically cut sulphur dioxide pollution. But the new technology will only extract base metals nickel and copper, leaving platinum and palladium in the residue un-extracted, unless the price is high enough to provide the economic incentives to extract the precious metals using alternative approaches. This change would be a catastrophic loss of global palladium supply and will be sure to cause market panic.

Full Disclosure: The author has large long positions in palladium mining stocks SWC and PAL, in addition to silver mining stocks like SSRI, CDE, HL, and coal mining stocks PCX and ACI. The author has no position in rare earth metal plays REE and MCP.

Tuesday, October 5, 2010

The Ultimate Energy Investments

You read that title right, I am talking about The Ultimate Energy Investments, not the "Alternative Energy" investments. Alternative energy is a very sexy word to the ears of investors, in recent years. I am all for alternative energy developments. But I am not a big fan of most of the alternative energy developments. They are too costly in terms of energy and money invested, in terms of energy return, and none of them can be ramped up quickly to meet even a fraction of energy demands in today's global economy. I believe LENR, or Cold Fusion, which involves precious metal palladium, is humanity's only solution to Peak Oil energy crisis.

We face the Peak Oil reality, a reality that the total energy supply of the world will begin to decline, instead of continue to increase. The world must cope with and live within the reality of ever declining energy supply, until a new abundant energy source can be developed to replace the depleting fossil fuels of the earth.

It makes sense to hoard something when supply is in shortage. Wouldn't it be nice to physically hoard energy itself, as a commodity investment? This is why I gave the title of this article as "The Ultimate Energy Investments". Yes I am talking about HOARDING ENERGY itself.

How do you hoard energy? Energy is invisible, has no shape or form. Energy price is still cheap but it won't stay cheap. One kilowatt hour of electricity is worth about 5 US cents at whole sale. You can hoard energy by storing it in a battery, but it is an ineffective investment: One set of Toyota Prius hybrid car batteries, costing a few thousand dollars, stores about 500 watt hour of energy fully charged, or less than 3 cents worth of energy. Is it so impossible to hoard energy?

It is not possible to hoard energy directly, but it is possible to hoard energy indirectly. It can be a very good investment. Energy drives all activities of the society. All goods or services we produce or consume ultimately depends on energy in one way or another, directly and indirectly. When you take a hair cut in a barber's shop it costs lots of energy: Electricity is used to drive the hair clipper. The hair clipper itself is made of plastic and metal parts. You need energy to produce the plastic and produce the metal from minerals. You need energy to turn raw plastic and metal into parts and then assembly into a hair clipper. The barber needs to eat food. You need energy to produce the fertilizer needed to grow grocery foods that the barbers and every one of us consume daily. Everything costs energy.

The ultimate energy investments are investments in commodities that cost a huge amount of energy to produce in the first place. Such commodities may be extremely rare, and can be very expensive, reflecting the huge amount of energy it costs to produce these commodities.

Precious metals, particularly PGM metals, platinum and palladium, are such ultimate energy hoarding investments, because these metals cost huge amount of energy to produce. According to the annual report of Anglo Platinum (AGPPY.PK), the direct electrical energy cost of producing just one ounce of PGM metal, is almost 7GJ in 2008, or 7x10^9 Joules. In terms of electricity that's roughly 2000 kilowatt hours of electricity to produce just one ounce of PGM metal. At retail electricity rate of US$0.15 per KWH, it costs US$300 just in direct energy cost to produce one ounce of PGM metals. Indirect energy cost, e.g. the energy cost to produce the mining equipments, explore and develop the mine, as well as costs to pay salary to feed the mining workers and their families, is probably several times higher.

I guestimate that all direct and indirect energy cost combined, it costs about 10,000 KWH of electricity worth of energy to produce one ounce of platinum or palladium, or the equivalence to the energy contained in six tons of coal.

ONE OUNCE of PGM metal equals SIX TONS of coal. Remember that and think about it!

The platinum engagement ring you bought for your wife contains about 1/6 of an ounce of platinum. It costed one ton of coal to produce the metal. Your wife is wearing one metric ton of coal right on her ring finger. Just tell her that there is one ton of coal sitting on her finger!!!

When you buy a one ounce platinum or palladium coin, you have hoarded 6 tons of coal under your pillow, without taking up any space in your backyard. When South Africa exports one ounce of PGM, they consume six tons of their coal. By the time South Africa depletes its coal reserves, they won't be able to produce a single more ounce of PGM metal, even if there is still be plenty of metal lying underground.

As energy becomes more expensive, it costs more to produce the precious metals. The value of a physical asset is generally decided by the replacement production cost, the ounces of precious metal you hoard will grow more valuable over time, as Peak Oil starts to take its toll in societies.

Isn't it great that you can hoard energy itself, by simply hoarding bullions of precious metals, without costing space in your backyard to store a small mountain of coal! Just remember this: one ounce of platinum or palladium equals to six metric tons of coal.

The concept can be applied to other precious metals and base metals. Gold production is also extremely energy intensive, having to sort through tons of rocks to extract just a fraction of an ounce of gold. One base metal that is tightly correlated to energy cost, is aluminum. There is no scarcity in the raw material to produce aluminum. Aluminum production is merely a matter of applying electricity energy to separate the aluminum metal by electrolysis. When you buy an aluminum bar, you bought a certain amount of electricity, stored in the metal, in the form of energy consumed to produce the metal.

If you want to hoard electricity, you can hoard aluminum bars instead. I do not know how many kilwatt hour of electricity it costs to produce one kilogram of aluminum. Probably you can check the annual reports of producers like Alcoa Inc. (AA) or Aluminum Corp. of China (ACH) to find out. One thing is sure, as electricity price goes up, so will the cost of aluminum production, and so will the market price of the metal.

Recently, another energy source, natural gas, has become a hot topic of discussion in the investor community. I agree with the general sentiments that current natural gas price is unreasonably too low in comparison with other energy sources. Current natural gas price does not fairly reflect the production cost, particularly the shale gas production cost. The low price is unsustainable. It must go up soon.

What can you buy to invest in natural gas, besides producers like CHK, COG, APC, PETD? Many people talk about natural gas ETF funds like UNG, FCG, UNL, WCAT. I must point out that people should NOT touch any of these ETFs that are based on nothing but paper. Ask managers of these ETF funds: Do you hoard even one cubic feet of natural gas? Do you have any facility they can show you that contains natural gas? If they don't have the physical goods, then they only have worthless papers created out of thin air by counter-parties. I have learned my lesson in UNG, fortunately without suffering any loss. I argued why people should NOT invest in UNG, USO, or any other paper based ETFs. It is extremely important that you read it and try to understand the difference between paper and physical goods.

Is there no way to hoard physical natural gas for an investment? Well, there IS a good way of hoarding natural gas, without giant steel storage tanks. Natural gas is used to produce a very important agriculture commodity whose other raw material for production is free: the air! It's called urea, a nitrogen fertilizer. The nitrogen comes from the air. The hytrogen, as well as the energy needed to produce urea, comes from natural gas. No other raw material is involves. Urea is stable, safe and cost effective to store. By hoarding urea, you are hoarding natural gas in solid form. Current urea price is at multi-year low, reflecting the current low natural gas price and therefore the low production cost of urea. The urea price must go up when natural gas price goes up, and when global food demand goes up, driving more urea demand in agriculture.

Go ahead to hoard urea at current low price if you want to invest in physical natural gas.

As for me, I have been a long term advocater of palladium investment. There is now even more reason to invest in palladium, besides the bullish factors I have talked about repeatedly. At current price of only $578/oz, it is nice to know that one ounce of palladium represents at least six metric tons of coal, right at your finger tip. Since the December, 2008 lows of precious metals, the performance of palladium has beaten other precious metals: gold, silver and platinum. Palladium will continue to outperform the other precious metals, until at least it reaches a price parity with platinum.

Not to mention that there are hundreds of gold or silver mining stocks to pick from, notably like ABX, GG, AU, NEM, PAAS, SSRI, CDE, HL, just to name a few.

When it comes to platinum, there are much fewer choices: AGPPY.PK, IMPUY.PK, LNMIY.PK, AGPBF.PK and NMPNF.PK.

When it comes to palladium, the only primary mining plays available is Stillwater Mining (SWC), and North American Palladium (PAL).

Full Disclosure: The author holds shares in SWC as the largest long position. The author also holds shares in PAL, SSRI, CDE, PAAS, HL, PCX. The author hoards physical palladium metal but currently has no plan to hoard physical urea due to lack of suitable market access. The author has no long or short position in any of the ETF funds mentioned.

Tuesday, September 14, 2010

The Pitfalls of Almost Every ETF Investments

I am telling you something every investor should know, but no one has told you! Even the most successful investors like Warren Buffet or Jim Rogers has failed to tell you this important investment rule that you are about to hear from me. I believe Jim Rogers does not intend to withholding his investment knowhow from you, but he truely does NOT actually get it himself. It took me a while to get it as well.

When Jim Rogers pitched agriculture commodities and urged people to buy future contracts of those commodities, he did NOT know what he was talking about! I hope that some one close to Mr. Jim Rogers can bring my words to him and explain why he was wrong. I have high respect to Mr. Jim Rogers and I hope he gets what I am about to tell below. This is an investment mistake 99% of people make, including Jim Rogers himself.

If you believe something is bullish and want to invest in it, then you MUST own it outright.

Allowing some one else to own your investments for you, simply won't cut it. Owning something "indirectly", for example, by purchasing futures contracts, won't cut it, either. If you don't hold something outright, physically, under your own control, then you really don't own it. If you don't own something outright, then all you have is merely a piece of promise, written on a piece of paper. You are owning merely paper assets, not the physical assets. You should reject all assets that rely on a promise printed on a piece of paper, because a promise can be created out of thin air, and can just as easily vanish into thin air, with little or no repercussion to the one who breaks the promises, but tremendous loss to you who wrongly trusted that promise. Let me explain.

But first let me clarify that owning equities, i.e., owning shares of stocks of publicly traded companies, is NOT owning paper asset. The company, like the Stillwater Mining Company whose stock I own, is a real physical business entity, if I push a computer button to buy shares of SWC through TD AmeriTrade, I do own a small piece of that company. My ownership is recognized as legitimate. If I have any doubt I can request physical stock certificate. If there is still any doubt regarding the ownership, then the stock should not be bought. So let's make it clear, equities, as long as the ownership is not in question, are physical assets, not paper assets.

But all indirect ownership of physical assets, or ownership of derivatives of physical assets, are paper assets because they rely on a promise made by some body, written on a piece of paper. Take for example the physical gold ETF, the GLD, and physical silver ETF, the SLV. The respective investment prospectus claims these funds are backed by physical gold and silver, and hence owning shares of these two ETFs are equivalent to owning actual physical precious metal.

Maybe these ETFs are really backed by physical metals, maybe not. We don't know. All I know is by owning shares of either GLD and SLV, you are NOT owning physical gold or silver. Not at all. You are owning something which is based on a mere promise, a promise that some how some where in a secret location in the world there are a pile of gold or silver bars and those bars really do belong to you, but you have no way of knowing and you have no access to it. Those physical precious metal bars might as well be put on the moon and you can point to the moon and tell your grandsons that you really do own something on the moon, and that some one promised it to you, you just don't have control or access to it.

Make no mistake about it: You are owning a piece of promise, not a piece of metal, by owning GLD or SLV. It's up to you to decide how much you can trust that promise and how much you value it. But to me, I don't even trust my best friend to hold a few palladion coins for me, why should I trust some guys that I don't even know personally to hold my precious metal in a fund called GLD and SLV? In the past I scrutinized the metal bars list of SLV and raised plenty of red flags. I determined that regardless whether those red flags have legitimate explanations, it is not worth risking my own investments to count on some Santa Clause keep a good promise.

Another categories of ETF funds are even worse. The GLD and SLV fund at least claims to be backed up by physical assets. But there are ETF funds which are backed up by nothing but paper. Most notably are the USO fund for crude oil, and UNG fund for natural gas. The USO fund does not own a single drop of oil and the UNG fund does not own a single cubic of natural gas. They own future contracts, i.e., promises made by some one, not physical commodities digged out of ground. Why do people buy these two funds and then expect to make profits when prices of the underlining comodity goes up, if there is not an ounce of the actual stuff involved? They don't. I recognized that fundamental fact on Oct. 29, 2009. I advise you to read that article again. It was a very important lesson I learned.

Lucky for me, once I recognize why the investment based on paper will not work, I quickly unwinded my entire investment in UNG, which was once the second largest position I held, without suffering any loss, and I never touched it again. In hind sight I have chills in my spine thinking what could happen had I not timely realized what's wrong with UNG, and other similar paper based ETF funds. Unlucky for many investors who still buy such paper ETFs thinking they are investing on the right thesis of bullish commodities, or bearish US dollar. These investors suffered great losses and will continue to suffer losses in the future, until they realize the problem with owning paper, or untill they lose all their money, whichever comes first.

Notice what the prices of crude oil and natural gas were doing, since the low of March, 2009, and what were the share prices of USO and UNG doing, during the same period? Do I need to bring your attention to what FAZ and FAS has been doing over the long term? They are supposed to be a pair of opposite financial ETFs and they are supposed to run in the opposite directions, but over the long term, both run down. Same story with UUP and UDN, the dollar up and dollar down funds. In short term they indeed run opposite to each other, but in longer term, both runs in the same dorection: downward. All those are paper instruments based on nothing but mere promises made by counter parties. So why should any one expect to make money out these papers? Why do you think those counterparties are nice Santa Clauses ready to deliver profits to you happily? They don't. These paper instruments are gamblings, not investments.

There have been recent criticisms on UNG, on GLD and on SLV, and even on USO. I share some of the criticisms on these ETF funds. But no one on Seeking Alpha has really touched the more fundamental reasons why paper-based, or promise-based ETFs, are fundamentally wrong as investment vehicles, regardless of the bullish fundamentals of the underlining commodities.

When it comes to investments, if you don't hold it, you don't own it. Please pause and think about it. Hopefully you learn something. Hopefully next time Mr. Jim Rogers tells you to buy agriculture commodity future's contracts, you can help me to explain to him why he was wrong; why people should not buy this index or that index, or this or that ETF, or buy future contracts or other derivatives. Hoarding the physical stuff is the only correct way to invest in a commodity.

I still remember when I first pitched physical tellurium investment, many analysts, some well known, immediately asked me where they can buy tellurium futures contracts. I should have told them that I am quite happy to write up and sell them some tellurium futures contracts, at good prices, but they are not going to make money out of me. If you want to make money from tellurium, you have to purchase and hoard physical tellurium, just like I did. It is true for all commodities. It is true for all investments. If you don't hold it, you don't own it.

Therefore I reject virtually all ETF investments as legitimate long term investment vehicles. If you want to invest in precious metals, you have to own the real metals, or own stocks of the related mining companies. I am happy to see that I am now vindicated and will continue to do well in my insistence that palladium will be the best precious metal to invest in, and my insistence on the only known primary palladium producers, SWC and PAL. It was not a love affair. It was a firm conclusion from my own objective investment analysis. I just wish that if investors are bullish on palladium, they should go out of their ways and purchase any ounce of physical palladium they can find, instead of counting on buying palladium future contracts.

Full Disclosures: The author owns SWC as the largest position on his investment portfolio, and is invested in physical palladium metal. The author does not have position in USO, UNG, GLD, SLV, FAS, FAZ, TBT, UUP, UDN, and does not intend to enter any position either. Although the author hoards physical tellurium and is skeptical of FSLR, he holds no position in FSLR.

Sunday, July 18, 2010

BP Well Pressure Test Proves a Leak Exists Under Seabed!

BP scientists puzzled on why closing the new sealing cap of the Macondo well did not raise the well pressure to the expected 8000 to 9000 PSI pressure, but reached only 6700 PSI after the first 24 hours and 6745 PSI after 48 hours. If the well did not leak underground, with oil from the underground reservoir could only gush into the well but not leak out of it, the pressure should promptly reach equilibrium with the reservoir pressure. The reading at the sealing cap should then reach between 8000 to 9000 PSI, calculated based on reservoir pressure which is estimated based on conditions when the well blew out on April 20, 2010.

BP scientists offer only two possible explanations:
1. There is a significant underground leak from the well.
2. The oil reservoir pressure has dropped due to depletion from 80 days of spill.

I believe the pressure deficiency clearly indicates there is a big leak underground. Almost every one fail to notice to another data which is more important, and more disturbing: Why it is so slow for the pressure to approach its final equilibrium level. It's been more than two days and the pressure still hasn't fully stabilized yet! If the well has no leak, since the volume of oil in the well is small, and the liquid oil is hardly compressible, the well pressure should promptly raise to equilibrium level and stabilize within a few minutes after the sealing cap is shut off.

Let me explain the basic physics how fast the pressure in the well should raise, after the valves at the new sealing cap is shut off. If the well is not leaking, then all the oil already in the well has no where to go. Mean while at the bottom, the oil from reservoir continue to gush into the well. As the oil from reservoir squeezes in it builds up the pressure. This continues until the pressure reaches equiulibrium with the reservoir, and then there is no more oil getting in or out of the well any more and the pressure is stabilized.

How fast the pressure builds up to equilibrium level depends on three things:

1. How fast the reservoir oil can gush in under the pressure difference. The faster the oil gushes, the faster the pressure builds up.

2. How big a volume the oil in the well is confined to. The more room there is, the longer it takes to squeeze in extra oil to build up the pressure.

3. How compressible is the oil. The less compressible the oil is, the harder it is squeeze extra oil into the volume and therefore the faster the pressure reaches equilibrium.

Based on the estimate that reservoir oil was gushing into the well at a flow rate of 50,000 barrels per day, the total confined volume of oil the well is no more than 6500 barrels. And the compressibility of that amount of oil (liquid is not very compressible!) gives no more than 50 barrels extra space under full pressure. It takes roughly 3 * 50/50,000 of one day, or roughly 5 minutes, for the pressure in the well to build up to equilibrium level.

But now it's taking much longer than 5 minutes, and the pressure is far from stabilized yet. At the start the pressure was at 5000 feet deep water pressure level, or 2250 PSI. After the first 24 hours it reached 6700 PSI. After 48 hours it was 6745 PSI. After 72 hours it was 6775 PSI. Now after 4 days it's nearly 6800 PSI. The fact it is raising so slowing, and the pressure fails to stabilize, is a very troubling sign.

The data tells us that the oil is confined in a volume way much bigger than just the well itself. As the oil gushes into the well, it simutaneously leaks out of the well, through a pierced opening, into a way much bigger pocket of storage within the seabed rocks. This is why the pressure builds up extremely slowly. Lots of oil is being squeezed out through the leak point into the giant pocket in the seabed, to build up the pressure there slowly over time.

There is no question that the well casing is compromised and there is a huge leak some where in the well casing.

So why can't BP spot any seepage of oil out of the sea floor, if the oil is leaking out of the well into the seabed? That's because the well itself is 3 miles deep under the sea floor. If the oil seeps through the seabed and leak out from sea floor, it does not necessarily come out of the vicinity of the well site. It can come out at ANY spot within a roughly 3 miles radius from the well site. That is a pretty wide area to look for leaks. It is also pitch dark at the sea floor, the ROV video camera must use artificial lighting and can not see more than a living room's area of sea floor at at time.

if there is one single leak out of the sea floor within a 3 mile radius, it will take forever for BP to discover it using those under-sea ROVs. If BP find one leak, that means there must be hundreds of un-discovered leaks out of the sea floor!

What should BP do? BP should publicly publish detailed profile of pressure change over time, since the beginning of the pressure test. Let the experts look at the data and build physics model to discover what teh data tells us, and debate the scientific question whether there is a leak and how big the leak is, and/or whether the leak has penetrated all the way to the sea floor.

As for the relief wells, if the well casing has been dameged, then there is no point to proceed with the relief wells any more. Once the relief well is pierced through to the wild well, BP will continue to lose mud throught the leak in the wild well. Once all the mud is lost, BP will have a blowout at the relief wells, causing a much bigger disaster than the existing one.

It's time for BP to be honest with itself, publish all information and invite experts around the world to deal with the problem together. This is a disaster that BP can not handle on its own.

Full Disclose: The author currently owns a small short position of BP. But my main stock portfolio are on long positions on my favorite palladium mining stocks, SWC and PAL, as well as silver mining stocks such as SSRI, CDE, PAAS. The author does intend to increase BP shorts over time, if there is significant recovery of the BP stock price.

Thursday, July 8, 2010

Warning to BP: Stop the Relief Wells Or Expect a Much Bigger Catastrophe!

I issue a serious warning to BP: Stop it right now, do NOT drill the last few feet of the relief wells. Do NOT punch that hole through. Think everything through very carefully! If BP proceeds to puncture the hole through to the original blowout well, it opens up a Pandora's Box which may lead to a much bigger catastrophe than any one has ever bargained for!

BP must halt now and invite all experts for a good debate on exactly what could happen. Build a computer model and test all scenaries. Build a physical model and run tests on it. BP is foolhardy to just proceed and pray/gamble for a success. Because what could happen is not just another failure, but rather a much bigger catastrophe!

BP explains how a relief well works. You drill another well nearby which intercepts and punches a hole through the casing of the original well, at 18000 feet below sea level, or 135,000 feet below the sea floor. Then heavy mud is injected through the relief well into the original blowout well, filing it up from near the bottom. Since the density of the mud is heavy, the gravity of the mud column generates a pressure enough to counters the pressure of the oil and gas from the reservoir, hence the oil/gas flowis stopped. Once the oil/gas flow is stopped the well can then be sealed off using cement.

It sounds simple. But due the the extreme depth of the well and the extreme pressure from the reservoir, some technical details makes the plan virtually impossible to work. Let me explain.

For the plan to work. BP needs to ensure several things:
1. The mud must have a density heavy enough to counter the pressure of the oil from the reservoir and to stop the flow of oil from the reservoir.

2. The mud must be pumped into the junction point fast enough to prevent it from being diluted by oil and gas coming from the reservoir. See condition 1.

3. The mud must not be too heavy that it seeps down into the fracture of rocks, damaging the rock formation, fracturing the sea floor which releases oil and gas in an uncontrolable way.

4. BP must have enough mud at hand. If it ever runs out of mud it's game over for BP. But not so much mud that it all go down into the rock fractures and causes the sea floor to rupture. See condition 3 again.

I don't see how BP can pull it off.

For the discussion below, let's keep one thing in mind, when liquid flows thorugh a path, pressure drops the further you go alone the path. Part of the pressure is lost to overcome the resistance to the flow. The higher the viscosity (sticker) is, the narrower the flow path is, the more pressure drops along the path. On the other hand, if the liquid is not flowing, then there is no pressure drop due to liquid flowing.

In the first phase of operation, mud is injected from the relief well through the junction point into the blowout well, expelling the oil and gas originally in the blowout well out of the exit point, while stopping the flow of oil and gas from the reservoir below.

When the oil from reservoir is to seep through the rock fractures and then gush out of the blow out well, the pressure at the junction point is way much lower than the reservoir pressure, because it is much harder for the oil to seep through the rock fractures then to flow through the blowout well. Hence more pressure is lost at the rock fractures, than the pressure loss needed to push the oil up through the well. What it means is once the oil below the junction point stops, the pressure at the junction point quickly raises to a much higher level. And BP needs to be able to counter this much higher junction pressure and still be able to push the mud in.

Now consider the path of the mud. It is pushed down the relief well and then it pushes the oil and gas up the blowout well. Note the exit point is free flowing. The pressure of the mud must be high enough that while the mud is flowing at very high rate, it still generate high enough pressure at the junction point to fight the static pressure from the oil in the reservoir. That goal is extremely hard to achieve, because most of the mud pressure is lost in pushing the mud through the resistance of the relief well.

Likewise, the original oil and gas must be pushed to gush out of the blowout well even faster than the free flowing rate, to generate enough back pressure to push back the oil coming from the reservoir. Failing that, the oil will continue to flow from below to mix with the mud, hence diluting the mud entering the blowout well. This, again, is virtually impossible for BP to achieve. We are talking about pushing the mud in at more than twice the rate how free flowing oil and gas gushes out of the blowout well.

To put things into formulas, let's call the pressure at the junction point Pj:

Formula One, Junction Pressure from the Relief Well:
(1) Pj = P(Pump) + P(Mud Column) - Q2(Mud Flow) * Rm(Mud Resistance in Relief Well)

Formula TWO, Junction Pressure from the Blowout Well:
(2) Pj = P(Sea Floor) + P(Oil Column) + Q2(Oil Flow) * Ro(Oil Resistance in Blowout Well)

Formula THREE, Junction Pressure from the oil from the Reservoir:
(3) Pj = P(Reservoir) - P(Oil Below) - Zero (Oil below not flowing)

Let's define net pressures, which is the pressures the three source of liquid would generate at the junction point if we put a flow stopper there, as such:

P(Net Relief Well) = P(Pump) + P(Mud Column)
P(Net Reservoir) = P(Reservoir) - P(Oil Below)
P(Net Blowout Well) = P(Sea Floor) + P(Oil Column)

The relationships can be re-written as such:

(4) (P(Net Relief) - P(Net Reservoir))/(P(Net Blowout) - P(Net Reservoir))
= Rm(Mud Resistance in Relief Well)/Ro(Oil Resistance in Blowout Well)

Let me explain it in layman's English. Let's imagine the reservoir is directly connected to the junction point with no resistance to the flow movement in either direction. The net force that pushes the mud down into the oil reservoir must be pushing the mud down at the same rate that the oil from the reservoir is able to push oil up to gush out of the blowout well, in terms of barrels per day.

I don't see how BP can have mud heavy enough to achieve this goal. The fact that viscosity of mud is significant higher than the viscosity of oil, hense mud flow experiences much higher resistance than the oil flow, makes it even harder.

Now that is just one condition, being able to inject mud and completely fill the blowout well with it, without being diluted by the gushing oil. It requires mud heavy enough. This condition directly contradict another condition, which is that the mud must not be so heavy that it is able to seep into the rock fractures, which requires mud that is not so heavy.

The second condition, preventing mud from seeping into the rock formation, can simply be written as:

(5) (P(Net Relief) - P(Net Reservoir)) <= 0 This second conditon, formula (5), can not be achieved at the same time that first condition, formula (4) is achieved. I predict that BP's relief wells are not going to be successful.

A MORE SERIOUS warning to BP: If the relief wells fail as I predicted, do NOT resort to the desperate act of using nuclear options. If you use nuclear option, there is a good possibility it will trigger chain reaction of methane eruption on a global scale, turning the local catastrophe into a global catastrophe!!!

Full Disclosure:
The author does not currently have any short or long position in BP, but plan to short BP if irrational exuberance pushes BP share price higher leading to the near finish of the relief wells giving people false hope it's going to be successful.

Saturday, June 26, 2010

Eco Emissions - Great Innovation and Huge Demand Potential for Platinum Group Metals

There are eureka moments when you slap on your thighes and ask yourself: "Why haven't I thought about THAT!" The time when I first learned about Eco Emissions is one such moment.

But let me first remind people on the on-going and ever worsening Gulf Oil Spill caused by British Petroleum (BP). Many predicts that the disaster is so bad that a BP bankruptcy is a certainty. That includes Matthew Simmons, author of Twilight in the Desert, who calls for a BP demise in a month. I have high respect for Matthew Simmons but I believe he owe an appology to the world for getting his math wrong, by orders of magnitude. I believe that the fate of BP is now a political issue with Peak Oil implication which goes far beyond the mere fate of one big company. If death of BP means the death of the deep water oil drilling industry, there may be political will to save BP after all. But I will not touch BP either way at this moment as there are too many uncertainties. I will discuss when is best time to buy BP in another article.

The real story: Fossil fuels are bad pollutants, both BEFORE and AFTER they are burned. Before the oil is burned, they could pollute the ocean and kill birds. After the oil is burned, carbon dioxide and sulphur dioxide is emitted to pollute the air and destroy rain forests. But if oil is only partially burned, the pollution is way much worse: it results in emissions containing carbon monoxide, a toxic gas which is several hundred times worse than carbon dioxide in its greenhouse effect; and various nitrogen oxides which kills infants and senior citizens; and worse, particulate matters which are cancer agents which causes millions of deaths per year. The world collectively generates a thousand BP oil spill environmental disaster per year by producing and burning fossil fuels, accumulatively killed many times more people than was killed in WW II.

Incomplete burning of fuel is a big problem, it reduces fuel efficiency and creates air pollution. Scientists have worked relentlessly to solve the problem. The biggest progress of ourse is the global adaption of catalytic converters on automobiles. Using PGM metals, platinum, palladium and rhodium, as catalyst metals in catalytic converters, auto makers like FORD (F), GM (GMGMQ.PK), and TOYOTA (TM) are the largest industry users of PGM. What occurs in catalytic converters is basically after-burning: the incompletely burned fuel is once more burned more thoroughly in the catalytic converters, hence it cuts the pollutant emissions.

But catalytic converters do not solved all problems: They do not improve the fuel burning within the combustion chamber and hence do not improve fuel efficiency. More over, ocean traveling ships are currently not required to be equipped with catalytic converters, although there are pending new regulations which may finally impose such requirements on ships and also on gasoline-operated lawn machines.

This is going to change big time, thanks to a startup company called Eco Emissions Systems, founded only in 2008. The idea is simple: just directly introduce the catalyst in the combustion chambers of diesel engines! Doing so makes the fuel burn more thorough and hence improves engine efficiency. It also means less pollutants are emitted into the air. The technology is already there: platinum metal can be use to make nano-solutions containing tiny particles of the metal. The liquid can be turned into moist and injected into the diesel engine combustion chamber through the air intake. The catalyst contained in the moist then meets the fuel and promote the thorough burning, resulting in great savings of fuel cost. A simple idea worth billions of dollars.

At roughly 10% or more fuel savings, a typical dry bulk ship could save $1M per year just in fuel cost. For a shipping company like DRYS, EXM or EGLE, applying the technology on a fleet of 40 ships means a saving of $40M per year. That is a huge boost of their financial bottom line.

Too bad I did not come up with the idea early enough: Eco Emissions Systems already patented the idea globally and they stand to rip huge profit from the patent. Their stock symbol is ECMZ.PK or ECMB.OB. They are already well into business as their systems are being tested on a Holland America cruise ship, before being expanded to the whole fleet. I can see Royal Caribbean Cruises (RCL) and Carnival Corp (CCL) expressing interest soon. According to their web site, the company already has more than $132M documented product demands and that was in 2009, a mere one year after the founding of the company. I can see they grow much bigger! Who would not like the idea of saving cost?!

I would like to come up another novel idea which might be worth billions of dollars as well, but instead of patenting it I would give it out for free to big oil companies like BP, XOM and CVX: Why not simply add the platinum containing nano-solution to the diesel fuel itself, and hence achieve the same fuel efficiency improvements, without the need to retro-fit existing diesel engines to modify the air intake system? This way, their diesel fuel products will be more competitive. But then I guess the big oil may not like the idea: they want consumers to pay higher prices for oil and burn more fuels, not less. But if an idea can save consumers money, it will catch on like wild fire, regardless whether big oil like it or not.

Where is the investment opportunity here? The Eco Emissions technology, and similar technologies that put PGM catalysts directly into fuel combustion chambers can create huge demand for the PGM metals! Even though only a small amount of platinum is consumed, consider the fact that the world consumes one cubic miles of oil per year while producing no more than a cube of 8 feet worth of platinum annually, this new demand on PGM metals could mean paradigm shift in the global supply/demand picture, sending the prices skyrocketing.

How do you invest in this opportunity? Venture capitalists might want to talk to Eco Emissions Systems and get a good gauge what their growth potential is. For average investors, it's time to hoard physical platinum and palladium, and invest in two physical metal backed ETFs: PPLT and PALL. More leveraged play would be investing in stocks of platinum and palladium mining companies, like South Africa's Anglo Platinum (AGPPY.PK) and Impala Platinum (IMPUY.PK). Some one keeps refering Norilsk Nickel (NILSY.PK) as a palladium play. But even though I keep mentioning Norilsk Nickel as the world's largest palladium producer, they are a nickel play, not a palladium play, as palladium is only their by-product.

Of course, my most favorite PGM play remains Stillwater Mining (SWC) and North American Palladium (PAL). They are closer to home in North America, and they are the world's only primary palladium producers. SWC recently published a market study, A Case For Palladium, which documents how various factors, like the termination of the decades long Russian government palladium stockpile sales, and ongoing South African electricity crisis, could create a ten year bull market in palladium.

More than 95% of my 401K retirement account is invested in SWC and PAL, mostly SWC. I keep hearing people calling me crazy on that. One day they will know it's crazy not to have a big chunk of that stock in your portfoio, knowing the huge potential in palladium. Cold Fusion which uses palladium was considered a crazy idea to begin with, but it's now getting more and more acceptance in the mainstream. Peak Oil is still considered a crazy idea by most, but it is a looming reality right now right this moment. All great investors were called crazy at certain point of their investment career. Warren Buffett was called crazy putting all his eggs in just one busket, purchasing that bankrupt textile mill no one heard about. He was crazy. But the company by the original name which is now known globally is totally out of the textile business and into quite something else. You know the rest of the history of Berkshire Hathaway (BRK-A and BRK-B).

Full Disclosure: The author is heavily invested in SWC and PAL and own palladium metal bullion coins. The author also owns shipping stocks mentioned: EXM and EGLE. The author currently has no position in BP or other stocks mentioned and has no connection to Eco Emissions Systems other than learning it from the news.