Monday, September 24, 2012


Photo by Ewan

My daughter loves balloons.  I suppose most kids like them, but for some reason this twelve year-old absolutely is crazy for them.  Earlier this summer in August I found myself driving all over town in a vain attempt to find a place to purchase helium-filled balloons to ensure that her birthday celebration would be perfect.

I went to our normal place to buy cheap balloons, the Dollar store.  As a "value" kind of guy I learned quickly that it is the same helium in those balloons and it is simply a waste to pay more at a grocery store or one of those party stores.  Why pay $2 or $3 when you can pay $1?  Unfortunately, to my surprise, I was told they didn't have any helium.  I shrugged this off and went to another discount store only to find that they too didn't have helium.  In desperation, I shrugged off my frugal ways and went to the local high-end grocery and party stores knowing that they would have the gas to fill the balloons to make the birthday perfect.  Not a chance.

Once I got home I couldn't resist doing some research to attempt to find the cause for this apparent balloon nightmare, the issue it seems has several causes.

First, there has been some maintenance of a helium pipeline in West Texas.  This pipeline carriers 30% of the world's supply of the lighter-than-air gas.  The July pipeline update caused supplies to be rationed.

Helium production facilities in Algeria, Poland, and Australia also have production stoppages or slowdowns.

There is another  reason though that as the pipeline was shuttered we saw major supply disruptions.  It seems the world is in a transitional phase as a hand-off is happening where government is essentially going to turn over responsibilities to private industry and the transfer of responsibilities is less than perfect.

In Amarillo, Texas the US government runs the Federal Helium Reserve.  This natural cavern is the depository for most of the US supply of helium.  In the 1920's as a result of the war effort, the US government took over the responsibilities of maintaining supplies of the important gas and still does today.  In 1996 though, Congress passed legislation to terminate government control of the reserves and get out of the business handing it to private industry in 2015.

Since we are only two and a half years away, it is important to see new supplies of helium coming on line from private companies here in the US, however firms in the industry complain that the government's role in the Helium Reserve is causing problems for any new producer.  This issue is that the US government sells its current supplies at below market production costs (some say as much as 20% below) and therefore any new firm cannot compete.  While several firms might take the plunge and brave initial losses to gain a foothold in the space, there are other issues that muddy the water.  Congress is now considering extending the handoff period and therefore adds more uncertainty to the industry.  Why would any business invest and face losses when there is the threat that the US government won't exit and won't stop distorting the market?  This is just another example of how the government OR NOW THE THREAT OF THEIR ACTION simply destroys capital investment and job creation.  This is the exact issue we see now in the broader economy and why employers are refusing to hire.  They believe they will face greater taxation, greater regulation, and greater unknown burdens from the encroaching hand of government.  Why would you do more for potentially less?  Why would you take risk if you might get crushed by the government?

(International Balloon Association)
 "The BLM is currently legislated to operate through 2015 with 10-15 years of reserves on hand. The crude helium suppliers that currently feed the pipeline are seeing a reduction in production and there is only one new plant scheduled to come on stream in the US in the next three years. As plants in Qatar,Algeria, and Russia become fully operational they will be expected to supply the growing demand in Asia and the Middle East allowing US exports to slow down. Depending on the pace of growth in the US helium market, the US may become an importer of helium from the new foreign sources previously mentioned.  Until that time, technological research to decrease the need for helium as an input to the production of other goods and services is underway while the science and medical industries look for ways to recapture and recycle helium." 

Helium is very critical in MRI technology as helium cools the magnets that are the key components in the imaging devices that are used in the medical fields.  If helium is not available, the MRI magnets will melt.  The industry cannot deal with shortages of the important gas.

In reality, there really isn't a shortage, I think we are just seeing some short term disruptions that will pass.  The key will be to ensure that a good handoff exists between government and private firms and that as international supplies come on line that US suppliers make strong connections to make sure we can continue maintaining an uninterrupted supply of this important resource.

I wanted to highlight a couple of the firms in this space.  Ultimately, I don't think helium's shortage or lack of it makes much of a difference to either of these firms, but it is a good opportunity to look at some firms I normally don't watch.  Based on the charts of Praxair and Airgas, I don't think I would touch them for a long play at all.  PX is at the lower portion of an ascending channel and is facing stiff overhead resistance.  I don't think it would take much to drop into the up 90's.  In addition, its paltry 2% yield doesn't make it an attractive yield candidate either.




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