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How to Profit from China's Record Auto SalesBy
Thursday, January 23, 2014
Yesterday, we covered China's love of cars.
Last year, China's car imports hit an all-time high. And since most of those cars run on gasoline, China's oil consumption has skyrocketed over the past decade. It now imports more oil than the U.S.
However, China's cars are also contributing to a serious problem: pollution.
China's air quality is already terrible from the coal-fired plants that produce the country's electricity. Adding millions upon millions of cars is making it worse. Major cities like Beijing (the capital) are often shrouded in smog.
In order to combat its pollution, the Chinese government has instituted a vehicle-emission standard equal to Europe's pollution standards from 2010. These standards won't take effect until 2018... But they're likely to make precious-metals investors a lot of money over the next few years.
Here's why...
The key to cutting China's vehicle pollution is catalytic converters.
Catalytic converters are devices that convert harmful car emissions to less-harmful car emissions. They contain thin strands of platinum and/or palladium. These two semi-precious metals have unique chemical properties. They act as catalysts, speeding up reactions and making them more efficient.
Since most vehicle pollution comes from incomplete combustion (an oxidation reaction), these metals are excellent at reducing pollution. They act as filters that help finish the process of combustion.
That means the vehicle produces far less carbon monoxide (a bad actor that causes smog). It also reduces the amount of un-burnt fuel in the exhaust.
According to the new standards, there must be one of these filters, or catalytic converters, on every new car and truck in China.
And China's car culture is just getting started...
As I mentioned yesterday, in 2012, there was about one car for every 85 people in China. In America, the ratio was 0.9 cars per person – almost one car for each person. This simple comparison shows how massive the Chinese automobile market could grow.
China's imports of cars and chassis (which become cars) hit an all-time high in November. The total number of cars sold in China from last January to September was a massive 12 million, according to the Financial Times. That's an enormous volume, up 15% from the previous year.
As resource-investing guru Rick Rule pointed out to me recently, that's also an enormous amount of demand for platinum and palladium. According to the bank HSBC, China's platinum imports hit a 30-month high in September. (China consumes a huge amount of platinum for jewelry as well.)
China's demand isn't the only thing that could drive platinum prices higher.
About 70% of the world's supply of platinum comes from South Africa. The country is a political basket case. Mining strikes are practically a national sport.
In fact, it was reported on Monday that at least 70,000 South African platinum mine workers are planning to begin one this week. Any strike in South Africa can depress supply.
With China setting a new record for vehicle demand and the looming supply issues, it looks likely that platinum will enjoy a bull market in the coming years. If you don't want to buy physical platinum, an easy way to participate in rising platinum prices is through the Sprott Physical Platinum and Palladium Trust (SPPP). It's a fund that rises and falls with platinum prices.
Although it's fashionable to predict an economic meltdown in China, the facts say its economy is still growing. Commodity and auto imports are at all-time highs. And this means higher prices for related commodities.
Good investing,
Matt Badiali
Further Reading:
"The platinum market is vulnerable to a major supply shock," Editor in Chief Brian Hunt writes. And master resource investor Rick Rule thinks the dwindling supply will make prices soar. Find out how high Rick thinks it will go here.
Matt says India's fuel needs are about to drive the price of another resource higher... "Contrary to what most folks think," he writes, "coal isn't going out of style. The world is still consuming huge amounts of the stuff..." Get all the details here.
Market NotesA BIG, BULLISH SIGN FOR URANIUM If you're long uranium, you're getting good news from the market.
Last month, we featured bullish commentary on uranium, which is the fuel that fires nuclear power plants. After the March 2011 disaster at Fukushima in Japan, most of the world shunned nuclear power. Physical uranium and uranium stocks plummeted. Giant Canadian producer Cameco (CCJ), for example, dropped more than 60% from its 2011 peak.
But nuclear power plays an essential role in fulfilling the world's energy demand... It's not going away. And some of the brightest investors we know see uranium as a tremendous bargain. (Listen to this interview with Rick Rule for specifics.)
After getting crushed in 2011, Cameco has spent the past few years forming a "price floor"... in the $17 area. And as you can see in the chart below, Cameco just broke out to a 20-month high. The market is starting to agree with the bullish case for uranium... and Cameco is marching higher.
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