When you think of helium, you may envision buying a bunch of balloons for a party, or uttering something in a goofy, high-pitched voice, or perhaps pointing out an occasional blimp hovering overhead. What you might not know is that while helium is the second-most abundant gas in the universe (behind hydrogen), on Earth, it’s considered a rare element. You see, even though most natural gas contains traces of helium, it’s unusual to find it in concentrations that are commercially viable to extract, capture, and store. The gas has proven to be essential in military, medical, and industrial applications, all of which far exceed its use as a lifting medium. And it’s in high demand all over the world. Now, there are plenty of known reserves on the Moon, but supplies of helium on Earth will last only another 25 years or so. The United States had the foresight to start storing helium back in the 1920s, but changing policies are inflating prices for this sought-after element.
Helium is one of the most unique elements on the periodic table; there’s simply nothing else like it. It has the lowest boiling point of any other element and won’t solidify or freeze, even at temperatures near absolute zero. In fact, helium is the most important element in understanding super-cold conditions. Furthermore, its inert properties (meaning that it doesn’t react to other elements or chemicals) make it the only gas that can pressurize and purge the liquid engines of super colliders and even rockets. Helium is also fantastically light, but it won’t explode like other gases, such as hydrogen. The Hindenburg most likely wouldn’t have exploded in 1937 had it been filled with helium instead of hydrogen. Helium is also useful as a liquid coolant for superconducting magnets like those used in magnetic resonance imaging (or MRI) machines. Its inertness makes it useful as a shielding agent in arc welding. And it prevents contamination with oxygen in air, making it pertinent in semiconductor and fiber optic manufacturing. Helium can also replace nitrogen in deep water diving to help prevent “the bends.” It supports nuclear reactors, helps some newborn babies breathe, and is good at preserving historical documents. But, there are still some challenges that come with this miracle gas.
The Balloon Toss
Storing what’s left of the helium we have, a gas that’s lighter than air, is difficult. To deal with this problem, the U.S. government mandated the creation of the 1921 Federal Helium Reserve, a long-term storage facility for unrefined helium. The first helium production plant established the beginning of a formal U.S. program to create a domestic source, whereby the government became the helium buyer of last resort. But with the government controlling the market, the business of helium wasn’t a lucrative one, and thus didn’t attract entrants. The 1966 Helium Privatization Act set a price for the share of helium in the government reserve and mandated that government entities using helium had to purchase the gas from the stockpile. The price was fixed at $43 per 1,000 cubic feet, 25% above the market price, with the logic being that government entities would purchase from the stockpile and that such pricing would recoup the outstanding debt from helium operations. The controversy surrounding the price ceiling encouraged the government to raise the price to $64.75 in 2010, $75.00 in 2011, and $75.75 for the 2012 fiscal year. The 1996 Act also dictated that the Government would sell off all of its helium reserves by 2015 to retire its debt, which was frozen in 1996 as a result of the Act. Thus, the government has been selling off its helium stockpile over the past two decades, at Congress’ insistence. Then, last year, an auction of helium from the national reserve outside of Amarillo, Texas didn’t go as expected…
Popping the Government Bubble
A number of problems were addressed on July 8 at a meeting of the House committee’s National Research Council, which invited dissatisfied participants to comment. Many felt that the government made a lot of money at the sale because auction winners were able to afford higher prices as they had special access to the reserve via pipeline. Complaints focused on the industry’s hierarchical distribution system, which supported deliveries based on such factors as how a given customer plans to use the gas as well as the depth of their pockets. Helium’s supply is rationed when periodic shortages occur. Military and medical users sit at the top of the priority list, as do large consumers with long-term, fixed contracts. Meanwhile, mom and pop retailers can’t blow up their balloons.
Up, Up, and Away
At this stage, it’s tricky to determine an actual fair price for helium. What we do know is that helium is both limited and irreplaceable. With the U.S. government’s diminishing role in helium production, industrial gas companies have continuously raised retail helium prices, even though demand continues to rise globally. It makes one wonder, with no market-driven mechanism being used to establish the price of helium, what would it be without government influence? Industry experts say is could be double or triple the current price. The result of the hearing was that the committee recommended that “the Bureau of Land Management (BLM) should adopt policies that open its crude helium sales to a broader array of buyers and make the process for establishing the selling price of crude helium from the Federal Reserve more transparent.” In the meantime, there are some opportunities for investors.
Get a Lift
Because helium is hard to obtain, transport, and store, there are only a limited number of companies and countries involved in its production. Currently, the United States is the largest global producer of helium. Although new helium extraction/purification plants have come online in countries such as Australia, Poland, Russia, Qatar, and Algeria, they still aren’t able to meet their own demand, and continue to rely on U.S. imports. Unlike other commodities, there’s no futures market on which helium is traded. But there are opportunities in the equity space with companies that extract, process, and sell helium. All helium consumed today is extracted from natural gas streams where concentrations are high enough to economically separate. Practically all the helium found in the earth derives from the radioactive decay of uranium and thorium-rich minerals. As such, it pays to look for companies with knowledge in oil exploration and production, geochemical analysis, and field experience. The biggest players do more than just sell helium. Air Products & Chemicals (APD) is the world’s largest supplier. Others include Praxair (PX) and ExxonMobil (XOM), which, along with BP (BP), have taken a beating from the fall in crude oil prices this year. BP also fell this week when it missed profit estimates due to its Libyan write-offs. There are also a number of smaller players, including The Linde Group (LIN) and Pioneer Natural Resources (PXD). Bottom line: Helium is a vital element that’s quickly disappearing. While we aren’t going to run out of helium as an element, we’re still unlikely to uncover a hidden cache that will force prices lower. Keep a sharp eye out for additional information at the U.S. Bureau of Land Management’s website. Or fly to the moon and load up. Good investing,