Attack of the Commodity Supercycle

Attack of the Commodity Supercycle
By Nick Hodge
January 17th, 2012

I told you a few weeks ago you'd be hearing more about my recent trip to a graphite mine in the Ontario wilderness...

Many things I saw and learned on that trip are worthy of passing along.

Today I'd like to focus on the conversation I had with the CEO of the company I went to visit during our three-hour ride to the mine from Ottawa.

The Commodity Supercycle

“We've all seen what the commodity supercycle has done to copper, gold, and many other resources,” he said as we pulled out of the hotel parking lot.

“Copper traded between $0.50 and $1.00 per pound for decades. And then, because of the commodity supercycle, it went over $4.00. Same with gold... It used to sell for between $250 and $500 per ounce. Now it's $1,600 per ounce.”

That isn't inflation.

That's the commodity supercycle.

Many things have caused this change, the big one being China, with India soon to follow.

And in the mining industry, the deposits we've lived off for years have been the big low-cost, easy-to-find mines — just like with oil.

But those mines are all getting deeper and older, so costs are increasing.

Engineering and environmental standards have gone up and there's been capital and cost inflation.

So gold can't go back to $400 per ounce... and copper can't go back to $1.00 per pound.

Next in Line

Graphite has been one of the last minerals to respond to this commodity supercycle. And the reason for that is there was excess production capacity from China.

From 1990 until 2005, graphite prices were in the tank.

Gradually, the growth in automobile and steel demand began to eat up that spare capacity, and prices began to rise. They grew steadily through 2008. Then something else happened...

China got tired of selling the world cheap graphite.

They control 70% of the market, and just as they did with rare earths, they started imposing export duties and value-added taxes to manipulate the market.

Currently, China is adding a 20% export duty and a 17% value-added tax to graphite produced there.

And, just like with rare earths, graphite prices have started to soar:

Graphite Prices

They're up more than 120% in the past few years.

But valuations of companies and deposits were slow to catch up.

When the company I went to see got going in 2008, it only had a market cap of $2 million — and it's potentially the largest graphite mine in the world.

It's since grown to about $40 million...

But with hundreds of millions — if not billions — of dollars worth of graphite in the ground, it certainly won't stop there.

I can't wait to tell you more about it.

Rising Tide

I'm sure you've taken notice of the “commodity supercycle,” even if you didn't know what it was called.

Copper, nickel, gold, wheat, corn and, of course, oil will never again see the prices of the nineties and early oughts.

I break these commodities down into three categories: energy, agriculture, metals. Some may split metals into two categories: precious and industrial.

We've been showing you how to profit from the energy side via oil and natural gas producers. Last week, I showed you how to buy energy and agricultural commodities directly.

To help get you up to speed and profit from the metals side, I've been researching and taking as many hands-on trips as possible.

I firmly believe physical materials will be one of the best ways to grow your wealth over the next few years.

And my recent trips to Canada have already revealed a great way to play it: a shale formation containing billions of tons of highly sought-after metals.

Tomorrow, we'll start accepting sign-ups to attend our upcoming educational series on the precious side of that group.

Call it like you see it,

Nick Hodge Signature

Nick Hodge

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Nick is an editor of Energy & Capital and the Investment Director of the thousands-strong stock advisory, Alternative Energy Speculator . Co-author of the best-selling book Investing in Renewable Energy: Making Money on Green Chip Stocks , his insights have been shared on news programs and in magazines and newspapers around the world. For more on Nick, take a look at his editor's page .

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