When the Man Comes Around
I spent last week in the beautiful city of Nashville, Tennessee. It was my first visit, and it was impressive. You Nashvillians should be proud.
Broadway, a four-block section of honky-tonks and cowboy boot stores, was jamming out at 10:30 on a Tuesday morning. A wonderful cacophony of sound blasted through open windows and rattled around the street.
I was at the MetCoke Summit 2019 to learn about the backbone industry of America. I can tell you that coking coal, coal in general, and steel production might be the most hated industry in America. And also the cheapest. It’s a contrarian dream.
As a reminder, U.S. Steel went from $8 in 2003 to $180 in 2008. A nice run. One could make the argument that low interest rates will fuel another building boom and push it higher again. It's back down to $13 and change.
Metallurgical coal is a grade of high-end coal that is turned into coking coal, which is essential for making steel. The United States has the most and the best of this type.
Some of these metallurgical coal companies are paying 18% dividends and have solid cash positions here at the bottom of the market. Met coal trades in tandem with steel.
In regards to steel, President Trump put in protection measures a year ago. Steel is a very slow-moving, conservative industry. The disruption in the short term caused some problems with supply chains and visibility, and the stocks sold off as everyone waited to see what would happen.
However, according to insiders at this conference, things are turning around, and in the medium and long term these measures will be very good for steel companies like U.S. Steel (NYSE: X) and Nucor (NYSE: NUE).
As an aside, the U.S. Steel stock price is up 35% in the last month. AK Steel (NYSE: AKS) is about the same. These stocks are down 80% from 2016 and could double with a whisper of good news, which we could get as soon as next quarter.
The one big takeaway from the conference, which included leaders from railways, barge companies, and import/export agents, was that everyone ended their talk by saying, “Of course, no one knows what will happen with the IMO 2020 sulfur cap.”
As a refresher, here is what I wrote last week about When the IMO 2020 Hits the Fan:
Many years ago a small United Nations organization slipped a time bomb into the engine room of global commerce. The committee is called the International Maritime Organization (IMO). The rule is the IMO 2020 rule on high-sulfur marine diesel.
You see, the oil used by ships all over the world, from Supermax to cruise ships to island junkers, is called “bunker fuel” [or high-sulfur fuel oil (HSFO)]. It is a heavy fuel oil created by distillation of crude oil.
It is one step from the bottom of the stack, right above asphalt, and it contains 3.5% sulfur. This sulfur is nasty stuff that goes out the smokestack. The annual emissions from one large container ship running on bunker fuel are comparable to the emissions from 10 to 15 million cars running on diesel fuel.
Sulfur oxides (SOx) are known to be harmful to human health, causing respiratory symptoms and lung disease. In the atmosphere, SOx can lead to acid rain, which can harm crops, forests, and aquatic species, and it contributes to the acidification of the oceans...
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The first IMO regulations came about in 2005, under Annex VI of the International Convention for the Prevention of Pollution from Ships (known as the MARPOL Convention). Since then, the limits on sulfur oxides have been progressively tightened.
The big shoe will drop on January 1, 2020.
The limit for sulfur in fuel oil used on board ships will be reduced to 0.50% m/m (mass by mass). It will cut pollution but will also cause a massive disturbance in global shipping just as the global economy is slowing down. [This fuel is called low-sulfur fuel oil (LSFO).]
Currently, the global shipping industry uses 4 million barrels of [HSFO] a day — that’s more oil than is produced by Canada, Iran, or Kuwait. There is no way it can be replaced easily, if at all. But that’s what must happen unless you want the global economy to come to a dead stop.
Many analysts think fuel prices will surge. Some industries like airlines and trucking that use [the LSFO replacement called red diesel] will run out altogether.
And this won’t be a one-day event. Disruption could last years because most global shipping will have to (1) change their engines to consume the new fuel or (2) install multimillion-dollar devices called “scrubbers” that can take the old fuel.
We could hit $200 for low-sulfur fuel oil (LSFO). Prices are already taking off. There are 35 full oil tankers off the port of Singapore just waiting for the price spike.
At the same time, prices for high-sulfur fuel oil (HSFO) are dropping to record lows. Refiners that can turn it into LSFO will be big winners in the next quarter. Those shipping companies with scrubbers will also win, as they can use HSFO on the cheap.
No one is talking about the IMO 2020 rule, and we are six weeks away.
In investing, you have to look ahead. I was recommending Bitcoin in May of 2016, well before it hit the mainstream. My readers made 2,528% gains as others jumped on the bandwagon.
I was recommending fintech and cloud companies years ago. My readers made high triple-digit gains.
We are up across the board on our 5G stocks. Qualcomm is up 60% in the last few months alone.
But that was the past. Rarely in the market do you get a clear future date for a massive change in the energy market.
We have one now, and it is fast approaching. I’ve written a free report. You can find it here.
Don’t delay. The big profits will be made now, before the deadline hits and the world wakes up.
All the best,
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