We will continue to drive cars run on gasoline, homes will continue to be heated by natural gas, and power plants will continue to burn oil. Sure, we may see 10% or 15% of our electricity come from renewables in the next decade or two. But, according to the EIA, the U.S. will still need 47% more oil and 54% more natural gas by 2025.

As investors, we should use that to our advantage. We have the option of buying oil producers, oil technology developers, and oil refiners. But, the real money is in pipeline builders.

This nation’s pipeline infrastructure has already aged far beyond what it should have. These pipelines have far outlived their expected lifetimes, and unlike much of this country’s neglect for failing infrastructure, oil and gas pipelines are not forgotten. In fact, we are at the start of an enormous pipeline infrastructure overhaul.

According to Stockinterview.com’s senior editor James Finch, the increase in oil and gas demand over the next decade and a half “implies pipeline projects on the order of some 600,000 miles.” Even if a quarter of that is built, it will certainly cause a boom in the pipeline industry.

But most pipeline companies are already big. They are mostly giant corporations that have already been built up. Plus, their expenses are high with the surge of steel prices. It takes a lot of steel to build all those pipelines. So we need to find another way to get in on this game.

One way would be to find a steel manufacturer. The demand for steel is through the roof with the rapid growth of China and India. Steel manufacturers like POSCO of South Korea are doing quite well for themselves as everyone else is struggling. But we are too late in the steel boom. Wall Street has already figured it out.

If we continue to backtrack through the process, we land on the metals miners. We need to find the companies that are digging the metal out of the ground that will go into the steel that will be used in pipelines to carry the oil and gas to be burned. If you can follow this string from the end result – the increase in oil and gas demand — to the beginning of the process — pulling the metal out of the ground — then you already did the hard part. Here’s what that chain of investment opportunities looks like:

Base Metals Miners -> Steel Producers -> Pipeline Manufacturers -> Oil and Gas Companies

So let’s invest at the beginning, because you know how the middlemen always get their cut. By the time you get to the end, margins are minute. So, base metals miners are the way to go.

Now, you have to find out what you are looking for. You don’t want to pick just any mining company. You have to make sure you have one that is a) mining the right metal, b) at the right price, and c) doing it cost effectively.

Pipelines — which we can’t forget is the end use — use a lot of metals that will strengthen the steel and prevent corrosion. That means chromium, nickel, titanium, copper, and aluminum miners should do quite well. But there is another metal out there you may or may not have ever heard of.

We’ve written to you about molybdenum before. It is the hard working rare metal that — when added to the mix — strengthen steel for tough assignments like carrying billions of barrels of oil and gas from producers to refineries to power plants over a half a century of wear and tear. That’s quite a workload. Steel producers and pipeline companies alike are making sure molybdenum is mixed into the alloys.

So that’s where we should look. If you can find the right molybdenum miners before the market does, you will be sitting on a major investment opportunity.

Sincerely,
Jim Nelson
September 11, 2008

Investing at the Beginning of the Profit Chain was originally featured in the Penny Sleuth.