Things are about to get really bad in the United States. Clowns really are going to cry and birthday parties will soon become decidedly dull unless the government quickly passes a law authorizing continued access to the federal helium stockpile.
Jokes aside, helium is a critical gas to the nation. While clowns do deploy it for balloon animals and countless parents create festive birthdays with party balloons, it's also used by the manufacturing and defense industries, and in medical devices such as MRIs.
Chipmaker Micron Technology (NASDAQ:MU) and others like it use helium to achieve ultra-clean manufacturing and assembly environments, and, according to the National Academy of Sciences, chipmakers and optical fiber manufacturing account for 13% of all helium usage. (Balloon animals are apparently only a tiny fraction of overall demand.) Unless Congress passes a bill by Oct. 7 to continue the party, however, we're going to face a critical helium shortage and it's all going to come to an end.
In reality, the helium shortage is the government's fault, as there is no real shortage. It's one of the most abundant gases on Earth, if not the in the universe in general, and the U.S. produces about 75% of the world's supply. But the government diverts about half of it to the Federal Helium Reserve, from which it sells the gas to private enterprise at below-market rates. And anytime you discount a product below market prices, you end up with shortages. There's less incentive to produce it and more incentive to use it.
If you want to know why Micron testified earlier this year in favor of the Senate's passing of the so-called Responsible Helium Administration and Stewardship Act -- well, we certainly wouldn't want irresponsible administrators and stewards -- look no further than the subsidized price it pays for gas from the stockpile.
Praxair (NYSE:LIN), which also supports reupping the helium preserve, owns helium currently held in the reserve and has contracts with the federal government for storage in the reserve through 2015.
A bunch of hot air
The Helium Reserve Program had its genesis in World War I, when the War Department (it goes so far back we actually waged war back then, not "defense") preferred the inert gas to the more volatile hydrogen for its planned fleet of lighter-than-air fighting dirigibles. As a result, the Bureau of Mines created a vast helium extraction and purification plant just north of Amarillo, Texas, that went into operation in 1929 and still operates today. While the stockpile was originally meant for government purposes, private demand outstripped the government's, and today the reserve provides enriched crude helium to private refiners.
Like most programs that long outlive their intended purpose, the helium reserve is a program that just won't die. Under the 1996 Helium Privatization Act, the program was supposed to sell off its reserves until it recoups the costs of producing it. That's the "helium cliff" we're quickly approaching, and politicians and corporations are lining up to keep it alive.
You're certainly not going to find helium suppliers complaining about the manufactured shortage. Air Products (NYSE:APD), the world's largest helium producer, saw gas sales rise 6% in the U.S. and Canada last quarter as it took advantage of higher helium prices caused by lower volumes. Where its oxygen, nitrogen, and argon operations suffered from falling prices, their losses were offset by higher helium prices. It expects the market to remain tight for at least a few more years.
Similarly, Airgas (UNKNOWN:ARG.DL) has been forced to shed non-contract customers because of the shortage, as its suppliers aren't living up to their contracted volume commitments. New supplies are coming on line in the Middle East, it says, but they won't be able to address the current shortage.
Because helium is sourced from helium-rich domestic natural gas streams, you'd think we'd be awash in the stuff, considering the natural gas boom we're witnessing. But there's little incentive to develop the infrastructure because of the below-market pricing.
While chipmakers may be scrounging for handouts to keep their prices low, the three producers I've mentioned should continue seeing their stocks float higher. Shares of Airgas and Praxair trade about 15% higher than they did a year ago, while Air Products has gained almost twice that amount. As the biggest supplier of the three, I'd look for it to keep its stock aloft.