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October 28, 2005

Anecdotal Asides: Rubber Hits the Road and PVC Hits the Pavement -- Face First
by Rob Kirby

Road Kill

Over the past couple of weeks crude oil prices have plummeted on the NYMEX [exchange] in N.Y. After a long and pronounced run up in prices from approximately 20 or so dollars a barrel a few years ago - the recent respite in petroleum prices is viewed by many as welcome, relief and necessary - take your pick.

For anyone who regularly consumes business related news from such illustrious sources as CNBC, CNN or any of their trusted major newsprint media outlets - you are likely more than well aware of the ravages caused by the hurricanes, Katrina and Rita, which recently ravaged the U.S. Gulf Coast. Over the past few weeks [ending Oct. 20/06 at the time of writing], the Energy laden Toronto Stock exchange"s Energy sub index has now receded close to 20% - all seemingly on the back of recently cascading [NYMEX] futures prices for crude oil, distillates and natural gas. It has been reasoned, heck argued, through these venerable news outlets - time and time again - that the rising prices of said commodities have in effect sown the seeds of their own declines, and all is either fine or returning to normal. The age old reasoning, of course, is that rising prices lead to lessened demand and a resultant fall in prices - all economics 101 stuff that few would argue.

Reality Bites [and tells a different story]

The real story, however, happens to be somewhat different than the one espoused by the mainstream media - who at this point seem more intent on keeping the flock placid than informed. Reality [where we - the seemingly the last to know - work and reside] is perhaps better depicted by the following budding crisis in PVC [pipe] market. For those who may not be aware - PVC - is a key ingredient in vinyl; something we should all be somewhat aware of since, no doubt, "plastic" touches us all on a daily basis:

You see, the CURRENT situation for many ancillary industries, despite claims from officialdom to the contrary, is already dire. Royal Pipe Systems is North America"s largest PVC extruder and just happens to be one of the largest suppliers of building materials to the construction industry in Canada. If Canadian home builders are facing shortages and feeling the pinch - it goes to reason that so too are their American brethren. As the letter above points out, 25% of North America"s ability to produce PVC resin is now "off line." The letter goes on to explain why:

• shortages of ethylene
• shortages of chlorine

These shortages are directly attributable to "shut in" or diminished capacity to produce petroleum related products [feed stock] from the Gulf Region. Claims that "all is fine" are beginning to look like misguided wishes or patent and premeditated lies. All is not well - shortages in critical industries never are. The above letter speaks of "unprecedented crisis," "unpredictable cost increases," "lost or cancelled business" and an indeterminate time frame regarding a predictable or favorable resolution to these issues. This is perhaps the most vital driver of economic activity in our economy today; the building industry folks!

And Yet, All Is Fine?

Call me silly, but I"ve really been scratching my head the past couple of weeks - wondering why the heck petroleum based products [crude, gasoline, nat. gas as well as their specific related exchange listed shares] have been plummeting in price? The shortages outlined here are not only real but involve the most basic and fundamental products required in countless industrial and manufacturing processes - jeepers, we wouldn"t even have potable water without chlorine. You see, the letter cited above never once mentioned that price was an issue. What the letter did do was explicitly state that "supply shortages" was the issue. With that being the case - why are these prices precipitously falling and why are we being "pelted" with pronunciations that "all is fine" when it clearly is not? My fear: Is Uncle Sam and the tricksters at the Federal Reserve surreptitiously propping up the stock market [DOW] and are they now perhaps fudging oil inventory data as they most surely hood wink us all with their incredulous support of the bond market [TIC Data], pegging of the U.S. dollar and the price of gold?

Houston, We"ve Got A Problem

The recent collapse of many things related to the petro chemical complex - as well as an "over reaching U.S. dollar" [and fixed income complex for that matter] in the face of overwhelming negative fundamentals has the same bad stench that emanates from the precious metals complex [long proven to be rigged] - in my opinion. The prospects of serious interruptions relating to supply of Gulf Region Nat. Gas and oil remain a clear and ever present danger. No wonder, others like the luminaries John Embry, Andrew Hepburn and Eric Sprott have noticed too! Lately, it seems that major U.S. stock market indexes seem to "thrive" on hurricanes, destruction, unprecedented energy costs, not to mention foreign governments abandoning the currency. With countless Fed personalities spouting off recently about inflation concerns - one might even wonder why they didn"t write this piece instead of moi?

Getting Our Pipes Cleaned?

When the PVC pipeline [pun intended] runs dry - odds are, home building activity will be greatly reduced - a whole bunch of folks stand to be imminently unemployed and that will be a shame. When natural gas shortages are manifested with copper pipes bursting due to sub zero freeze ups - folks are going to get cold or worse and that will be a bigger shame. I"ll bet the mainstream pundits - along with Fed officials - will crow that they "never saw it coming." The conundrum: Wonder if our financial markets will still be juiced then?

Get real. Get Gold.

Rob Kirby
Kirby Analytics

Copyright © 2004 - 2006 Rob Kirby

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