April 12, 2022

The ongoing war between Russia and Ukraine—and the consequent sanctions and production cuts—has forced producers across several areas of the metals sector to make desperate bids to secure much-needed supplies.

This dynamic is expected to keep metal prices elevated across the board in the coming weeks and months. As noted here previously, there are other fundamental factors behind the bull market in the major industrial metals, but this is diminished by the Russia factor.

In the portfolio, we just added a new position in a silver miner that is showing a surprising amount of relative strength given the current silver market backdrop, as well as a major player in the titanium dioxide market.

Is the Dollar Telling the Truth about Inflation?

One of the most puzzling aspects about the current boom in metals and other commodities is the fact that it’s happening in spite of a U.S. currency that is actually strengthening. In most commodity bull markets hard asset prices have tended to trade inversely to the dollar. This time around, however, is clearly an exception to that long-established rule of thumb.

Indeed, even as the official U.S. inflation rate hovers around 8% and the Reuters/Jefferies CRB Index, the benchmark for broad commodity futures prices, is up almost 60% since last April. Yet the U.S. dollar index (USD) still managed to strengthen 9% year over year despite the obvious presence of inflation.

From a currency perspective, this is an extraordinary development that defies conventional wisdom. It also begs the question of how the traditionally inverse correlation between the dollar and commodities can be in such disarray? And significantly, it has forced investors to wonder if perhaps the stronger dollar is predicting an end to the commodity market boom in the foreseeable future.

Currency analysts have attempted to explain the positive correlation between the rising dollar and commodity prices by pointing to the current relative strength of the U.S. financial market and economy vis-à-vis other major countries. Under this interpretation, the dollar is strengthening largely because other foreign currencies are weakening. Moreover, the stronger U.S. economy is attracting lots of capital inflows from foreign investors looking for a safe place to park their money.

Then there is the supply-based explanation. Much of the inflationary pressure being felt around the globe is a result of commodity supply bottlenecks due to the coronavirus-related lockdowns and restrictions of the last two years. Add to that war-related supply shocks from Russia/Ukraine and it helps explain why the supply part of the classic inflation definition (i.e. “too much money chasing too few goods”) is as much a reason for rising prices as the monetary aspect.

Speaking of war, another explanation for the dollar’s strength comes to us courtesy of the late economic journalist, Henry Hazlitt. In his book, Economics in One Lesson, he observed that “(i)t is impossible to control the value of money under inflation … The value of money, as we have seen, depends upon the subjective valuations of the people that hold it. And those valuations do not depend solely on the quantity of it that each person holds. They also depend on the quality of the money.”

In Hazlitt’s words, this means that the dollar’s current value often depends on “what people expect the future quantity of money to be.” On that score, financial analyst Harrison Schwartz recently opined that informed investors may be anticipating a run on the greenback. He stated that if the dollar index continues rising, we could witness a “dramatic U.S dollar shortage”—or something akin to a dollar short squeeze—as other nations race to obtain dollars “in order to avoid being forced to pay more” of their debts in weakening local currencies.

(Incidentally, Schwartz believes that a continued rise in U.S. dollar exchange rates could serve to attenuate the “immense inflationary pressures from the commodity shock,” though he still expects to see considerably higher gasoline and food prices while other manufactured goods from abroad become cheaper for U.S. consumers.)

Returning to Hazlitt, he further observed that in wartime, victorious nations (or those in positions of military and/or economic strength compared with other combatants) often see their currencies strengthen in spite of wartime inflationary pressures. This could be another explanation for the recent strength in the dollar, namely due to the U.S. government’s financial assistance to Ukraine in its war with Russia.

A final consideration is that the U.S. Fed has been increasingly hawkish in its monetary policy, which normally supports a stronger dollar. Other central banks—particularly in Europe—have been far less restrictive, which further explains the dollar’s strength. Essentially, the dollar is now competing with gold to be the world’s safe haven du jour.

But does the dollar’s newfound global safe haven status mean that the bull market in gold and other commodities is doomed to fail imminently? Or that inflation isn’t the major problem economists are making it out to be?

My answer to both questions is in the negative since the demand for war-related materials will almost certainly necessitate huge consumption for metals like steel, copper, nickel and aluminum, along with countless other commodities. The bond market foresees higher inflation ahead, as the Fed’s implied inflation rate indicator suggests (see chart below). And with the latest Covid-related lockdowns in China creating even more supply-chain bottlenecks for the global economy, the commodity bull market has another major support in the foreseeable future.

The bull market in gold, meanwhile, should continue to enjoy support from not only the continuing buildup of global inflationary pressures, but from its traditional status as a safe haven in times of turmoil and uncertainty. That especially includes war, as the last major war during the turbulent 2000s taught us. All told, I expect gold and the other precious and industrial metals to continue benefiting from the ongoing inflationary trend.

What to Do Now
South Africa’s Gold Fields (GFI) is one of the world’s largest gold miners with total attributable annual gold-equivalent production of more than two million ounces and attributable gold-equivalent mineral reserves of 52 million ounces, providing the firm with plenty of exposure to rising prices. In Q4, Gold Fields increased revenue by 8%, to $1.8 billion, while per-share earnings of 38 cents were in line with expectations. Attributable gold equivalent production for 2021, meanwhile, was 5% higher from a year ago and above guidance, while all-in sustaining costs for mining gold were $1,063 an ounce—well below the current price of around $1,930 an ounce—providing the company with lots of room to expand operations or take on additional projects. Gold Fields said its South Deep mine (one of the world’s largest) was the “stand-out performer” of 2021, with production increasing 29% on lower all-in costs and generating cash levels that were 157% higher than 2020’s, with plans to ramp up production at the mine in the next three years based on its consistent improvement. Looking ahead, management said it expects total production to grow by an additional 20% to 30% over the next three to four years and expects growth to be “more or less linear” in the years ahead, with 2022 production forecast to increase around 7% from last year. Per the rules of my trading discipline, I recently recommended taking 50% profit and raising the stop-loss on the remaining position. Let’s further raise the stop to slightly under 14 (closing basis). HOLD A HALF

With inflation likely to persist, not only industrial metals but commodities in general should outperform. One way of playing the bullish trend in natural resources is the Invesco DB Commodity Index Tracking Fund (DBC), an actively traded index ETF which is based on several major commodity futures contracts ranging from metals (including gold, silver and copper) to grains (including corn, wheat and soybeans) to energy products (including oil and natural gas). A combination of strong global demand for farm commodities, exceptionally volatile weather in many food growing regions around the globe and rising input costs (i.e. fuel and fertilizer) should contribute to rising hard asset prices in the months ahead. Additionally, crude oil prices are expected to remain elevated in the coming year, and for that reason, I expect DBC—which is heavily skewed toward the energy sector—to continue to outperform. Traders recently purchased a conservative position in DBC using a level slightly under 21.50 as the stop-loss on a closing basis. After the 21% rally since our initial entry, I previously suggested taking 50% profit in this position. I also suggest raising the stop at slightly under 25 (closing basis) on the remaining position. HOLD A HALF

New Recommendations & Current Portfolio

Silver Demand Eclipsed by Gold
One of the remarkable aspects of gold’s impressive rally in recent months is that silver hasn’t shown quite the same level of strength.

Although silver has managed to gain 16% from its December low of $21.50 an ounce, exceeding gold’s December-March rally in percentage terms, it still hasn’t managed to exceed its June 2021 peak of $28.50. Gold, by contrast, currently stands at a 1-year high and is just 6% below its all-time peak of $2,075.

What, then, explains silver’s lagging performance in terms of not being able to achieve a 1-year high? My explanation is that gold’s rally so far this year has been obviously based almost entirely on safe-haven demand, with little of the speculative element involved.

Silver typically follows closely in gold’s tracks when smaller retail participants believe that gold prices will boom in the foreseeable future. This in turn prompts them to increase their exposure to much cheaper silver, allowing them to in essence ride gold’s upward trend from a distance.

Right now, smaller players evidently aren’t feeling comprehensively bullish enough on gold to speculate on silver. This was confirmed by the latest sales results released by Coin News, which noted that while U.S. Mint bullion sales in March picked up for gold coins, it slowed for silver coins.

According to Coin News, American Eagle gold coins rose 155,500 ounces in March, increasing 74% from the prior month and an astonishing 136% from a year ago. For the year to date, American Gold Eagle sales are 4% higher from a year ago.

By contrast, American Eagle silver coins increased 1,080,500 ounces last month, which represents a 28% decline from February and an eye-opening 74% drop from last year’s March. For the year to date, American Silver Eagle sales are 37% lower from the comparable 3-month period in 2021. Clearly, then, speculative interest in owning physical silver is lower compared to gold.

Moreover, the market-moving commercial players in the silver market have tended to be more or less neutral in their hedging activity of late, suggesting that the intermediate-term sideways trend in the silver price will likely continue.

However, if commercial hedging activity diminishes in the coming weeks (as shown in the above graph courtesy of SentimenTrader), we’ll have a heads-up that silver is about to break out substantially higher from its trading range.

Meanwhile, there is a positive development in several of the actively traded silver mining stocks that is becoming more discernible by the week. It should be noted that silver stock strength sometimes precedes strength in the physical metal. In view of this nascent strength, I’m recommending a new silver miner position for our portfolio (below).

What to Do Now
SSR Mining (SSRM), formerly Silver Standard Resources, operates Argentina’s largest commercial silver project (Puna) and also produces gold, zinc, lead and tin. SSR also boasts a pipeline of high-quality development and exploration assets in the U.S., Turkey, Mexico, Peru and Canada. The company recently guided for its combined properties to produce around 740,000 gold equivalent ounces annually through 2024. In last year’s fourth quarter, SSR posted revenue of $408 million, which was 10% higher than the year-ago quarter and 5% above analyst expectations. For gold, the company also delivered Q4 production of 211,717 gold-equivalent ounces at an all-in sustaining cost of $961 an ounce (well under the current $1,950 gold price). Management emphasized that SSR’s excellent cost profile ensures strong free cash flow and capital returns going forward. In view of the stock’s excellent relative strength profile, participants can purchase a conservative position in SSRM using a level slightly under 21 as the initial stop-loss on a closing basis. BUY A HALF

Copper Rebounds on Production Cuts
Copper prices have been quietly rebounding in the wake of last month’s sudden 10% drop. After bottoming around $4.50 a pound on March 15, the red metal has gone on to recover about half its “correction” loss since the March 7 peak.

Persistent worries over supply deliveries have helped bolster copper’s demand profile, thanks in no small part to the Russia/Ukraine war. Additionally, the recent coronavirus-related lockdowns in China have crippled copper production there, further adding to supply concerns (see LME inventories chart below).

Last month, spot trades for copper concentrates in Asia soared thanks to a production halt by major Chinese copper smelter Shandong Xiangguang Group. A total of 44 spot transactions were recorded in March, the highest number in a single month since the launch of the Platts CIF China copper concentrates assessment by S&P Global Commodity Insights over a year ago. “Many contractual sellers rushed to reallocate the clean copper concentrates that were cancelled by Xiangguang,” observed Hellenic Shipping News Worldwide.

Meanwhile, in order to address what some analysts have projected as an annual supply deficit of nearly six million tons by 2030, the global copper industry will need to spend more than $100 billion to build mines that will meet the exploding copper demand.

Speaking at the recent 2022 CRU World Copper Conference in Santiago, Chile, CRU base metals analyst Erik Heimlich said the supply gap for the next decade is estimated at six million tons per year, largely due to increased clean energy and electric vehicle sector demand.

This would translate to building eight projects the size of BHP Group’s (BHP) Escondida mine in Chile in the coming eight years. Heimlich views this outcome as “possible” rather than “probable” in view of the technical and environmental challenges it poses.

Freeport-McMoRan’s (FCX) CEO Richard Adkerson largely agreed with this assessment, observing that the copper market’s supply tightness is “far beyond a price issue,” adding that “the market is going to need it far faster than companies like ours can produce it.”

Answering the call to alleviate the supply issue, world’s largest copper producer Codelco plans to start drilling in the Salar de Maricunga, purportedly beginning in late March and lasting into early 2023. Additionally, the International Copper Study Group (ICSG) said mine production grew more than 2% in 2021, driven by higher output from Peru (the world’s second-largest producer) and Indonesia.

However, Goldman Sachs’s chief copper analyst, Nicholas Snowdon, told the CRU conference that prices need to go “much higher” before a meaningful supply response can be achieved.

What to Do Now
In view of copper’s strong near-term fundamentals (inventories are near record lows while global demand remains high), we added Teck Resources (TECK) on February 8. The company plans to start up its Quebrada Blanca Phase 2 project in Chile during the second half of this year, which will double its consolidated copper production by 2023. Teck also raised its annual base dividend to 50 cents per share (from 20 cents), and declared a dividend of 63 cents per share. Going forward, Wall Street expects high double-digit top-line and triple-digit bottom-line growth for Q1 and Q2 2022. For the full year, management expects copper production to average about 280,000 metric tons (down 2% from 2021), while forecasting steelmaking coal sales of around 6.3 million tons for Q1 (up 2% from the year-ago quarter). After Teck’s recent 11% rally, I previously suggested booking 50% profit. I also recommend raising the stop-loss on the remainder of this trading position to slightly under 38 on a closing basis. HOLD A HALF

Global Steel Supply Tightens Further
New coronavirus restrictions in China have created global supply fears for steel, as most of the nation’s mills now face raw material shortages.

Supply shortage worries are growing after top steelmaking city Tangshan implemented a lockdown, while transportation disruptions have followed lockdowns in other areas of China.

Meanwhile, war-related sanctions have frozen Russian steel and mining giant Severstal PAO out of a third of its sales and set the scene for “possibly the first debt default by a major Russian company since the invasion of Ukraine,” according to The Wall Street Journal.

Severstal is also Europe’s third-largest steelmaker by output and “deeply embedded in the global trade system,” said WSJ. Two weeks ago, the company failed to make a debt payment, despite having funds available, after Citigroup froze interest payments to investors in Severstal’s bonds.

In response, Severstal has just applied to the U.K.'s Office of Financial Sanctions Implementation and authorities in Luxembourg and Ireland for a license to authorize the release of a $12.6 million payment that had previously been blocked by Citigroup. No additional details are available yet.

In addition to the above-mentioned supply pressure, sanctions on Russian pig iron (a key steelmaking ingredient) and suspension of iron exports from top provider Ukraine have resulted in higher iron ore prices and have forced producers to hike retail steel prices while scrambling to find replacement cargoes.

Moreover, skyrocketing energy costs have also added pressure on the global market on top of an already tenuous supply situation, pushing 62% iron ore pellet prices (below) to their highest level in six months.

What to Do Now
Natural Resource Partners (NRP) is a master limited partnership engaged in owning and managing a diversified portfolio of mineral reserve properties, including coal and other natural resources (mainly gas and timber). Approximately 65% of the firm’s coal royalty revenues and around 45% of coal royalty sales volumes were derived from metallurgical coal in the latest quarter, making the stock a good proxy for steel demand. The company released fourth-quarter earnings results last week that boasted revenue of $84 million, a 114% increase from a year ago, along with per-share earnings of $2.42. The company stated, “Strong demand for metallurgical coal, thermal coal and soda ash in the fourth quarter produced one of the best quarters in terms of free cash flow generation in the Partnership’s history.” Management was sanguine about the year-ahead outlook, with plans to generate even more “robust” free cash flow in the coming months while paying down debt and solidifying its capital structure. The company also recently declared a 45-cent per share quarterly dividend (4.7% yield). Participants recently purchased a conservative position in NRP, and after a 10% rally, I recommended selling a half and raising the stop on the remaining position to slightly under 34.50. I now suggest raising the stop a bit higher to slightly under 40 (closing basis) where the 50-day line comes into play. HOLD A HALF

Nucor (NUE) is a leading steel company with a massive market share in North American structural, cold finish and bar steels. Nucor has managed to maintain consistent profit growth for many years, even in periods when other steelmakers have struggled. A key to Nucor’s success has been in its steady intensive capital investments, allowing it to achieve increasing efficiencies (the latest being a $290 million modernization of its Indiana sheet mill). The firm’s investments paid off handsomely in 2021, which was a record-setting year for the firm. Nucor posted full-year sales of $36 billion, up 81% from the prior year, based on higher tons sold and higher selling prices (up 64% from 2020). Fourth-quarter revenue was $10.3 billion (its fourth consecutive quarterly record), up a mouth-watering 97%, while per-share earnings of $7.97 beat estimates by 13 cents. Nucor also operated its mills at 94% of capacity for the year, versus 82% in 2020, a testament to the strong demand for its steel. Management said it was “overwhelmingly positive” for 2022 based on pent-up demand, predicting the end-use market would remain strong for steel and steel products and expecting another year of “strong profitability.” Shareholder returns remain another focus going forward (returns averaged 55% of net income last year), and Nucor just hiked its quarterly dividend by a healthy 24% (1.3% yield) with plans to repurchase additional shares in 2022. For Q1, analysts see sales and per-share earnings jumping 50% and 132%, respectively. Participants recently purchased a conservative position in NUE using a level slightly under 134 as the initial stop-loss on a closing basis. BUY A HALF

Peabody Energy (BTU) is the world’s largest private-sector coal company, engaged in the mining and distribution of steelmaking and thermal coal. The company has lately benefited from significant price increases for seaborne metallurgical (met) coal used for making steel. The company has made it clear that it expects the steelmaking coal segment to lead the way in 2022. In Q4, Peabody reported revenue of $1.3 billion which was 71% higher from a year ago, driven by higher coal prices and sales volumes. Per-share earnings of $3.90, meanwhile, beat estimates by $2.79. Also during the quarter, the company generated $427 million in free cash flow (about one-fourth of its current market cap) and retired $200 million of secured notes as it continues to pare debt. Management further guided for the strong conditions in the coal market to persist, while expecting that export volumes of met coal will increase “substantially” due to recent mine expansions. Participants on March 22 bought a conservative position in BTU using a level slightly under 19.75 as the initial stop-loss (closing basis). After the 19% rally from our initial entry point, we sold half the position on March 29 and raised the stop on the remaining position to slightly under our initial entry point of 21.90 (closing basis). HOLD A HALF

Last week we were stopped out of our conservative long position in Reliance Steel & Aluminum (RS) when the 180 level was violated on a closing basis. The recent decline occurred on no news in particular. SOLD

Aluminum Makers Getting Desperate
A recent ban on alumina exports to Russia by Australia is putting upward pressure on global aluminum prices.

Australia supplies 20% of the world’s most widely used base metal to Russia, but imposed a ban on exports to Russia on March 20. Of note, Anglo-Australian multinational mining giant Rio Tinto (RIO) owns an 80% stake in Australia’s Queensland Alumina Ltd. in a joint venture with Russia’s Rusal International PJSC, the world’s second-largest aluminum producer. Rio Tinto also became the first major mining company to sever all business ties with Russia following the latter’s invasion of Ukraine.

Together, both Australia and Ukraine account for some 40% of Russia’s alumina supply. And with the world’s second-largest aluminum producer Rusal recently slashing production at its Nikolaev alumina refinery in Ukraine (due to the war), the supply situation is expected to tighten further.

On top of this, aluminum makers are also searching for old cans, shredded cars and factory waste in a desperate bid to keep up with aluminum demand. According to The Wall Street Journal, companies including Norway’s Norsk Hydro, Novelis Inc. and Canada’s Matalco Inc. are adding U.S. plants to manufacture more aluminum used by auto companies and beverage makers.

To further this goal, Norsk Hydro has begun construction on a plant in Michigan that will be able to make 120,000 metric tons per year of new aluminum from scrap. However, the project likely won’t be completed until late 2023.

Aluminum consumption increased 11% in 2021 in a major rebound from the prior year’s pandemic-related downturn. Industry experts warn that the recent string of export bans may also exacerbate inflationary pressures in the global economy.

Utilities Scramble for Uranium
Uranium oxide prices have reached $59 a pound—a level not seen in almost 11 years—over supply concerns involving Russia. Prices, moreover, are up by almost 40% since the Russia/Ukraine war began on February 24.

Unlike most major metals, uranium isn’t currently experiencing a shortage. Because Russia is a key supplier of secondary uranium, however, uranium users have been on a buying binge of late. With around 43% of global operational and planned capacity located there, according to the World Nuclear Association, sanctions against Russia are expected to disrupt the global industry.

On that score, Republican lawmakers recently introduced a bill to the U.S. Senate to ban imports of Russian uranium as a sanction for Moscow’s invasion of Ukraine. The U.S. nuclear energy sector produces 20% of the nation’s electricity, relying on Russia for 16% of its imports, according to Trading Economics.

A Wall Street Journal article observed, “One factor that helps keep uranium-ore demand down is the oversupply of enrichment capacity,” with much of that capacity in Russia. But regardless of whether or not Western nations decide to formally sanction Russian uranium, “Western utilities could be more inclined to seek supply from elsewhere on future contracts to ensure security of supply,” WSJ said.

Hence the scramble on the part of utilities to obtain more uranium in case war-related shortages hit the energy metal, which is expected to put further upward pressure on prices.

What to Do Now
Uranium and uranium miners were in the doldrums for several months after prices peaked last fall, as the industry fell out of favor on Wall Street along with the overall alternative energy group. But the energy metal is attracting new interest among investors in the wake of Russia’s invasion of Ukraine, while prices for uranium have lately firmed up. Consequently, the most actively traded uranium fund—the Global X Uranium ETF (URA)—recently provided us with another attractive entry point after correcting almost 40% between November and January. Participants subsequently purchased a conservative position in URA on March 1, using an initial stop-loss slightly under the 20 level. After the 13% rally in URA from our initial entry point, I recently recommended locking in 50% profit on the remaining position in late March. I further suggest raising the stop-loss on the remaining position to slightly under 24 on a closing basis. HOLD A HALF

Serbian Election Could Be Good News for Lithium
Lithium carbonate prices in China were at 496,500 yuan per ton as of early April, representing an 80% gain in the year to date. Demand for the battery metal continues to skyrocket while supply is very tight, partly due to restrictions on new mining ventures.

Underscoring lithium’s rising demand profile, after rising 157% to more than three million units in 2021, electric vehicle (EV) sales in China are expected to exceed five million this year, according to a Deloitte report. Deloitte also predicts a 29% compound annual growth in EV sales going forward, for a total 32% of new car sales by 2030.

Part of the problem with meeting rising demand for lithium is the challenge of locating new sources or developing new technologies to extract lithium from brines. Accordingly, lithium’s supply deficit is forecast to expand to 26,000 in 2022 and to 300,000 by 2030, according to Trading Economics.

On the supply front, Mineral Benchmark Intelligence said Chinese lithium inventories continue to tighten. Benchmark added that with lithium prices at all-time highs, the metal is “set to continue on [its] upward trajectory as demand continues to outstrip supply.”

Elsewhere, the recent election victory of Serbia’s pro-mining president, Aleksandar Vučić, and his ruling Serbian Progressive Party (SNS) has improved Rio Tinto’s (RIO) chances of having the license for its $2.4 billion Jadar lithium project in Serbia reinstated.

In a report, risk intelligence company Verisk Maplecroft said, “Once re-elected, we expect the SNS will maintain its pro-mining stance.”

The Jadar lithium project was on track to be Europe’s largest lithium miner before its license was suspended, according to Mining.com. The project has an estimated production of 58,000 tons of refined battery-grade lithium carbonate per year, or enough to power a million EVs.

What to Do Now
Sigma Lithium (SGML) is a Canadian company that develops, through its subsidiary Sigma Mineracao S.A., hard rock lithium deposits in the Americas. Sigma’s properties are located in Brazil’s Minas Gerais State in the municipalities of Aracuai and Itinga, and the company holds nearly 30 mineral rights in four properties spread over 120 miles, including nine past-producing lithium mines. The firm is focused on producing battery-grade lithium concentrate from its Grota do Cirilo property—the largest lithium hard rock deposit in the Americas—to support the booming electric vehicle (EV) industry. Analysts expect Sigma will begin generating revenue by the end of 2022 as its lithium production commences at half scale, bringing the company one step closer to its goal of being the world’s largest low-cost lithium producer. Additionally, Bank of America recently picked Sigma as one of its top “scarcity plays” in the face of a tight supply backdrop in the global lithium battery space. Participants on March 22 bought a conservative position in SGML using an initial stop-loss slightly under 10.50 (closing basis). Last month, I suggested taking 50% profit in this stock after it rallied 14% from our initial entry point. I also recommend raising the stop-loss in the remaining position to slightly under 13.50 (closing basis). HOLD A HALF

Titanium Market in Limbo Over Russia
Aerospace companies Boeing and Airbus source much of the titanium they use for making aircraft and other aerospace applications from Russia. And while sanctions against Russia are already impacting this market (though titanium itself hasn’t yet been sanctioned by the U.S. and Europe), it’s not expected to have a material impact on the major aerospace firms that are big consumers of the metal.

VSMPO-AVISMA Corp. is the world’s largest producer of titanium and factors into the supply chains of both companies, with roughly a third of Boeing’s titanium coming from VSMPO. Last month, Boeing announced it has stopped buying Russian titanium and will source it elsewhere.

For its part, VSMPO said it had anticipated such a move on Boeing’s part and will fill the demand gap by diverting sales and production to other customers. Airbus, however, is more reliant on Russian-sourced titanium, according to Mentourpilot.com, and continues to utilize Russian titanium in its airplanes and helicopters.

The Wall Street Journal recently noted that while Boeing and other aerospace companies are claiming to be secure in their titanium supplies, “Finding new suppliers of titanium is only the first step” in assuring a steady supply. “The strength and quality of any new titanium components must be validated through a process that can take a year or longer—a risk highlighted in Boeing’s latest annual U.S. securities filing, which also flagged potentially higher costs and delivery delays,” said WSJ.

Imports from Russia make up 50% of the European civil and military plane maker’s titanium supplies, according to Reuters. And with global supply chains in disarray, prices for titanium and titanium-based alloy mill shapes have risen 6% since November.

What to Do Now
Kronos Worldwide (KRO) is a leader in the production of titanium dioxide pigments, the world’s primary pigment for providing whiteness, brightness and opacity (used in two-thirds of all pigments). In Q4, the company reported net income that was 220% higher from a year ago (28 cents per share) on revenue of $496 million that was up 20%, driven by higher titanium dioxide prices. Titanium dioxide segment profit was 55% higher for full-year 2021 and a whopping 143% higher for Q4. Going forward, analysts see sales rising 9% and earnings soaring 31% for 2022, which will likely prove conservative. A 5% dividend yield ties a bow on this package. Participants can purchase a conservative position in KRO using (an admittedly tight) stop-loss slightly under 14.75 on a closing basis. BUY A HALF

Current Portfolio

Buy means purchase a position at or around current prices.
Buy a Quarter/Half means allocate less of your portfolio to a position than you normally would (due to risk factors).
Hold means maintain existing position; don’t add to it by buying more, but don’t sell.
Sell means to liquidate the entire (or remaining) position.
Sell a Quarter/Half means take partial profits, either 25% or 50%.

The next Sector Xpress Gold & Metals Advisor issue will be published on April 26, 2022.