Nick Hodge,
Publisher
Oct. 12, 2021
You probably know there is a global semiconductor chip shortage.
And while there has certainly been a lot of media coverage about it already… We all know the media rarely ever gets to the heart of the matter or how you can benefit from it.
Most articles you read about the chip shortage will say something like this:
Supply chains were disrupted as the world went into lockdown over COVID, and then those issues were compounded as lockdowns continued in some places while consumer demand came back in others.
Even items that are actually getting produced and put on container ships and shipped out are still relatively unable to get where they need to go because now the ports are backed up. It’s now taking 80 days to get goods across the pacific — twice as long as before the pandemic. And shipping costs are rising along with everything else.
The rate to ship a container ship from China to LA has gone up something like 3-5X. It was over $20,000 for to ship a single container ship recently, up from $5,000 at this time last year.
Those are all the reasons you'll hear for basically everything that's in short supply.
It has become the generic reason you hear for all sorts of shortages you’re currently experiencing. Sort of like the dog ate my homework. “We don't have that bottle of wine or this coffee syrup or this part for your generator or whatever it is.”
Why Is There a Microchip Shortage
But behind the scenes, there's real reasons, of course, things and trends that I've been writing about and investing in for a long time.
And with the chip shortage specifically, it comes down to the materials needed and why there were looming supply chain implications even before COVID was a thing.
Let’s start with copper, which was already approaching a supply deficit scenario before the pandemic. Copper is one of the things we need for the electrification of everything. To make semiconductor chips, you need base metals. Metals that are conduits of electricity that are used for soldering, things like copper, zinc, aluminum, tin, and more.
There's been a lack of capital investment fundamentally for a long time because mining was viewed as environmentally bad and because mining goes in capital cycles. And lots of the large, long-life-producing assets for these commodities, on the whole, are coming to the end of their lives and need to be replaced.
Because we need new supplies of these metals to come online... There needs to be a shift in the capital cycle, which is happening now.
That’s why you're seeing all these commodity prices inflate. It's driven by money printing and stimulus, yes, but also by the real need for the prices of those commodities to go higher to incentivize new supply to come online.
As these commodity prices have risen, you've seen things like China selling lots of copper into the market to sort of temper the prices. China wants to temper the commodity inflation because it hurts them domestically when the price is rising. It hurts their people. So China wants to keep a lid on it.
But what's happened is China itself has run out of copper to sell into the market to keep the price down. And that's what I mean by copper shortages.
It’s happening with other metals as well.
In some areas, aluminum production has ground to a halt because electricity prices are too high to run the smelters.
And so that's the real reason why there's a microchip shortage.
The next question is when will it end?
When Will the Microchip Shortage End
Well, everyone wants to know that.
And I've got some bad news here because I think the world is years behind.
Years behind the capital investment needed for these new resource projects I just mentioned. And also years behind in terms of supply catching up to demand.
I mean, try to go buy a new car right now. I did. Custom orders are at least three months out. Ford and other companies have production offline, and it's going to take them a while to catch up to the demand that has built up.
The capital equipment replacement cycle doesn't slow down because there's a chip shortage. So the demand is only going to compound while supply struggles to catch up.
I view it as a medium-term to longer-term righting of the ship. It will likely take 18 to 36 months to work through all of these bottlenecks just for the chip shortages, and then years to bring the new supply of commodities online that are going to meet the needs for the electrification of literally everything from your car to your toothbrush and the devices that connect them all.
Like I said to some of my colleagues recently... if you want an e-toothbrush to connect to your eCalendar to remind you when to brush your teeth, the world had better get busy bringing new base and energy metals supply online.
How to Profit from the Chip Shortage
I've been investing in these things for years — the raw materials, the commodities — that are needed for this energy transition that we're in. And so has Gerardo.
The world is going from internal combustion engines to battery, electric power, hydrogen power,
Same thing with electricity generation. We’re moving from coal to renewables.
All those things take more copper, nickel, tin, zinc, lithium, and more. Even uranium if you want to produce cleaner electricity.
And so going back a half a decade to 2015… I've been investing, advising members to invest in all of those things... from the big companies that produce those commodities like Rio Tinto (NYSE: RIO) and BHP Billiton (NYSE: BHP) on the copper side and Cameco (NYSE: CCJ) on the uranium side…
All the way down to the mid-tier producers and of course the smaller explorers and developers where they have the potential to make many multiples of your money because they're smaller companies leveraged to those rising commodity prices that can go up several times.
And that's sort of been my and Gerardo’s bread and butter for most of our careers.
Members and I have had the opportunity to make 10 times — in some cases 20 times or more — on our initial investment in these commodities.
So how do you solve the chip shortage?
Well, you get through COVID. And that's happening now. The case rates are starting to go down, vaccination rates going up, and treatments are now going through testing.
Then you get the supply chain back on track.
But that can’t happen without significant investment in sustainable supply chains for the base and energy metals needed for this transition post-COVID.
That's how Gerardo and I have made most of our wealth along the way.
And we’re doing it again with uranium right now.
Call it like you see it,
Nick Hodge
Editor, Daily Profit Cycle