Why Not to Buy Indium for Speculation

DETROIT () -- I wasn't aware until this week that there were "Indium & 'Strategic Metals' Scams," but I came across them as a category (of swindle) in my research for this week's article. I was actually inspired to write about indium by a very recent by frequent (and appreciated) commenter Zeno451 to a Pitpundit Blog item from 2005 blog entry titled "."

I suspect that 99% of my readers do not know what indium is used for and that the same proportion doesn't even know what it is. This lack of information is what has made indium a component of scams. All you need to know about indium is that it is a sister metal of aluminum and gallium, and although it is much less abundant in the earth's crust than gallium (by a factor of 300!) it is much more accessible, so its annual global production is 500 metric tonnes, or 5 times as much as that of gallium.

It is easy to memorize the minimum requirements that you must place upon a seller of anything you wish to buy for trading (i.e., speculative) purposes. You must determine:

  1. Is there a transparent market for the material? In other words, can you easily find the buying and selling price of the material independently of the person offering to sell it to you?;
  2. Do you have and can you have an exit strategy for your investment? This means that whenever you want to sell it, can you do so for the above "market price"? and;
  3. Is there always a willing buyer, which is another way of saying that requirement No. 2 above is met?

It is not easy to quantify the factors that integrate to produce the price of indium, since the metal is rare, has few producers, even fewer refiners and is not traded on any exchange (defined as a group of companies, and sometimes individuals, that owns and holds inventory to guarantee delivery at a set price on a set date). This means the price of indium is in the hands of those who are called "merchants," i.e., those who own and have the actual, physical material in their possession or under their control, and the only way to determine a price on any given day is to poll the merchants with a requirement for a quantity to be delivered immediately or at a fixed date in the future.

The prices you may see for non-exchange-traded metals such as indium in such publications as The American Metal Market or Iron Age are in fact obtained in even a less-reliable fashion than that suggested above. Staffers of those publications call sellers and buyers of the metal in question, whom they know personally, or are directed to by those in the trade, and simply ask them what their most recent transaction volume and price was. A Hollywood film about this might well show na"ive young callers speaking to mustachioed villains attempting to corner the market by manipulating prices. Judging by many metal run-ups and crashes in the last decade alone, I wouldn't put the Hollywood version as too far from the truth.

Before you ask why those investors who want to know the price of indium don't simply call the producer of the end use item they want and get a quote you need to know that indium is one of those high technology metals for which the cost of refining and, for most uses, ultra purifying far exceeds the cost of the "99.97" indium at the mine's refinery, which is in fact the article of commerce being priced in a publication such as The American Metal Market.

Just to give you an idea of the scale up in price that occurs when a rare metal needs to be ultra refined or even further processed for end use look at platinum. Investors think they understand that there are two "market" prices for a metal like platinum: 1.) The price asked by the LME (London Metal exchange) or the LPPM (London Platinum and Palladium Market) traders for registered quantities of guaranteed purity (Ingots, bars, and the like) made by exchange members (London Good Delivery this material is generally called in the case of precious metals) and 2.) The price for a fabricated material, which was made by starting with the material from the first pricing mechanism.

In any case, those two prices are "set" everyday on each exchange that guarantees to sell and buy the metals either actually in the forms offered or in some relationship to the forms offered. This is transparency.

If you cannot easily determine a way to sell something other than through the person or company from which you bought it, this indicates that the investment is in an item for which there is no transparency and, even worse, no market accessible to non-merchants. Run, do not walk, away from this investment.

I have always thought that most, if not all, non-coinage, consumer forms of gold and other precious metals fall into the above category. Only for certain forms of precious metals, the producers of which are registered and current members of specialised exchanges such as the London Platinum and Palladium Market (LPPM), is it mandatory that they be bought by a member of such an exchange at a posted set price. Each time you place another person in the chain of conveyancing for such forms, a local dealer, a New York-based "representative of the exchange" and so on and so forth, you must pay a fee in the form of a discount to the market price even though you are selling or buying London Good Delivery forms of the metals.

Now let's get back to indium. It looks like I'm saying never buy indium for speculation, and I am saying that for the small investor, this is always true.

There are, however, some miners and even some end users of indium in which you could speculate on the price and availability of indium. This is done by buying and selling the shares of those companies on well-regulated stock exchanges in which transparency and a market for the listed shares are guaranteed.

Henry Paulson and I disagree on the safety of the guarantees offered by exchanges in emerging economies even in the one that is emerging to overwhelm all the others, China. My question to a broker is always, "If I give you a sell order for shares you have purchased for me on the Shanghai exchange, for example, and I know my stock was traded at that price after I gave you the order, do you personally guarantee to make me whole if the transaction fails for any mechanical or governmental interference reason?" If the answer to this question is more than one word beginning with "Y," or, regardless of the answer if your broker isn't part of a major firm with American assets with seats and offices on and in the emerging country exchange don't say I didn't tell you so.

No indium was recovered from ores in the United States, so says the USGS, in 2006. This is a bit misleading, because indium occurs predominantly in the zinc-sulfide ore, sphalerite and this is widely found in North America. The Canadian firm, Teck Cominco Ltd. [NYSE:TCK; TSX:TCK-B], said by Reuters to be the world's largest zinc miner, is a long-time producer and refiner of indium as a byproduct at its facilities in Trail, British Columbia, Canada. In 2005, Teck produced 41 metric tonnes of indium there from concentrates not only from its company owned or operated western Canadian operations but from a major American mine in Alaska that it, Teck, operates for Native American owners.

Teck announced in 2005 that it was planning to increase indium production to 75 tonnes "in a year or two." The USGS indium data sheet for 2006 does not show any increased production of indium in Canada between 2005 and 2006, but I believe the increase will show up in the 2007 figures.

Indium's price as reported by the USGS, for 99.97% indium, has gone from $97.00 per kilogram in 2002 to $855.00 per kilogram in 2006. The USGS reports annual average prices, and I do not have a number for 2007 to date, but I have been told (in a phone call to a friend) that indium has reached $1,000.00 per kilogram at this time. Before I could hang up he told me that he was confident that the price would reach $1,500.00 per kilogram by 2010 or 12.

Cautionary comment: The Canadian dollar has been rising as the U.S. dollar is falling recently, and the two are not in lockstep. Canada's economy has boomed on its prominence as an exporter of natural resources, metals, minerals, and energy. The Reuters article linked above shows the Canadian dollar at C$1.25 = USD$1.00 in mid 2005. The Canadian dollar has since appreciated by between 10% and 20%. Since demand for indium is rising at the moment it, indium, in USD$ terms may be somewhat undervalued, and I'm sure that Teck Cominco hedges American currency and any other currency rising against the dollar in order not to lose money simply on exchange rates, because Teck itself produces enough indium to supply between one-third and, perhaps even, if Teck's production has reached the planned peak, three-fifths of the American (apparent as estimated by the USGS) consumption

Note that the producer must hedge foreign currencies in order to manage his own risk. Do you consider this aspect of your investments in foreign companies? Do you consider that many metals traditionally priced in dollars may not be rising but merely acting as indicators of the dollar's value?

I don't know how much of its indium Teck sells to American end users, but I suspect that due to its recovering indium from zinc mined on American territory that it does. At least I hope the American owner of the Alaskan mine has the good sense to take a first right of refusal to at least their share of the production and to sell it to American customers. If not, I would hope they would consider this move. America in 2006 imported 22% of its apparent indium consumption, 125 metric tonnes from Canada. This 25 mt represents less than half of Teck Cominco's production. We got the same amount from countries such as Japan and Russia (combined) where the indium is imported as ore concentrates and refined.

By the way, the majority (70%) of the imported indium is used in the U.S. to make transparent conductive coatings, ITO (indium tin oxide), which are the key element of modern display technology. These coatings allow light to pass through them while maintaining a voltage gradient that either allows Liquid Crystal Display (LCD) or Plasma Display (PD) screens to work. This function is also critical to the production and operation of thin film solar cells and panels. Indium solders are also used in electronics and last but not least compound semiconductors which are indium compounds and alloys are used in the production of high speed electronics, lasers, and high efficiency solar cells.

The article of commerce in the indium trade is 99.97%. The USGS says that are just two companies in the U.S. producing this item from lower grade imported metal. In the U.S., a very small number of specialty firms also produce ultrapure indium, the material from which electronic devices are made.

The largest firm producing the purest (ultrapure) indium is Umicore in Hoboken (Belgium), which I discussed last week. Umicore produces 99.99999% pure indium for electronics use. Based on a comparison with other such up-conversions of which I have knowledge it would not surprise me if Umicore's ultrapure indium sold for between USD$5000 and USWD$10,000 per kilogram.

The mining production of indium is tied mainly to the mining production of zinc, but the end uses of the two metals as well as the environmental aspects of the two metals are vastly different. Where the two metals are in lockstep is that a shut down of a sphalerite, zinc-sulphide, mine or an interruption in its production will immediately also stop the production from that mine of indium.

There is probably no recycling of indium in the U.S. Umicore in Belgium may well be the world's pre-eminent recycler of electronic and electrical scrap for the recovery of indium (and other metals), because it has been in the recycling business since at least the end of World War II and has during that time built up a vast international network, a virtual global infrastructure, for buying collected products containing specialty metals such as indium.

There are small miners who regularly announce zinc or "polymetal" strikes in places like Argentina and Ontario (Canada) that contain up to one ounce per tonne of indium, which used to be ignored, by the way, in the analyses.

My conclusion is that no small investor should get into an indium "play." Indium is not a metal to be stock piled or squeezed (all of the physical metal bought out in order to force the price up) by a bored private equity fund manager. It could well be that the world's largest mining producer of indium, China's zinc and tungsten industries, will stop exporting it, as China has already restricted 99.97 indium's export with taxes intended to drive ultra refiners (like Indium Corporation of America, which is already operating in China, and end user product production to China, but there is enough indium and there are enough substitutes for it in all of its uses so that even if that happened no end user anywhere would be driven to a "no build" position.

Electronic and electrical manufacturers' purchasing departments have to worry about indium's price. You don't and shouldn't. Put simply, there's no market for indium speculation to which the average investor has access.

About the Author
Jack Lifton

Jack Lifton is a leading authority on the sourcing and end use trends of rare and strategic metals. He is a founding principal of Technology Metals Research LLC and president of Jack Lifton LLC, consulting for institutional investors doing due diligence on metal- and material-related opportunities.

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