Infrastructure Demand

“[Nature] is rich, she is generous, she refuses to no one who will ask his share of her treasure of which she has inexhaustible reserves in the trees, in the mountains, in the sea. But one must know how to climb the tall trees, how to go into the mountains… One must know how to catch fish, and how to dive to tear loose the shellfish so firmly attached to stones at the bottom of the sea. One must know, one must be able to do things.”

— Paul Gauguin, Noa Noa

Paul Gauguin, the famous painter, moved to the South Seas in 1891. There he painted and sketched and also recorded thoughts in his journal, since published as Noa Noa, which I recently read. Among his many observations was the one quoted above. Though he is far apart from us in both time and space, I have had this thought of his in my head of late, because it applies to the current commodity boom.

The price of commodities swept higher in late February. Only two months into the year and natural gas was up 26 percent, coal up 56 percent and platinum up 41 percent. This in two months! We know there are tons of this stuff in this big ball of a planet we call home. The trouble, as Gauguin would point out, is that you have to know how to find it, get to it and dig it out. Aye, there is the rub. As global demand explodes for nature’s riches, it takes time for the market to deliver the goods.

So, too, copper and aluminum were within striking distance of all-time highs. Believe it or not, the consensus heading into 2008 was that the unfolding global slowdown would take these metal prices lower. That certainly didn’t happen.

Some of the price rise was due to supply problems in China and South Africa. Producing these metals requires a lot of energy. Yet persistent blackouts and power issues plague producers in these countries. In any event, aluminum topped $3,000 per ton for the first time since May 2006.

Copper hit $8,500 per ton, near all-time highs, as Chinese consumption remains high. Global copper inventory covers only about three days worth of global consumption. With a market running that tight, prices remain susceptible to big spikes. Credit Suisse says copper could spike to $12,000 per ton, partly on the rising cost of sulfuric acid, which about a quarter of copper producers use to process copper ore.

But the biggest driver behind metal prices such as copper and aluminum is the huge global demand for infrastructure. Morgan Stanley estimates that emerging markets will spend $21.7 trillion on infrastructure over the next 10 years. Power plants, roads, bridges, airports…

One sleeping giant in all of this is India. I see it in ABB Ltd. (ABB: NYSE), the world’s biggest maker of electrical grids — and the world’s third largest buyer of copper. India is the fifth largest market for new orders for ABB. In the last quarter, new orders were up 42 percent in India. ABB claims its orders in India will double by 2010!

Certainly, when you compare India’s consumption of metal on a per capita basis with that of other countries, you see enormous room for growth. (See next chart.)

This is not idle wondering. This has real merit, like mixing vodka and tomato juice. Increased metal consumption is practically a given. India desperately needs more power. (See chart below.) And India’s government will spend billions of dollars adding around 600 gigawatts of electricity by 2030:

All of this infrastructure requires a lot of metal, especially copper. Hence, one of the hot growth sectors in India is its metals and minerals. Most investors tend to think of India’s famous technology companies. But here is an industry still in the early stages of growth.

India has substantial deposits of bauxite, iron ore, copper, zinc and more. In some of these, India’s reserves are among the largest in the world. With all the demand for metals both from India itself and abroad, India’s production has ramped up significantly. Indian companies are also among the lowest-cost producers in the world.

In many parts of the world, and especially here, the need for infrastructure is on the rise. But in developing countries like India, we’re seeing some of the biggest demand spikes for these types of resources. Stay tuned to this situation and keep following these exciting price spikes…

Regards,
Chris Mayer
April 29, 2008