How Arabs Will Drive the Next Great Infrastructure Boom
By Dan Denning, editor, Australia Resource & Mining Report
June 5, 2008
For the past several years, the Pilbara Region of Western Australia has witnessed a boom like few mining districts have ever seen.
I've been covering the Pilbara and its huge iron ore deposits since moving to Australia three years ago. I consider the place ground zero in the resource bull market. Like most bull markets today, the Pilbara's boom is related to Australia's neighbor to the north, China. China is consuming iron ore, coal, natural gas, copper, zinc, and crude oil at a pace we've never seen before in human history.
Most of us know China's boom is a huge driver in the bull market in infrastructure, energy, metals, and minerals. But there's another developing region you've probably never considered... one that could make you a rich investor over the coming years: the Middle East.
The Economist reports the six nations of the Gulf Cooperation Council (Saudi Arabia, Kuwait, Bahrain, Omar, Qatar, and the UAE) earned $381 billion from oil exports in 2007. The cumulative earnings will reach into the trillions if oil remains over $100 for several years. The region literally has more money than it knows what to do with. A lot of that money is flowing into infrastructure.
From Dubai to Kuwait, there's an estimated $2.4 trillion in construction projects either underway or in development in the world's biggest oil patch.
Surprisingly, $1.4 trillion of that total is for projects in civil construction. This means spending on residential and commercial construction projects in the Middle East outweighs construction on oil, gas, power, petrochemical, industrial, and water projects combined.
The three largest civilian projects are:
1. King Abdullah Economic City, Saudi Arabia: $120 billion. The leading firm is Dubai-based developer Emaar.
2. Silk City Project, Kuwait: $86 billion. The leading firm is Tamdeen Real Estate.
3. Dubailand, UAE: $60 billion. The leading firm is Tatweer.
The Saudi Arabian government wants to diversify the Saudi economy from its current "Three Pillars" strategy of oil, petrochemicals, and industrials. This building strategy is just one of the forces driving up steel prices, which are now over $1,000 a ton.
The Saudis know their 262 billion barrels of oil reserves won't last forever. They are attempting to plant the seeds for self-sufficient regional growth that's not related directly to the oil economy. This means building six brand new cities as centers of commerce and enterprise.
That's right... They're building giant new cities out of nothing. Four have already been launched. They are:
1. King Abdullah Economic City
2. Jizan Economic City
3. Knowledge Economic City
4. Prince AbdulAziz Bin Mousaed Economic City
Whether the Saudis can build economic prosperity from nothing is an open question. They certainly have the capital to try. High oil prices have guaranteed that.
From an investment perspective, the long-term success of the Saudi's grand economic strategy doesn't matter. The money is going to be spent. Any sensible investor, seeing such gaudy capital expenditure figures, would do the only sensible thing: follow the money.
It is not just Saudi money either. And it is not just residential and commercial growth. A lot of it is industrial, petrochemical, and power related.
For example, in the United Arab Emirates, Dubai recently announced plans to build the world's largest aluminum smelter ever. It's a $5 billion project with the aim of producing a smelter that can generate 700,000 tons per year. Saudi Arabia has plans for its own $3.8 billion aluminum smelter. Oman has plans for a $2.2 billion smelter.
That's $11 billion for just three projects.
How can you profit from all this? As I've written in my previous columns, the global building boom is going to require awesome amounts of iron ore and base metals... so producers of this "stuff" still have years of gains ahead of them.
You can also buy engineering and construction firms. Someone has to receive the contracts to build all of this stuff. Go through the holdings of the PowerShares Building & Construction ETF for some ideas.
Whichever investments you choose... realize the infrastructure boom isn't just focused on China. The U.S. is spending to upgrade its "F" infrastructure rating. Russia is spending. Latin America is spending. And now, the Middle East is spending its oil money. It all points to big returns in infrastructure stocks.
Good investing,
Dan Denning
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