INFRASTRUCTURE! THE LONG-TERM DEMAND FOR COMMODITIES IS GROWING

The demand side for commodities has a major new engine of growth in the years ahead; the need for infrastructure! And it is coming at a time where the supply side is already constrained due to the downsizing that occurred because of the 2011 – 2015 commodity bear market.

Last week, Blackstone LP, the largest private equity firm announced a $40 Billion infrastructure fund, with Saudi Arabia as an anchor investor, and with leverage that could take investment to $100 billion! This leapfrogged them ahead of several other billion dollar funds constructed by the likes of Brookfield Asset Management, Macquarie, and others.

More: https://www.bloomberg.com/news/articles/2017-05-22/blackstone-jumps-on-plans-for-40-billion-infrastructure-fund

So, what is the need for infrastructure all about it and why are we seeing overwhelming institutional interest? With a little investigation, it is easy to conclude that the massive need for infrastructure spending is a global issue, from the most industrialized nations down to the many emerging and even frontier nations. The credit crisis and melt down of global markets in 2008-2009 slowed or altogether stopped much of the needed infrastructure investments, leading us into a global infrastructure gap.

Building and/or repairing roads, bridges, transportation systems, airports, electricity grids and more requires capital, equipment, machines, labor and massive amounts of raw materials. There is little doubt that infrastructure has become a very timely issue across the globe and you don’t have to look too far to take notice:

  • The current U.S. administration, beginning with President Trump’s acceptance speech, has frequently spoken about the tremendous need for infrastructure spending in the U.S. due to the massive repairs needed to bridges, roads, mass transit systems, airports, and more (ranging from $500 billion to as much as $1 Trillion over multiple years).
  • India announced $376 billion in spending over the next 3 years as it begins to address the need for sufficient infrastructure if it is going to be successful moving along the path towards broad industrial growth.

https://www.ibef.org/industry/infrastructure-sector-india.aspx

  • The Canadian Government has committed to $180 billion over 12 years for public transit, green infrastructure, social infrastructure, trade and transportation infrastructure including the rural and northern communities.

http://www.infrastructure.gc.ca/plan/about-invest-apropos-eng.html

  • Australia is committed to spending $145 billion across two major initiatives for transport infrastructure of all kinds across the country including bridges, road and rail investments.

http://investment.infrastructure.gov.au/
http://www.abc.net.au/news/2017-04-27/government-to-fast-track-infrastructure-in-budget/8477802

  • Vietnam needs $100 billion in next four years to meet spending plans.

http://e.vnexpress.net/news/business/vietnam-looks-for-100-billion-miracle-to-meet-public-investment-needs-3476646.html

  • World Bank publishes why “We Need to Close the Infrastructure Gap in Sub-Saharan Africa”.

http://www.worldbank.org/en/region/afr/publication/why-we-need-to-close-the-infrastructure-gap-in-sub-saharan-africa

  • China’s “One Belt, One Road,” or the new “Silk Road” plan entails a $3 trillion infrastructure building campaign.

http://fortune.com/china-belt-road-investment/
https://qz.com/983460/obor-an-extremely-simple-guide-to-understanding-chinas-one-belt-one-road-forum-for-its-new-silk-road/

  • Global consulting firms such as McKinsey & Company and PWC Global have established entire practices to focus specifically on the global need for building infrastructure.

http://www.mckinsey.com/industries/capital-projects-and-infrastructure/our-insights/voices-on-infrastructure
http://www.pwc.com/gx/en/industries/capital-projects-infrastructure/publications/cpi-spending-outlook.html

Ultimately it is the forces of demand and supply that are the largest drivers of prices. Infrastructure spending is potentially a massive demand factor for commodities over the years ahead. This comes at a time when so many suppliers of raw materials have been forced to downsize or shut down marginal capacity which in many cases could take years to re-establish. Importantly, this demand/supply imbalance is building at the same time that global macro forces for commodities may also be turning favorable with inflationary pressures growing, interest rates beginning to rise, and the dollar starting to give back some of its tremendous gains over the past 5 years. All of these are positive for commodity prices. Reversion to the mean is a powerful concept and despite the near term volatility, there may be a perfect storm brewing that may lead many commodity prices significantly higher over the years ahead.

Alan Konn

Partner & Managing Director of Price Asset Management