- May 27, 2011
- Global Infrastructure a $6 Trillion Opportunity
A few weeks back we highlighted the strong link between GDP growth and oil consumption by showing you how oil consumption per capita has risen in selected countries as per capita incomes rise (Each week, more than one million people are either born in or migrate to cities around the world. Much of this rapid urbanization comes from the emerging world, putting tremendous pressure on that country’s feeble infrastructure. Pipes burst, roads are jammed, the water is tainted and the lights even go out.
You can see that Brazil has the worst overall ranking among the countries listed. Though the country is a large exporter, the extremely poor condition of the country’s roads and rails has hampered the growth of internal textile and farming industries. However, there is light at the end of the tunnel for the country, as the government already has a plan in place to improve these conditions (Read: Brazil’s Infrastructure Plays Catch Up).
India’s infrastructure also rates poorly, and is slowing the country’s ascent to top of the world’s economies (Read: India’s Achilles Heel). One of India’s key issues is electricity. Merrill says that nearly 40 percent of Indian households do not have access to electricity, the worst of any major developing economy.
Power is also a problem in South Africa where a major power plant has not been built in 20 years and blackouts/power outages have hurt the country’s mining industry in recent years. Merrill projects $54 billion will need to be spent on the country’s power system over the next three years, accounting for nearly half total infrastructure spending.
China, which accounts for more than half of that $6 trillion estimate, ranks far above emerging peers in terms of infrastructure at the 65th percentile. Merrill says that one of China’s biggest needs is in water and environmental development. The firm estimates that the Asian country will need to build roughly 40,000 reservoirs at Rmb 12.5 million a piece to create an internal water distribution system and alleviate pressure when regions experience extended droughts such as what China is seeing presently.
The needs of a growing global population set to reach 7 billion later this year and investment needed to supply these people with sufficient water, roads, housing and power is why we identified infrastructure as a megatrend in 2007 and made it the key investment theme of the Global MegaTrends Fund (MEGAX).
Although some infrastructure investments, such as those in Russia, have seen delays as fiscal dollars have been diverted during the financial crisis, we continue to believe in the long-term viability of the story.
Read How Policy Reforms are Paving the Way for Indonesia
Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.
Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk.
"http://www.usfunds.com/investor-resources/frank-talk/Energy-Natural-Resources/The-Strong-Link-Between-GDP-and-Oil-Consumption-5331/">Read: The Strong Link Between GDP and Oil Consumption).
Specifically, we noted the potential for China’s oil consumption—already the second-largest oil consumer in the world—to catch up on a per capita basis with other Asian countries such as Taiwan and South Korea.
That’s where we think China’s oil consumption is headed, but this chart from Carnegie shows how strong oil consumption per capita growth has been over the past 50 years. Back in the days of Chairman Mao, China’s oil consumption per capita was roughly 0.2 barrels per year (b/y). When Deng Xiaoping took over in 1982, that figure had grown to roughly 0.6 b/y.
Since then, there’s been no looking back. China’s oil consumption per capita has increased over 350 percent since the early 1980s to an estimated 2.7 b/y in 2011. In fact, consumption per capita has risen nearly 100 percent in just the past decade.
Oil consumption per capita in the U.S. currently ranks among the top industrialized nations in the world at 25 b/y. However, today’s consumption levels are approximately 20 percent lower than they were in 1979.
China isn’t the only emerging country to show big increases in per capita consumption; in fact, the growth in consumption for several other countries far outpaces China. You can see from this next chart from Carnegie that consumption per capita in Malaysia has nearly quadrupled since the mid-1960s. Consumption in Thailand and Brazil has more than doubled to roughly 5.7 b/y and 4.8 b/y, respectively.
Meanwhile, many developed countries—especially those in Western Europe, have experienced substantial declines.
Today’s per capita consumption in Sweden is roughly 12 b/y, down from 25 b/y in the mid-1970s. That’s one of the largest declines in the developed world over that time but isn’t the only one. France, Japan, Norway and U.K. all use less oil on a per capita basis than they did in the 1970s.
This trend is why we feel emerging countries, especially Asia, are the epicenter of oil demand growth for years to come.
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Merrill Lynch estimates that $6 trillion will need to be spent by selected emerging market countries over the next three years to meet the basic needs of these citizens. Water, transportation and energy investments will consume the bulk of these funds, accounting for 82 percent of total projected spending. Nearly every emerging market country Merrill researched will make an investment in all three.- May 5, 2011
- The Answer to What Drives Emerging Markets
If I asked you what is the most important factor driving emerging markets these days, how would you answer? Here are a few suggestions:- It’s the rapidly growing urban populations.
- It’s the fact that emerging countries need improved roads, ports, airports.
- It’s the investment in commodities, such as oil, coal, iron ore, steel and cement.
- It’s the affinity for gold.
Our experience researching and meeting with companies around the world dictates that we create a fifth choice, “All of the above.”
The latest Shareholder Report magazine shows how these trends are intertwined. Our natural resources outlook focuses on how experts anticipate infrastructure spending to be in the trillions in several emerging market countries over the next few years. And gold demand continues to grow because of the developing markets’ rising wealth linked with a traditional affinity for the metal, and the accumulation of gold by central banks.
In a new feature entitled, “Minute with the Manager,” we sit down with Tim Steinle, the co-manager of the Eastern European Fund (EUROX), in between his trips around the region. Learn where he’ll be focusing his attention in 2011. You can also watch parts of the interview by clicking here.
Like Tim, all of our fund managers continuously try to find the best investment opportunities. That’s how we believe we can deliver superior investment performance over the long-term. Read my letter to see how our shareholders have benefitted from our experience.
Click on the link below to see the online version of Shareholder Report now. If you would like a hard copy, send us an email at editor@usfunds.com.
Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.
Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio. The Eastern European Fund invests more than 25% of its investments in companies principally engaged in the oil & gas or banking industries. The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile.
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- April 15, 2011
- Middle East to Spend $80 Billion on Public Transport
This week, the International Association of Public Transport (IAPT) World Congress held its 59th annual conference in Dubai. Two thousand delegates from 80 countries around the world attended the four-day event. In between their meetings, delegates took rides on the city's public transportation, including the longest driverless metro line in the world, completed less than two years ago.
Long known as a city dependent on its cars for convenient and comfortable travel, Dubai has been ramping up its infrastructure to relieve increasing traffic congestion driven by urbanization. Car traffic is forecasted to increase four times by 2020 as the population jumps from 1.2 million people in 2005 to more than 5 million by 2020.
To realize its vision of “Safe and Smooth Transport for All,” Dubai’s Roads and Transport Authority (RTA) has been fervently working on projects that cover several different modes of transport. These include 166 miles of metro lines, 268 new tram lines, 90 bus routes with 2,000 buses and 5 new waterways covering 130 miles with 67 water taxis.
Dubai is only one of several areas focused on these projects. The RTA Executive Director estimates that countries in the Middle East would most likely invest $80 billion in the public transport system over the next 10 years. A special report produced by the Financial Times highlights the progression of these projects. Across Saudi Arabia, Qatar and United Arab Emirates, numerous rail commuter and long-distance links are under construction or projected to be underway soon.
One high-speed rail project, the Mecca-Medina line, highlights a unique travel need in the region. To fulfill the requirements of the hajj, Muslims are expected to make the hajj pilgrimage to Mecca, the sacred city of Islam, at least once in their lifetime. And millions do.
Known as the largest annual gathering of people in the world, during the last month of the Islamic year, 2-to-3 million believers make the pilgrimage every year. Last November marked the first time that a metro light rail transported those making the journey at an estimated 199 miles per hour.
It will be interesting to see these exciting projects develop over the next several years. Between the urban areas of already crowded cities, to the spread-out, low-density regions across the desert, the pace of growth demands the infrastructure to support “safe and smooth” public transportation for local residents and visitors around the world.
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- April 1, 2011
- The Strong Link Between GDP and Oil Consumption
Global crude oil and liquid fuel consumption grew at its second-fastest pace in over three decades in 2010, rising 2.8 percent to 86.7 million barrels per day, according to the U.S. Energy Information Administration (EIA). In fact, worldwide oil consumption surpassed 2007 pre-recession levels.
For 2011 and 2012, the EIA forecasts that, around the world, we’ll use an annual average of 1.6 million barrels of oil per day. The EIA says this increase is expected to be driven by rising demand from the emerging world, mainly China, Brazil and the Middle East.
While Chinese oil consumption growth is expected to slow from the blistering 13.1 percent growth the country experienced in 2010, China is still expected to see a 6.6 percent growth in consumption this year. By 2015, the International Energy Agency (IEA) estimates that the use of oil in China will increase some 70 percent from 2009 levels, accounting for 42 percent of global demand over that time period.
One key driver of the increase in oil consumption is the continued rise in economic wealth of China and other emerging countries. Historically, the amount of oil consumed per capita is strongly linked with the country’s GDP per capita.
This chart from Barclays compares selected Asian countries’ use of oil over several decades by their population and GDP. You can see that Chinese per capita oil consumption is well behind the pace of its Asian peers when they had a comparable level of GDP per capita.Currently, China’s GDP per capita is just over $5,000 on a purchasing power parity (PPP) basis. That translates into consumption levels of just over 2 barrels of oil per person, per year. At the same PPP levels, Japan (over 18 barrels per person), Taiwan (about 6 barrels per person) and Korea (just over 4 barrels per person) consumed much larger amounts of oil at a similar level of GDP per capita.
Barclays says that China’s per capita oil consumption would have to increase nine-fold from 2010 levels in order to match that of the U.S. and India’s would have to increase 23 times what it was in 2010. If this were to happen an additional 170 million barrels a day of production would be needed to meet demand.
Considering the U.S. roughly consumes as much oil, in terms of total consumption, as the next five highest oil-consuming countries (China, Japan, India, Russia, Germany) combined and China has over 1.3 billion people, it’s doubtful we’ll see this come to fruition any time soon. However, China only needs to catch up with the likes of South Korea or Taiwan to put a severe strain on global oil supply.
This means that the global oil market will remain tight for the extended future. Barclays says “relative to other sectors of economic activity, oil has become scarce, implying a need to divert ever larger shares of total economic resources into the exploration and recovery of oil.”Watch Evan Smith discuss ways to play higher energy prices with Margaret Brennan on Bloomberg’s “In Business.”
Purchasing power parity (PPP) is a theory of long-term equilibrium exchange rates based on relative price levels of two countries.
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- February 10, 2011
- BRIC Self Sufficiency Index
Demand for natural resources in the emerging world is increasing, but how much of this increased demand is met by the country’s own production?
This interesting chart from Bank of America-Merrill Lynch shows the supply/demand fundamentals of several key industrial metals and basic materials.
The dotted line represents a key tipping point. The resources to the left of the line are those the BRIC countries must obtain outside of their own borders in order to meet domestic demand. The BRICs produce an excess amount of the two metals to the right of the line and export the remaining amount to other countries.
Last year, copper, nickel and coal were all top-half performers of the 14 commodities we track in our popular periodic table. The two metals the BRIC nations produce an excess amount of (aluminum and zinc) were among the worst-performers.These materials are the necessary elements needed for emerging nations to take the next steps in their development. You can see that the BRICs must rely on imports in order to meet demand for metallurgical coal, copper concentrate, thermal coal, iron ore, refined copper and uranium.
For example, BRIC production of metallurgical coal is less than 20 percent of BRIC consumption. Met coal, or coking coal, is used to make iron and steel—very important to the infrastructure build-out taking place in Asia.
Thermal coal is also important because it is principally used for power generation. Coal is the primary source of electricity in the emerging world, supplying more than 50 percent of Asia’s power. The BRICs consumed nearly 2 billion tons of coal for electricity in 2009, according to BP’s World Energy Statistics.
In order to combat these supply deficiencies, the BRICs have looked beyond their borders. In India, there were 27 cross-border deals in the metals and ores sector last year, according to research firm Grant Thornton.
China has been especially proactive in this regard. From 2005 through early 2010, the country inked more than $45 billion worth of cross-border deals for coal, copper and iron ore. These are deals in countries near (Vietnam, Mongolia) and far (Peru, Canada).
We think these areas are especially important for investors because these are the areas where we’re seeing wider profit margins and stronger returns on capital. This is why our Global Resources Fund (PSPFX) is currently seeking the best opportunities in this area.
Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.
Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk. Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.
BRIC refers to the emerging market countries Brazil, Russia, India and China.
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