Commodities Investing
Commodities Investing: How to Cash In on This Secret Commodities Boom
A Taipan Publishing Group Strategy Report
by Irwin Greenstein, Senior Research Analyst, Taipan Publishing Group
The explosive price of oil has triggered a secret commodities boom in the harshest climate on earth... and a great opportunity in commodities investing.
It involves 90 million tons of steel, the world’s largest man-made harbor and an epic effort to create the biggest modern cities in history. The men behind this commodities boom are modern-day pharaohs planning for the day when their oil wells run dry.
To capitalize on record-high oil prices, the Persian Gulf has embarked on massive real estate and public works projects intended to shift their economies from oil exports to industrialization, tourism and shipping.
This historic construction boom in the desert has given rise to a unique commodities play that most investors ignore.Commodities Investing: $1 Trillion Market
But after months of exhaustive research, we have identified the single best commodities opportunity in the Persian Gulf. It’s safe, easy to trade and gives you the potential for long-term wealth.
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When it comes to investing in this commodity, there are only two places that merit your attention: Dubai (a member of the United Arab Emirates) and Saudi Arabia.
Of the $1 trillion in construction projects under way in the Persian Gulf, the UAE and Saudi Arabia made up 29% and 20%, respectively, of all the work -- meaning that these two countries account for nearly half of all the construction in the region.
Today, the money in Saudi Arabia comes from oil. But tomorrow, the country’s fortunes are expected to flow from a massive build out. New factories, harbors and mega-cities will become more important than the oil wells and refiners that now pump petrodollars into the economy.
Commodities Investing: $500 Billion for Mega-Cities
The Saudi sheiks have earmarked $500 billion for construction projects that will create millions of new jobs and diversify the kingdom’s reliance away from petroleum exports over the next two decades.
These lofty economic goals are fueled by oil prices that have quadrupled since 2002 -- setting a record of $100 a barrel.
After 20 years of stagnation, the sheiks see that this is their chance to transform Saudi Arabia into an industrial powerhouse while prices hover at historic highs.
Commodities Investing: When the Oil Runs Out
It is also a tacit admission by them that the country’s oil reserves may be drastically lower than officially reported -- as documented in Matthew R. Simmons’ world-shattering book, Twilight in the Dessert.
Simmons created a compelling case that Saudi Arabia production will soon peak, exposing the world to a catastrophic oil shortage. He asserts that dramatic declines in oil production could happen at any moment.
In his most optimistic scenario, he suggests that Saudi Arabia might maintain current rates of production for several more years, but even then the kingdom could not boost production to satisfy the impending surge in demand for oil around the world.
If ever there was evidence to this startling revelation, it’s the massive construction projects underway. And interestingly, this building boom directly correlates with rising oil revenues.
From 2002 to 2006, these oil-producing nations earned $1.5 trillion -- twice as much as in the previous five-year period, according to the Institute of International Finance. As the leading exporter, Saudi Arabia has been the chief beneficiary.
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That money is financing the most explosive economic boom in a generation. The money is helping to build high-rises in Dubai (where the world’s tallest building is under construction), as well as modern telecommunications networks, new roads, power plants, desalination plants and universities throughout the region.
The driving vision is to turn the Persian Gulf into a major industrial power. For example, Saudi Arabia is intent on becoming one of the top three chemical producers in the world, requiring billions of dollars to build modern refineries and factories.
Commodities Investing: A Bold Strategy
The current high level of oil prices has given Saudi Arabia’s industrialization strategy new impetus. And this plan is already producing results.
The country’s private sector now accounts for 45% of the economy, compared with just 20% about 20 years ago. That shift coincides with the Saudi’s commitment of investing at home that started in earnest in the 1990s.
As championed by King Abdullah, the 83-year-old Saudi monarch, six new cities are under construction, including the King Abdullah Economic City, the Knowledge Economic City, and the Prince Abdulaziz bin Mousaed Economic City. The names may be hokey, but the money is real.
Commodities Investing: One Million New Jobs
The Saudi Arabian General Investment Authority expects these new cities to add $150 billion to the country’s GDP by 2020, bring 1 million new jobs to the workforce and become home to 5 million people. They will have four times the geographical area of Hong Kong and the economic output of Singapore.
With their Blade Runner-style architecture and over-the-top opulence, it’s no surprise that Dubai hosts the Persian Gulf's first indoor ski resort -- in addition to the world's tallest building, a seven-star hotel in the shape of a giant sail, its first underwater hotel, and a family of dredged-up, man-made islands where condos sell for $14 million.
Despite being in the desert, Dubai is a sea of liquidity. It’s all about decadent riches in a tax-free haven.
Commodities Investing: Bigger Than Iraq
To put Dubai’s ambitions into perspective, the reconstruction of Iraq is pegged at about $53 billion. Dubai’s projects are expected to cost upwards of $100 billion.
The Persian Gulf's version of Disneyland, called Dubailand, dwarfs the country of Monaco. It should, with a price tag of $4.5 billion. Dubailand will employ 300,000 people and attract an estimated 15 million visitors.
Dubai’s new urban railway, with 37 stops, will soon begin construction. Dubai will build its own Silicon Oasis for computer companies to the tune of $1.7 billion. And a $6 billion mixed development called Dubai Waterfront / Arabian Canal will house more people than Paris
Visit Dubai and you’ll see the largest man-made harbor in the world. Dredged out of the desert sands in 1979, the 1.5-mile quays have been described as fading into the desert haze.
All of this major construction means increased competition for building materials, driving prices to unprecedented highs.
Commodities Investing: Cement
And this is where we discovered your commodity play. You see, the soaring demand for core construction materials, such as steel and cement, is literally climbing to the sky.
The United Arabs Emirates will see cement consumption almost double to 26.2 million tons per year by 2011, as the companies and governments pour their petrodollars into some of the biggest construction projects on the planet.
Today, the UAE has one of the world's highest per-capita cement consumption, approximately triple the world average. Cement prices have doubled between 2003 and 2006 -- with no end in sight to higher prices.
Commodities Investing: Up 31.5%
In December 2007, the combined nine-month net income of the top 10 cement makers in the UAE rose 31.5% to $1.18 billion from $897.9 million in 2006.
But now, a major shift in the balance of power in Persian Gulf cement has opened an easy-to-trade opportunity. Long term, this company could prove to be a great bargain at today’s prices.
The best way to cash in on this Persian Gulf commodity boom in cement is through the world’s biggest supplier, Lafarge (Paris: LG.PA).
Lafarge made a move to dominate this region through its $12.75 billion acquisition of Egypt’s Orascom Construction Industries, a cement giant of the region. On January 3, the Lafarge board approved the acquisition.
Commodities Investing: A Decisive Opportunity
According to Bruno Lafont, chairman and CEO of Lafarge, the Orascom deal “is a decisive opportunity to accelerate our profitable growth strategy in cement in emerging markets.”
Orascom is an emerging-markets cement leader with No. 1 positions in Egypt, Algeria, UAE and Iraq, and with strategic positions in other growth markets in the region: Saudi Arabia, Syria and Turkey. The company also has positions in several high-potential markets in Africa and Asia, including South Africa, Nigeria, Pakistan and North Korea.
Lafarge’s move into the Persian Gulf could reap hefty rewards. The company now expects sales growth of 30% and annual pretax earnings growth of 33% over the next three years.
Lafarge may still be considered a bargain for those of you investing in commodities. The acquisition of Orascom gives Lafarge the leading market position in this booming region. After all, if the billionaire sheiks are smart enough to invest trillions in anticipation of a world without oil, it may pay for you follow their lead.
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Originally published February 11, 2008.
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Copyright 2007-2008, The Taipan Publishing Group, Taipan Daily and Chart of the Day, 808 St. Paul St., Baltimore, MD 21202. All rights reserved. No part of this report may be reproduced or placed on any electronic medium without written permission from the publisher. Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed.