Monday, January 21, 2008

A Tour Through the Middle East...

While we wring our collective hands about how the infrastructure companies are going to lose all their business as crude drops from $100 to $75, and projects will be cancelled due to their rich customers actually giving a rat's behind if crude is $100 or $75 let's take a look at reality. I noticed a story in the NY Times this weekend on Saudi Arabia - so I'd like to overlay that with just a snapshot of what is going on in some of the other countries in this part of the world - the Kuwaits, the Oman's, the Abu Dhabi's, the Qatar's....

... because perhaps I think most of us still are very inward looking as Americans and do not realize what is truly going on in this globe. I keep returning to the theme of this transfer of wealth - each day we become more of a debtor nation and our wealth is being transferred out. Only to return to buy our assets from beneath us (and not just banks). If not with imports (to Asia) than with the "great tax" that is petrol. A "tax" on all of us, and our country as a whole. Instead of devoting resources to stop taxing ourselves, we just give lip service or misguided pushes into corn ethanol of all things. We just don't seem too worried about it, because it's a creeping problem - it's incremental, like erosion (or inflation). I would like to highlight we are in a global economic 'competition', but there seems to be very little awareness of this from 'leadership'. Thankfully, we have some of the most financially innovative institutions to lead us through this.... errr, wait. Never mind that. But that's neither here nor there as an investor; I'll let others argue about the implications - I have my views, but I am just trying to make money off the trends. But I do have to say, it is interesting to see an over reaching national vision proposed by many of these "3rd world" countries 'leadership' - something we used to do here... but I guess you need money to do any large scale projects; along with a government that can actually pass something useful and not only in self interest.

Now as with all good booms (as we see in Asia and the Middle East) there is no clean situation - there will be intermittent booms and mini-busts, but I am speaking to the greater long term trend here. Specific to the Middle East, it appears this go around, as opposed to the 70s, the countries realize that their oil reserves are not unlimited and this time they are reinvesting the monies in ways that can leverage today's riches into future rewards. Maybe they'll succeed, maybe they won't, but they seem intent on trying. A very key point, and why I think the global engineering/infrastructure bull market is here to stay for a long time (again with mini busts along the way as things get overheated from time to time).

So we start in Saudi Arabia (above picture is the new King Abdullah Economic City proposal)
  • Amid a forest of cranes, towers and beams rising from the desert, more than 38,000 workers from China, India, Turkey and beyond have been toiling for two years in unforgiving conditions — often in temperatures exceeding 100 degrees — to complete one of the world’s largest petrochemical plants in record time.
  • By the end of the year, this massive city of steel at the edge of the Red Sea will take its place as a cog of globalization: plastics produced here will be used to make televisions in Japan, cellphones in China and thousands of other products to be sold in the United States and Europe. Construction costs at the plant, which spreads over eight square miles, have doubled to $10 billion because of shortages in materials and labor. The amount of steel being used is 10 times the weight of the Eiffel Tower.
  • “I’ve worked on many big things in my life, but I’ve never worked on anything this big,” an American project manager mused during a bus tour of the project, called Petro Rabigh, a joint venture of the state-run oil company Saudi Aramco and Sumitomo Chemical of Japan.
  • Size isn’t the only consideration. The project is Saudi Arabia’s boldest bet yet that this oil-rich kingdom can transform itself into an industrial powerhouse. The plant is part of a $500 billion investment program to build new cities, create millions of jobs and diversify the economy away from petroleum exports over the next two decades.
  • “The Saudi economy was in idle mode for 20 years,” said John Sfakianakis, the chief economist at SABB, formerly known as the Saudi British Bank, who is based in Riyadh, the Saudi capital. “Today, the feeling here is, ‘We’ve won the lottery; let’s not waste it.’ ”
  • The kingdom’s lofty economic goals would have been unthinkable without the surge in energy prices that has filled the coffers of oil producers. Oil prices have quadrupled since 2002 and reached $100 a barrel in New York this month.
  • Persian Gulf countries earned $1.5 trillion in oil revenue from 2002 to 2006, twice as much as in the previous five-year period, according to the Institute of International Finance, a global association of banks that is based in Washington. As the top exporter, Saudi Arabia has been the main beneficiary.
  • Despite all the recent headlines about Middle East investors bailing out troubled American banks like Citigroup, a growing share of today’s petrodollars are staying at home to finance megaprojects like Petro Rabigh, analysts say. That money is financing the biggest economic boom in a generation, helping to build not only the high-rises of Dubai, where the world’s tallest tower is going up, but also telecommunications networks, roads and universities throughout the Middle East.
  • Abu Dhabi is planning to spend close to $1 billion for a new museum with the help of the Louvre, in Paris. Dubai’s latest grandiose idea is to build a small-scale replica of the French city of Lyon, complete with residential housing, a museum, a culinary school and a soccer club.
  • In Saudi Arabia, Riyadh looks like a boom town: sprawling over 40 miles, it is teeming with shopping malls, electronics stores and luxury boutiques. But while times are good today, many Saudis realize that their country is locked in a race against time to create industries that produce more than just oil in order to keep a young and growing population employed.
  • TO be sure, the region’s economies are too small to absorb all the oil riches on their own. Too much money is chasing too few assets, analysts say, forcing oil producers to invest some of their revenue abroad and diversify their holdings, either through opaque state-owned investment funds or through direct private investments.
  • Last year, for example, a fund controlled by the government of Abu Dhabi bought a stake in Citigroup for $7.5 billion, while another run by Dubai’s ruler bought a large share in Sony, the Japanese consumer electronics giant. Sabic, a major Saudi petrochemical company, bought the plastics division of General Electric for $11.6 billion, and the Kuwait Petroleum Corporation bought half of Dow Chemical’s commodity-plastics unit for $9.5 billion.
  • The current level of oil prices has given the country’s industrialization strategy a new spring, allowing the government to improve its finances while investing in large infrastructure projects. The Saudi G.D.P. has doubled in the last five years. Not counting oil, economic growth has been 4 percent to 6 percent a year since 2002.
  • The financial turnaround has been spectacular. In 1999, the Saudi government’s debt amounted to 120 percent of G.D.P. That number has dropped to less than 20 percent as the government paid back its obligations and put its finances in order.
  • Last year, the government recorded a budget surplus of $48 billion, five times the surplus of 2003. (a government that runs surpluses for half a decade? Interesting concept) This year, it has built its biggest budget to date around a conservative estimate of oil prices of $45 a barrel; that will almost certainly yield a substantial surplus at the end of the year.
  • One of the most noticeable illustrations of the industrialization push is a plan championed by King Abdullah, the 83-year-old Saudi monarch, to build six new cities throughout the country — including the King Abdullah Economic City on the western coast, near the city of Rabigh; the Knowledge Economic City, near Medina; and the Prince Abdulaziz bin Mousaed Economic City, in the north. (And surely they will get cancelled the minute crude drops below $66.50, right? That's what the analysts tell me - and Barron's!)
  • The intent is to create industrial centers that double as housing and commercial hubs for the country’s young and growing population. The Saudi Arabian General Investment Authority, a government agency, expects these cities to add $150 billion to the country’s G.D.P. by 2020, create one million new jobs and be home to as many as five million people.
  • According to SABB, these cities together will have four times the geographical area of Hong Kong, three times the population of Dubai, and an economic output equal to Singapore’s. Other plans include building four refineries, two petrochemical plants and a modern graduate-level university with an endowment of $10 billion. (that's not what Barron's know the story, US recession, leads to China recession, leads to India recession, and next think you know, crude is $38 and the best laid plans....)
  • THE frenzied growth of the economy has had some serious downsides. Inflation has been rampant in the last year; food prices and rents have risen sharply. Traffic jams in Riyadh and other Saudi cities have become a constant affliction, while real estate values have soared and the construction sector is strained by a lack of workers. (boy sounds familiar; a lot like China without 1/100th the hype - those darn downsides of rampant money creation)
So folks, yes we might get a slowdown in backlog... a quarter here or two in the infrastructure names, and of course the bears will tell you "I told you so"... it's over, its just a cyclical stage and it's coming to an end. And when you hear that, and the stock dips 20% for no good reason, just remember articles like this... and remember this is one of many countries in the region in the same spot. Want to see what you do when you are just loaded with silly money that the rest of the world sends to you because you are sitting on vast quantities of dead dinosaurs?

Well you could dredge up land yourself, and create your own surface area right out of the ocean - to extend your territory. And make it in very cool shapes. For example:
  1. Want to create 3 Palm shaped islands out of the clear blue ocean? Yes you can, when your filthy rich and bringing in billions a week. Meet the "Palm Islands". Thanks Dubai!
  2. Or, how about an entire ecosystem of islands that are shaped to look like a topographic map of the globe? And you'd call it 'The World'. Fun slideshow here - looks like a fun place to visit... or live. Thanks again Dubai!

Or maybe have a forward vision - so out of the box - how about a plan for the first carbon neutral, car free city on Earth? Sounds cool right GWB? Those darn "green" Sheiks. Always focused on the environment. GWB seems to think so, but then again as of 3 years ago global warming was just a myth so probably he wonders what the fuss is all about... :) But at least he got to see the fuss first hand. How convoluted eh? The biggest producers of product that create the problem are planning already for the green movement. But then again so are we - corn ethanol baby!
  • President George W. Bush today saw a model of Masdar City - the world's first zero carbon, zero waste, car free city. Plans call for the green, sustainable city to open by 2009 in the desert sands of this federation of Gulf states that have built their wealth on oil and natural gas.
  • "I appreciate the commitment to conservation and to the environment, and the leadership you've shown here," the president said before leaving for Dubai and Saudi Arabia on the last leg of his Middle East visit that began January 9 in Israel.
  • The electricity for the six square kilometer Masdar City will be generated by photovoltaic panels, while cooling will be provided with concentrated solar power.
  • Drinking water will be provided through a solar-powered desalination plant. Landscaping within the city and crops grown outside the city will be irrigated with grey water and treated waste water produced by the city's water treatment plant.
  • Sustainable food will be plentiful in Masdar City and retail outlets will meet targets for supplying organic food and sustainable and or fair trade products. The sustainable water target specifies that per capita water consumption will be at least 50 percent less than the national average and all waste water will be re-used.
Well I guess when you have trade surpluses, and a lot of money to blow on crazy ideas you can try such things. I don't understand why GW did not just bring a stalk of corn to Abu Dhabi and say "look you guys are really complicating everything, it really is as simple as corn - it solves everything."

Enough political talk - as I keep saying, its an absence of leadership from both sides of the aisle. Anyhow I now await the analysts finding some absence in growth in some key metric somewhere in each infrastructure company and telling us how with slowing world growth, oil is going to $40 and clearly every major project that has been years in the planning is going to be thrown out the window. Again, their problem is they think like budget constrained, deficit loving Americans... not thinking like the rich (and growing richer by the hour) wealthy in this world.

Long infrastructure stocks, even after the analysts tell us the game is up in a few more quarters, and watching "savvy" investors nod their head in unison like sheep. Yes subprime woes & credit woes will be stopping projects worldwide.... obviously a direct correlation. Even though the capital to prop up our financial system is coming from.... well... we need to make a sky is falling in the Middle East scenario somehow.

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