Invest in Urbanization
According to the United Nations, the global urban population will have increased by 50 percent between 1990 and 2010, and as the industrialization of the emerging markets continues, urban growth should remain vibrant. By 2030, 54 percent of Asia’s population is estimated be living in urban areas, according to the UN.
Given this great change, governments around the world have come around in understanding the importance of infrastructure and have been moving toward arranging financing for such projects.
Furthermore, growth in incomes is also allowing people to expect better infrastructure as one of the major ways that governments can help domestic economies to expand and realize their true potential.
Source: United Nations Development Programme, World Bank
The global economic crisis has led many governments to scrap some projects. But there are a few regions that do have the will and the financial strength to move ahead, in addition to the fact that a lot of developing economies can’t get to the next level of economic development without major infrastructure improvements.
Under current economic circumstances, China, Russia and the Middle East (mainly Saudi Arabia and Abu Dhabi) should be the frontrunners in spending. Saudi Arabia and Abu Dhabi are particularly important as they’re building new cities that will require considerable investment in primary infrastructure such as power plants and grids.
India and Brazil are also in need of infrastructure, but they simply have less money to spend at this juncture and more domestic political issues to overcome. As a result, around 70 percent of short-term infrastructure spending should be covered by China, the Middle East and Russia.
That said, China is at the forefront of infrastructure spending, with between USD500 billion and USD700 billion to be put to work in the next three years. Transportation (rail, ports, airports), water and power will be the main focal points of those efforts.
India has also big plans to spend on infrastructure; its economy is in dire need of it. The government has planned for more than USD200 billion for the next three years, but the current economic turmoil could hit the government’s ability to come through.
Nevertheless, even if spending slows down initially, the country’s economic potential will endure and projects will continue to come thorough even if at a slower pace. Transportation, energy and water are the sectors that have been identified as the most in need of upgrade.
And you should expect big projects to start taking place even in the US sometime next year, as the country’s infrastructure is aging embarrassingly fast.
According to the American Society of Civil Engineers, the US would need to invest USD1.6 trillion to restore failing infrastructure to “good condition.”
Consider that the US highway system represents less than 1 percent of the country’s total roads and handles around 25 percent of the country’s traffic.
The US highway capacity has increased just 7 percent since the early 1980s, while passenger miles traveled have increased by 50 percent since 1980, and truck usage has more than doubled. It’s estimated that truck tonnage will double by 2035, representing 80 percent of the country’s freight tonnage.
France-based Alstom (Paris: ALO, OTC: AOMFF) is one of the bigger beneficiaries of the world’s urbanization growth, as it’s one of the purest global infrastructure plays. The company focuses on two major types of project: railroads (33 percent of sales) and power plants (67 percent of sales).
Alstom builds and supplies parts for modern natural gas, coal, hydropower (No. 1 in the world) and even nuclear power plants (No. 1 in the world). In addition, Alstom performs maintenance and upgrades to existing facilities; this makes it a direct beneficiary of the desire to upgrade power-plant efficiency.
The company is also a world leader in urban transport and high-speed passenger train markets as well as signaling and the related infrastructure equipment and all associated services.
Looking a bit further into the future, Alstom is also working on several carbon capture and sequestration (CCS) demonstration projects worldwide, including a handful of projects in the US.
CCS is a technology for capturing carbon from power plant emissions and then permanently storing that carbon dioxide underground. This business is a natural fit for Alstom because it already has years of experience fitting scrubbers on coal-fired plants and building highly efficient coal facilities.
A very important feature for the company is that its backlog of unfinished orders is strong at around EUR40 billion (USD51 billion), equivalent to nearly 2.5 years of sales. The market obviously has ignored this big positive as every company involved in a growth sector has been violently sold during the recent selloff.
That said, orders should be more volatile next year as projects around the world are being scrutinized, given the slowdown in credit availability and the strong growth in the past couple of years.
The company is one of the better equipped to handle cyclicality as well as the current economic uncertainty. Alstom has a net cash position of EUR1.1 billion, which has led to talk of raising the dividends. The company will be reporting numbers later in the week, and there’s a possibility that management can reveal something on the subject.
Russia is one of the countries that will be able to carry out its infrastcture program, and Alstom is in a very good position to capitalize on the country’s great need for infrastructure improvement. The company has formed a strategic partnership with Transmashholding (TMH), Russia’s major supplier to the Russian rail transport operator RZD.
The purpose of the new joint venture (JV) is to try and obtain the contract for manufacturing 1,210 double-deck passenger cars. The new JV is only a first step in cooperation between both groups, as Alstom also announced in a press release its intention to jointly manufacture of freight and passenger locomotives.
This type of car has never before been manufactured in Russia. It consists of double-deck “hotel” cars equipped with every convenience–couchettes, restaurants, showers–for passenger travel over sometimes very long distances. If the TMH-Alstom JV wins the contract, these trains will most likely be manufactured in Russia’s Tver region, northwest of Moscow, and would connect the cities of Saint Petersburg, Moscow and Sochi at speed of up to 160 kilometers per hour.
Russia is, according to Alstom’s statements, a market with the potential for around 1,000 locomotives annually between now and 2030. Russia is expected to spend around USD85 billion in transportation related infrastructure projects in the next three years, while more than USD150 billion should be invested in energy-related projects.
As mentioned above, expect the Middle East to play a big role in new infrastructure projects, especially in electricity and water. Saudi Arabia is a good example as electricity demand is growing at around 7 percent per year.
Source: Saudi Electricity Company
In September Alstom signed a contract with Saudi Electricity Company to build the third phase of the Shoaiba power project, the largest oil-fired power plant in the Middle East; it’s located on the coast of the Red Sea, 100 kilometers south of Jeddah.
The new 1,200 megawatt (MW) steam power plant (worth EUR1.9 billion) will be constructed adjacent to the existing plant, which upon completion of the project, the Shoaiba power station will comprise 14 units of 400 MW each, with a gross total output of 5,600 MW.
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