Infrastructure boom 0 comments

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This is not just a knee-jerk post after seeing the damage that Katrina has caused in the US. The infrastructure boom I am talking about is geographically different; it is in Asia, it is happening now, and it is likely to be a long-term trend going into the medium term.

Those investing in the stock market would not have failed to notice this trend. Most obvious of course is the offshore infrastructure segment, which of course has a lot to do with high oil prices. We have seen the rise of the water plays like Hyflux and recently Biotreat, both beneficiaries of governmental drives to improve the supply of a key necessity to their large populations. Inter-Roller has benefited tremendously from the sudden rush of contracts from various airports to expand their baggage handling capacity. Utilities are enjoying a tailwind due to high energy demand -- just look at China and their annual summer power shortage in the big cities like Shanghai. And telco infrastructure providers are starting to come out of the doldrums, due to the growing need by the developing economies to connect their populations.

This trend is not difficult to foresee. Firstly, it's a case of supply catching up to meet demand. The global economy has been on an uptrend since 2003, and both an increase in income (growing global GDP) and an increased willingness to spend it (better consumer sentiment) has led to steady growth in spending these two years. Certain industries have been quick to adjust, such as electronics industries which can usually ramp up production by adding more lines. However, heavy industries typically need longer lead times to increase production, and a supply crunch results leading to a sudden need to invest huge amounts to increase supply. The best example is of course the refining industry, an issue which has come to the fore after the Katrina hurricane.

Secondly, that China and India are probably the two most rapidly growing economies is a happy trend for providers of land-based infrastructure, such as roads, power and communications. The two countries are geographically huge, and as their economy grows they will be inclined to spend large proportions of their GDP on improving the standards of living and connectivity of their populations. In particular, China's government is committed to reducing economic disparity between the rich eastern coastal regions and the western interior; I can foresee heavy funding for infrastructural development of the interior for many years to come.

What does all this mean? It means bumper contracts are in the pipeline for many years to come for engineering companies with the right credentials and connections. Just look at Halliburton and how it has secured rebuilding contracts with its connections to the US government, for example. And closer to home, one can look at KS Tech and Hyflux and how they have expanded operations overseas successfully with the probably strong help of Temasek Holdings, a substantial shareholder in each case.