On Aug. 1, 2007, in the heart of rush-hour traffic, the 64-foot I-35W River Bridge in Minnesota suddenly and dramatically collapsed. Whole sections of concrete slabs and twisted metal fell into the swift waters of the Mississippi. Tragic photographs and video show a school bus just a few feet from a break in the bridge that would have taken the lives of 50 children returning from the Waite House Neighborhood Center Day Camp.
The collapse did take the lives of 13 people, and searchers spent days looking for missing people. Cars were trapped under the mangled wreckage of the bridge, and in the strong currents of the Mississippi River, the treacherous water was choked with debris.
In Maryland, on Dec. 23, 2008, at 8 a.m., a 66-inch water main broke and sent a 5-foot wall of water rushing down the ironically named River Road, trapping 15 people in their cars.
Helicopters were sent to rescue the stranded motorists, whose cars were being pushed down the road in the torrent. More than 135 gallons of water per minute was pouring out of the break…
These incidents aren’t unique, and can happen in any state in the nation.
Is Your State Safe?
The U.S. Department of Transportation’s Federal Highway Administration listed 73,764 bridges as structurally deficient in 2006, with four states showing greater than 20% of their bridges as structurally deficient:
Rhode Island: 25.37%
Each and every state has bridges listed as structurally deficient, and these episodes will serve to highlight the growing neglect of our nation’s infrastructure.
Our water system? That water main in Maryland was installed in 1964 – 45 years ago… In fact, this wasn’t the first time that the system had a problem. In 2007, there were 2,129 recorded leaks. In 2008, more than 1,357. All of our infrastructure is just as bad as the bridges and water systems, but we haven’t yet seen a large amount of money poured into fixing the problem.
The American Society of Civil Engineers estimates that we may need $1.6 trillion over the next five years to repair and restore the nation’s infrastructure. That’s not including new projects… That’s just making current infrastructure work.
Now, $1.6 trillion is more than double what President Obama has planned for the full stimulus package, but here’s what he’s focused on:
NPR reported, “Every $1 billion the federal government commits to roads, bridges and other infrastructure helps to support some 35,000 jobs.”
One idea that Obama has put forward is a National Infrastructure Reinvestment Bank that will disperse $60 billion over 10 years for highways and other infrastructure projects. And don’t forget the $150 billion over 10 years for alternative energy investment projects. Efficiency is a key factor in that plan, and transmission updates and power plant overhauls are sure to be on the list to get funds.
With Obama’s stimulus package estimated to cost more than $700 billion, investors are getting excited about what could be the Infrastructure Boom of 2009.
Folks are already starting to sift through the beaten-down companies that will see a boost from President Obama’s plan. That means we should be looking at two things: cement and steel.
Interestingly, 81% of the U.S. cement market is met by foreign companies. The three main companies are France’s Lafarge SA (LG:Paris), Holcim, Ltd. (HIM:London) out of Switzerland and Cemex SAB (CX) from Mexico. Each holds about 13% of the U.S. market.
Let’s take a closer look at Cemex.
Discounts South of the Border
Here are the bare numbers:
Annual production capacity of more than 96 million metric tons of cement
Annual production levels of more than 80 million cubic meters of ready-mix concrete and more than 222 million metric tons of aggregates
67 cement plants, more than 2,360 ready-mix concrete facilities, and a minority participation in 18 cement plants
564 aggregate quarries, 274 land-distribution centers and 97 marine terminals
I won’t try to cover up what’s been happening with Cemex here in the U.S. Its fourth-quarter numbers are pretty hard to ignore. The company announced a 25%, 39% and 43% drop in operations in the U.S. for cement, ready-mix and aggregates volumes. For the full year 2008, cement volumes are expected to decrease by about 14%, ready-mix volumes are expected to decrease by about 13%, and aggregates volumes are expected to decrease by about 3% versus the same period in 2007.
Here’s what Cemex has to say about Obama’s infrastructure plan:
Momentum is building for a major fiscal stimulus package to create new jobs in the U.S. economy, which would include substantial funding for public works construction. President Barack Obama is working with Congressional leaders on an economic recovery program that would include the largest public works funding program since the creation of the interstate highway system over 50 years ago. We are cautiously optimistic about these developments, especially in view of the fact that public works construction, particularly for highways and bridges, is substantially more cement and aggregate intensive than other types of construction activity.
Most recently, the company announced it received approval of a debt-refinancing deal from the banks. This news caused Credit Suisse to upgrade the stock from “underperform” to “neutral.”
With the positive atmosphere here in the States for a stimulus plan, Cemex has turned a corner. Since hitting a low of $4.01 on Nov. 21, 2008, the stock has rebounded strongly, and traded as high as $10.11 on the first trading day in 2009 – a gain of 152%!
This could be the beginning of a great comeback for the stock. It traded as high as $32.61 in 2008, and could reach $18.50 by the end of the year, as this infrastructure boom really heats up.
But cement isn’t the only commodity that could be jump-started by Obama’s Recovery and Reinvestment Plan.
Reinforcing the Trend
Bridges make up about 5% of U.S. steel demand, or about 7 million tons. That percentage was consistently growing prior to the economic belly flop in 2008. So with any significant push to update and improve existing bridges, steel demand could get back on track.
It wasn’t that long ago that nearly every commodities blog was touting the rise of steel. Over the past 10 years, steel demand was growing at an annual rate of 6%. International companies were raising prices by the month for consumers greedy to fuel their industrial growth. Now, demand is at a 26-year low.
Here’s the prognosis, from the Financial Times: “Global steel production could easily plunge by 10 per cent or more next year.”
But an interesting blog paints a different picture. Tony Taccone, a consultant to steel companies with 20 years under his belt has this to say:
While these projections may prove to be right, they seem overly pessimistic to me. First of all, the latest forecast of global economic prospects published by the World Bank, and discussed by James in a recent post, calls for the world economy to grow by 1.9% (PPP basis) in 2009. As I’ve argued in the past, there is a correlation between global GDP growth and the change in steel demand. If we plug 1.9% GDP growth into the model, the predicted decline in steel production for 2009 is -3% not -10%... Don’t forget that developing economies, which now account for close to 50% of global GDP and whose demand for steel typically grows faster than GDP, are still projected to grow 4.5% next year. They have been driving the global growth in steel production and will continue to do so in 2009.
The gist? An infrastructure boom beginning here in the U.S. with Obama’s Recovery and Reinvestment Plan will begin to put steel back on the right track.
We’ve already seen a bit of a turnaround in some steel companies, most notably with Nucor (NUE).
In a bit of a surprise move back on Jan. 6, 2009, one analyst downgraded Nucor from “buy” to “neutral” citing limited upside potential because of “relative outperformance” of its peers.
Let’s take a closer look at this steel producer.
Sales and earnings increased in the third quarter to $7.45 billion and $1.18 billion respectively. These numbers have been steadily increasing over 2008. Now, Nucor has said it expects its fourth quarter to be much tighter, so we have fair warning of some contraction.
But the relative outperformance comes from Nucor’s break away from the rest of the industry.
Back in October 2008, companies like U.S. Steel (X), Arcelor Mittal (MT), and AK Steel (AKS), along with Nucor were showing a share price loss of about 30% on the year.
But unlike the others, who continued falling (AKS dropping more than 80%), Nucor stabilized. On the year, Nucor is down only about 13%. The others are still down between 55% and 65%.
The company still has a ways to go before it re-establishes its former long-term uptrend, though. And a rise back to those levels could put Nucor back at $60. From its low of $25.25 back on Nov. 20, the stock has already climbed 74.9%. Another 50% could be in the works for 2009.
As good as these gains may prove to be, one of the simplest ways to play the coming Infrastructure Boom of 2009 is with a broad net method.
I’m talking about an infrastructure ETF. These guys have been pummeled lately. Just listen to these losses, as reported by MarketWatch.com: “Losses among ETFs included a 32% decline by the SPDR FTSE/Macquarie Global Infrastructure 100 ETF (GII) and a drop of 39% by the iShares S&P Global Infrastructure Index Fund (IGF).”
Playing the Field
But here’s the thing. All that private capital that made the companies in these ETFs tick dried up with the economic crisis. That’s the cause of these major drops.
So what happens when countries start injecting government cash into big infrastructure projects? The rising tide lifts all ships. The equipment makers, the engineers, the materials producers all benefit from global stimulus packages.
Why not play the field with a global infrastructure ETF?
Every analyst (and their mama) is talking about infrastructure being a mega-trend in 2009, and it won’t end with the U.S. stimulus package. China implemented a nearly $600 billion stimulus package back in November, and you know that country will do everything in its power to keep growing.
One of the most diverse is the iShares S&P Global Infrastructure Index Fund (IGF), with holdings in 22 different countries, though heavily weighted (26.46%) to U.S. companies.
Everything from energy pipelines, to water, to transmission cables, you name it, it’s in the fund… And at a discount!
The IGF has been knocked down some 40% in this economic crisis. But a global infrastructure boom, stimulated by government intervention in the U.S. and China could help the fund begin to turn around.
A rise back to before the mayhem would put the IGF up at $48, a gain of 65.9%.
Not bad for playing the field.
Obama’s Recovery and Reinvestment Plan
President Obama’s recovery plan could very well spark an Infrastructure Investment Boom in 2009.
With $700 billion out on the table for recovery, infrastructure is high on the list of job-creating initiatives. As we’ve noted before, NPR reported that every $1 billion invested in infrastructure has the potential to create 35,000 new jobs.
That kind of optimism is just what the private sector is looking for before it begins to pump its own money back into the system.
And, the idea that Obama may create a National Infrastructure Reinvestment Bank to disperse $60 billion over 10 years for highways and other infrastructure projects is extremely promising to companies like Cemex and Nucor.
And don’t forget the $150 billion over 10 years for alternative energy investment projects Obama’s got planned.
In all, this type of government intervention will be both well-received and used well. More than 70% of people in one poll said they approved of a $700 billion stimulus plan. And the companies in this report will certainly have no objection to a package that could have their share prices rising 50%, 65% or 80% over the next boom.
Investors won’t be complaining either.
Senior Research Director
Taipan Publishing Group