Australia’s Great Barrier Reef is in the path of a “coal highway” to China that may see shipments jump 67 percent by 2016… [Today] 55 ships are waiting to load at Newcastle [shipping port] in Australia, up from 17 a year ago. – Bloomberg/BusinessWeek
Imagine thousands of ships passing back and forth along a narrow sea corridor or shipping lane, trying to hastily pick up and deliver commodities to various countries (and China in particular).
Facing deadlines, fines and traffic, as the captain of a ship you might feel compelled to take a shortcut to save time and money. That’s what happened when a Chinese coal and oil freighter, the Shen Neng 1, recently ran aground off the coast of Australia on the Great Barrier Reef.
An Ecological Disaster
Australia’s Great Barrier Reef is the world’s largest and most famous reef… and for Australians in particular it is major source of pride (and tourist revenue).
I love oceans and the wonders beneath the sea, but you won’t catch me scuba diving. (In fact, I’ve actually been rescued from the ocean by lifeguards twice in my life – once right in front of my home.) But, I clearly understand why much of Australia is in a hissy fit over their national, natural treasure being put at risk by all these ships cruising by.
The Chinese tanker was 12 kilometers off course, and was traveling at full speed trying to make up lost time, when it ran aground on the reef. The good (environmental) news is that only a few tons of oil have spilled out of roughly 1,000 tons of heavy fuel on board, along with 65,000 tons of coal.
Australian politicos and environmentalists are in an uproar. They are calling the shipwreck a “shot across the bow” and talking up how the situation is a “ticking environmental bomb” since over 10,000 passages a year are made in the area.
Focused on the Opportunity
Although I am a fan of the environment and ecology, I’m also a focused investor with the job of presenting interesting investment ideas to you. So with regards to investing, the story behind the story surrounds the increasing global demand, led by Chinese demand, for Australian commodities (energy in particular).
Australia is the world’s largest coal exporter, and is also a major iron ore exporter. It is a major supplier to Asian economies, especially to China (its largest merchandise export market at $43 billion in 2009).
Ten major ports are located on Australia’s Northeastern coast, where the Great Barrier Reef is located. There currently is a huge backlog of freighters sitting off the Australian coast, waiting to load up at the various major ports. Some ships have been waiting for a month or longer.
In 2010-11, export earnings for Australian mineral and energy commodities are forecasted to increase by 19% to A$154 billion, according to the Australian Bureau of Agriculture and Resource Economics.
What’s more, Rio Tinto, the major global mining and exploration company, continues to be optimistic about growth in that region:
The exponential growth of China’s demand for iron ore, copper, coal and aluminium is expected to continue over the next 15 years, as the average wealth of many millions of people increases. Their consumption of raw materials will rise accordingly. As China nears the top of the commodity intensity usage curve, India is expected to follow, supporting a further potential wave of strong commodity demand. – Rio Tinto CEO Tom Albanese
Finding a Way to Play It
So how can you take advantage of that?
While the mining and material stocks have been home runs for a while, the overall Chinese market has underperformed compared to the U.S. markets over the past year or so. Of course, over longer periods of time, China and other emerging markets have been great performers, especially compared to U.S. indexes. But there is trouble lurking in China’s stimulus-driven growth.
Shipping rates are up sharply, but the rapid fleet expansion should be a damper on earnings for the shipping lines.
One suggestion that is an indirect, and perhaps less risky, play on China and Asian economic growth would be to take a look at Australian companies leveraged to that demand.
Obviously, you have (Australian) mining and exploration companies. That cat is out of the bag – the stocks of those companies have done very well. But you also have Australian transporters such as shippers and railroads – as most of Australia’s resources are not located near the major ports.
Australia is rapidly trying to build up its ports, and the infrastructure supporting it, to meet this crazy demand and to free up the backlog of ships sitting off the coast. So how about finding a way to take advantage of Australia’s large need for infrastructure investment and its role as a leading commodities supplier?
Opportunities in Infrastructure
As an example, in my Safe Haven Investor newsletter, there is a portfolio stock that is exposed to increasing global shipping traffic and increasing demand for Australian-based commodities.
Brookfield Infrastructure Partners (BIP:NYSE) is a global infrastructure company with about a third of its profits coming from Australian assets.
Down under, it owns economic interests in the world’s largest coal export port (also near the Great Barrier Reef), rail shipping lines, and natural gas networks (among other infrastructure-based assets).
Brookfield Infrastructure Partners is cheap and has an attractive long-term outlook. It offers a 6.2% yield and has beaten the S&P 500 since being added to the Safe Haven Investor portfolio in January of 2009.
BIP is just one example (that I happen to like), but there are several other stocks out there that are leveraged to China’s impact on Australia, whether it be commodities, infrastructure or even tourism.
Keep an Eye on the Big Picture
But be careful, because I’m not sure you can be only bullish on China’s growth. While I’m excited about some of the indirect investment opportunities such as those tied to Australia’s shipping backlog and infrastructure needs, there are clear risks and bearish opportunities out there too.
In fact, I hope you’ve read Justice Litle’s piece, “
Gearing Up for the China Bubble,” in which he looks at bubbles and mania. I look forward to his “Big Dig” into China, as no one peels the research and analytical onion better. Maybe I’ll join him on that too.
But for now, look at my Australian opportunity as a timely follow-up to his piece. Australia is now, and will continue to be, a direct beneficiary of China’s increased role in global commodity demand and economic growth.
In other words, when you think about China, think about “who” and “where” else there might be winners and losers. And remember that while the Great Barrier Reef is a short-term casualty of global growth, we could be long-term winners by taking a closer look at some of the investment opportunities from “Down Under.”
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Serving as the editor of Taipan’s Safe Haven Investor, and contributing editor to the free e-letter, Taipan Daily, Kent Lucas has over 20 years of financial and business experience centered around seven years as a research analyst and portfolio manager for a leading investment management firm. In that capacity, he actively managed $1 billion worth of equity assets, with particular attention to multi-industrial companies along with auto, construction and farm equipment-related companies.
In addition to his professional asset management experience, Kent also has worked in leading financial institutions’ divisions including Tax-exempt Derivatives, Corporate Trust and Equities Sales and Trading. With a BA in Economics from Harvard University and MBA from Stanford University, Kent brings a fundamentally driven, value-oriented approach going against the crowd to find solid companies at attractive prices.
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