Traveling Notes from Chile, China and Dubai
Whether it's the LA-style traffic of Dubai filled with Porsches and BMWs or the stark contrasts between the development of Chile and China, Lawrence Roulston shares fascinating insights from his recent travels around the world.
The investing world is becoming ever more global. Hints of further trouble in Europe and a moderation of China's decade-long growth spurt saw North American markets take a beating. The early March pullback, in fact, was overdue as equity prices had been on a steady uptrend. The S&P 500 was still up 7% on the year.
Fear remains that the Greek debt situation will unwind the global financial markets. Only time will tell.
Markets also reacted to a forecast that Chinese growth will average 7.5% this year. That is still an impressive pace for the world's second largest economy, but slower than the 10% level that the country enjoyed for years. A "slow down" to only 7.5% growth has also dulled enthusiasm for metals.
Even if metal prices dip in the short term, there remains an intense need to continue to replace and expand metal production. The mining industry is in a better position now than it has ever been, with record profits leaving the industry with $100 billion of cash. The path to new mines leads through the junior markets.
I travel extensively, in large part to gain an understanding of what is happening in the world. In the last half of February, I was in South America, the Middle East and China. I was also in Toronto, at PDAC (the annual conference of the Prospectors and Developers Association of Canada).
By far the biggest gathering of mining industry professionals, PDAC this year is setting new records for attendance with people from every part of the planet doing deals and learning from one another.
This article includes notes from those various trips. My impressions include direct observations, discussions with investors and industry people as well as learning from the local media.
Investors react quickly to international news, but for many people, there still isn't a sound understanding of the global picture. It is increasingly vital to understand the global picture when making investment decisions.
Notes From Abroad
A visit to Santiago provided a mid-February break from northern hemisphere winter. The results of meetings with mining industry people will be detailed in future issues. Santiago is a lovely modern city in central Chile. While nestled against the Andes, the city is not far from the ocean and has a climate similar to Los Angeles. Chile is the world's biggest copper producer. With strong prices for the metal in recent years, the country and its capital are prospering.
Like much of the developing world, there is a big migration from the countryside to the cities. In spite of the general prosperity of Santiago, the new arrivals still make do with shacks in sprawling shantytowns. That situation is similar to most of Latin America and Africa. The sprawling shacks are in sharp contrast to China, where a massive building boom creates permanent living spaces. (In essence, the new high-rise condos are occupied by the emerging middle class, with people generally moving up, creating vacancies at the bottom end of the housing market for the new arrivals.)
Latin America has a lot of catching up to do. With firming commodity prices and a more stable global economy, further investment in the region will accelerate growth. Brazil captures the headlines as the biggest Latin American economy. Chile is one example of another part of the region that is also growing strongly.
In late-February, I participated in an investment conference in Abu Dhabi and stopped off for meetings in Dubai. Those two main cities in the United Arab Emirates are rapidly emerging as important financial centers for the Middle East and North Africa and are increasingly taking on a global perspective.
Sitting in traffic on the way to the Dubai airport at the end of that trip provided time to reflect on how dramatically the world has changed over the past few years. The 12 lanes of slow-moving traffic could easily be in Los Angeles or another North American city. One difference is that the cars are decidedly smaller. The cars are also generally newer and much higher quality than in North America. BMWs are the current choice for young Dubai professionals. Porsche fans can accommodate new families, with the Porsche Cayenne SUV much in evidence.
Downtown Dubai is dominated by the sleek Burj Kalifa. At 800 meters (2,625 feet), it is far higher than any other building in the world. The tower and the city suffered a serious set-back after the Global Financial Crisis. The tower is now complete and Dubai has bounced back from the 2008 slump and is rapidly emerging as the financial center of the region.
With the good hotels in the downtown area priced from $700 to over $2000 a night, I opted for the mid-range Sofitel Hotel in an outlying area, priced at only $400. It was worth the extra drive to see a whole new city emerging on the fringe of Dubai along the waterfront. Dozens of new hotels and countless high-rise condo complexes are crowded along a beach within easy commuting distance of the downtown core. The bars and sidewalk restaurants create a wonderful community feel to the neighborhood, even in the midst of the chaos of new construction.
Dubai has the world's longest driverless commuter train network, spanning 75 kilometers. Plans are underway to extend the line to the Academic City area, to tap into the 30,000-strong student community there. Consideration is also being given to linking Dubai and Abu Dhabi by commuter train.
The Dubai airport architecturally is one of the most striking in the world. Unfortunately, it is run by people whose management experience seems to have been restricted to herding sheep. At least that is the impression given to passengers who attempt to use the facility. In Dubai, after an hour and a half to get through customs and immigration, you can begin to look for a cab. The drive into downtown can add another hour if the traffic is bad. In Hong Kong, it takes just over an hour to get from on board an international flight into a downtown hotel. Arriving back in Vancouver, I was through customs and in my downtown office 45 minutes after leaving the airplane. Dubai, while modern in some ways, has some catching up to do.
Dubai is the city of newly-rich and wanna-be-rich. It is young, fast paced, glitzy and brash. An hour and a half drive takes you to Abu Dhabi. The wealth there is grander, but more sedate, more sophisticated. Abu Dhabi is the home base for the truly rich.
Dinner at the Emirate Palace Hotel was quite a remarkable experience. That $3 billion extravaganza attempts to capture the atmosphere of a Middle East royal palace. In fact, a portion of the hotel is designated for visiting heads of state - a guesthouse for the Emir if you will. The gilded ceilings are real gold, to give a sense of the grandeur of the place. A vending machine in the lobby issues gold in various sizes of wafers and bars. The main hotel building spans one kilometer.
The grounds occupy several square kilometers and feature a dozen fountains set in beautifully landscaped gardens. The property features 1.3 kilometers of white sandy beach.
To give an idea of the wealth, grandeur and vision of Abu Dhabi, the emirate is developing the Saadiyat Cultural District to become an internationally renowned arts hub. A display, including models, of the ongoing development revealed a truly remarkable collection of facilities - impressive for their bold architecture and the enormity of the overall concept.
The centerpiece will be the Zayed National Museum, designed around the vision of the late Sheikh Zayed and his belief that "The prosperity that we have witnessed has taught us to build our country with education and knowledge and nurture generations of educated men and women."
The Maritime Museum will celebrate Abu Dhabi's maritime heritage and explore the local population's long relationship with the sea.
The Performing Arts Centre will surely rank among the top facilities of this type in the world. The centre will house a music hall, concert hall, opera house, drama theatre and an experimental performance space. The stunning facility will arch across the water with lobbies integrate sea-views.
Abu Dhabi has teamed with the American Guggenheim Foundation to build a huge art gallery designed by renowned architect Frank Gehry. "The Guggenheim Abu Dhabi will be a pre-eminent platform for global contemporary art and culture that will present the most important artistic achievements of our time. Through its permanent collection, exhibitions, scholarly publications and educational programmes, the Guggenheim Abu Dhabi will promote a truly transnational perspective on art history."
The Louvre Abu Dhabi arose from collaboration between the governments of Abu Dhabi and France. "The items on display will originate from societies and cultures all over the world, but universal themes and common influences will be highlighted to illustrate similarities arising from shared human experience transcending geography, nationality and history."
Abu Dhabi's emerging cultural centre will rank among the top collections of art and culture anywhere on the planet. It is a remarkable combination of vision and wealth.
Back to the present: The conference was held at the Fairmont Bab al Bahr, on the outskirts of Abu Dhabi. My room had a gorgeous view across the water to the Sheik Zayed Grand Mosque. That recently constructed mosque can accommodate 40,000 worshipers.
The Fairmont chain includes the Grand Chateaux built by the Canadian Pacific Railway in the late 1800s which includes the Empress in Victoria, the Banff Springs Hotel and the Château Frontenac in Québec. The Fairmont hotel chain was a Canadian-owned company until its purchase by a Saudi company in 2006. The same Saudi group holds two other high-end hotel chains - Raffles and Swissotel. The proliferation of luxury hotels in the Middle East fits well with Saudi ownership of three top chains.
Real estate prices in Dubai and Abu Dhabi appear to have hit bottom. Residential prices in Dubai are down as much as 60% from the highs of 2008. There was a steady supply of new product coming on the market even during the slump. The supply is now being met by an influx of new residents, from the region and from other parts of the world. Unrest in parts of the Middle East and North Africa is leading some people to relocate to Dubai and Abu Dhabi, which are stable and well established. Middle East buyers are also big players in the London real estate market, representing 9% of the new-build sales last year, up from 5% in 2010.
The United Arab Emirates' banking sector faces new rules that limit interest and fees on consumer loans and credit cards, with a proposed cap on interest set at 15%. (Such rules would be welcome in the West!) New broadband cables throughout the Gulf region are being installed to increase speeds and reduce costs for Internet users.
The Dubai International Financial Centre, in spite of a couple of tough years, has reached near full occupancy. The huge office complex is referred to as the "Emirate investment market hub". Plans are underway to double the size of the complex over the next five years.
While the economy of the region has not fully recovered from the crash, it is rebounding strongly.
A quick stop in Beijing provided a glimpse of the Chinese situation. Growth in the latest quarter was 8.2%, down from the 8.9% in the previous period. The current forecast calls for expansion of 7.5%. The government is gently pressing on the accelerator to sustain that level. Last year, they were tapping the brakes over inflation concerns. China is by far the most important factor in iron and base metals and is vying with India for top spot in the gold market.
It is extremely heartening to note that the focus of this tranche of stimulus will be small business. The large companies, as in any economy, have more clout than small business and typically collect the government hand-outs. The 2008 stimulus program in China was heavily slanted toward the bigger entities. The stimulus worked well, but created some dislocation. The government has listened to economists, who have quantified the much greater benefits that come from supporting small businesses rather than the giants.
Following are some notes to help understand how far this country has come in the past decade, and the pace at which it is still evolving.
China plans to send three astronauts sometime between June and August on a spacecraft to board their orbiting space lab. They will stay on board for an unspecified time. The program is part of a larger program leading to construction of a Chinese space station by 2020. Two further launches are planned this year.
China is on track to become the biggest market for diamonds by 2016. China surpassed the US in 2008, but resurgence of American demand put China back into second place. India is right behind. China is expected to overtake India this year as the biggest market for gold as demand soars for both jewelry and bullion. China is expected to top 1 billion mobile phone subscriptions this year, with a steady trend toward higher-end phones.
Chinese vice president Xi Jinping has encouraged the US administration to overcome the Chinese-US trade deficit by increasing US exports to China, rather than restricting Chinese imports. American technology exports to China are restricted by decade-old rules. The Chinese consumer market is developing rapidly, providing opportunities for American business.
The Chinese mining industry is looking to acquire further base metal producers and development projects. So far, the acquisition binge has been directed to producers and projects at the feasibility level. They are beginning to look at earlier stage projects where they can acquire a stake at a fraction of the price of the more mature projects.
Most of us grew up with the center of the universe firmly fixed in either Europe or North America, depending on one's perspective. The world has changed dramatically in the past decade. It has changed much, much more than most people in Europe or North America can begin to comprehend.
As Europe and North America muddle along, attempting to prop up struggling economies, Asia and the Middle East and other regions are getting wealthier by the hour. That wealth supports an escalating amount of clout, power and influence.
It is increasingly important for investors to take a global outlook, especially when looking at global products like resources. While the Western media is obsessed with European debt, the mining industry is seeking ways to build production. They have the dual challenges of replacing depleted mines and at the same time keeping up with growth in demand, driven largely by the emerging economies. The producing mining companies have been buying the juniors, and they will buy more juniors in the coming months.
Share prices have slumped in reaction to this week's headlines. That hasn't changed the longer term outlook.
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