The economic center of gravity will not always reside in the United States. In fact, it's already in the process of shifting from the US to Asia and the Middle East. Forward-looking investors cannot afford to ignore this trend.
One of my favorite ways to invest in the rapidly growing emerging markets is through the back door, so to speak. Invest in companies, wherever they are, that have what these economies need or want, but don't have. Airliner production is a classic example.
I bet most Americans would be surprised to learn, for example, that the Middle East is a very important market for new jets. The Gulf's leading airlines - Emirates (out of Dubai), Etihad (out of Abu Dhabi) and Qatar Airways have become big reasons why Boeing and Airbus make any money. "The Middle East is still the hub of aviation growth," says Airbus CEO, Tom Enders.
According to informed guesses, the Middle East will buy 1,400-1,700 planes over the next twenty years, at a cost of $240-300 billion. These planes will support passenger growth of nearly 5% annually over that timeframe. Many other developing nations around the globe are also becoming active buyers of passenger jets. Airbus just signed a $1.8 billion deal with Vietnam Airlines for four A380 super-jumbos and two A350s. Ethiopian Airlines recently put in an order for 12 A350s, at a cost of $3 billion. These are just two examples.
The Asia-Pacific region, despite the impressive growth out of the Middle East, is still the largest buyer of aircraft. Over the next 20 years, for instance, the Asia-Pacific region will require close to 9,000 planes, at a cost of over $1 trillion.
I've focused mostly on civil aviation. But there is also defense spending. In the Middle East, defense spending will probably rise to more than $100 billion by 2014, from only $36 billion now, according to a new study by consultancy Frost & Sullivan. That's why Lockheed Martin recently announced it would double its capacity to produce the C-130 Super Hercules - because of increased demand from the Middle East.
Also, I can't end without saying a word about the world's urge to lower carbon emissions. The industry has pledged to cut its carbon emissions in half by 2050 - an effort that will require new planes with lighter material, different design and innovative engines.
Despite all the good news on the aviation front, there is a fly in the soup that Boeing and Airbus will have to fish out before long: They are having a hard time making the planes on time. This is a rather fascinating subject on its own, given the history of aviation. In 1944, for example, Boeing used to crank out 16 B-17 bombers every 24 hours. Today, it's having a hard time producing one of its ballyhooed Dreamliners after more than two years of trying. Airbus has had its share of delays as well.
Eventually, they'll sort it out. Eventually, they will build the new planes. There are lots of ways to play on these ideas as an investor, as these new planes ripple through the supply chain.
My favorites are the titanium producers. Titanium is a lightweight metal. In fact, it has the highest strength-to-weight ratio of any metal, making it ideal for aircraft. The newer planes are titanium intensive, more so than in the past.
Our play here is Titanium Metals (NYSE:TIE), the second-largest producer of titanium in the world. It has a solid financial position with lots of cash and no debt. It's stayed profitable, even through the slump. And Wall Street doesn't expect much from it, as analysts rate the stock as a poor performer. The potential upside when it comes makes it worth hanging onto. In TIE's heyday back in 2006, it was a $40 stock. Today, it's about $13. All cycles turn, remember. And this one will, too. The company only recently signed a new agreement with Boeing that will keep it as a key supplier through 2015.
Titanium Metals has the potential to be a big winner once the aviation cycle gets in full swing again.
Regards,
Chris Mayer
for The Daily Reckoning Australia
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About the Author
Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer's essays have appeared in a wide variety of publications, from the Mises.org Daily Article series to here in The Daily Reckoning. He is the editor of Mayer's Special Situations and Capital and Crisis - formerly the Fleet Street Letter.
Comment by Ross on 9 March 2010:
Sometimes following the threads of investment you can trip over significant world views. Futurologists usually fail so you have to be good to win.
Below link is GS vs Buffet. A clash of world views. Buffet saying economic activity will remain high but oil will go higher bringing railroads into play (notice too Elphinstone's offer for CXG that I mentioned recently). GS however are "saying" they think oil will remain cheap and to buy air freight carriers (believing v saying somtimes being different).
http://www.fool.com/investing/general/2010/03/08/clash-of-the-titans-buffett-vs-goldman-sachs.aspx
But those knowing their stuff, you will find that UPS is one of the largest users of rail in the US and that most of their ground package deliveries destined outside an immediate delivery area moves on rail(perhaps the largest non commodity based user). And their neutral position on Fedex might be because they are more air biased than UPS who are ground biased.
Now to get back to Chris's article. UPS cancelled all their A380F orders and have retired all their old DC8's (about 60 of them by memory). They are furloughing pilots. Both UPS and Fedex suffer internationally in the air freight business due to their higher costs which are in turn driven by schedule inflexibility (maybe up to 50% more expensive before being offset by higher express cargo revenues).
And in freight what is the trend, well the switch from air to ground domestically and from air to ocean internationally is a massive trend. And how does this affect new orders for planes? Well it changes the cost paradigm when a passenger carrier looks to buy new planes because the freight business is doing less conversions of old passenger planes and hence used plane prices contract.
And on military airframes? Look at the costs per unit. The trend is less frames but higher costs. And do you think the US won't be forced to shrink its no. of airframes from the Reagan-Bush years. In part these past wars have been about running the service life down on excess assets to give them an excuse to retire them (all except the B52 that is which they want to make last a millenia).
So a long way before saying carefull on that titanium investment, but maybe their is more legs in other precious metals used in things like anti pollution gear and mobile technology. Those where world supply is dominated by China, well except for some choice deposits close to camp bondsteel in Kosovo, and some here that China has already bought into and controls the viability through its domination of world prices.
Comment by Biker Pete on 9 March 2010:
Admit I'm often left breathless by the scope of your vision, Ross. Your posts leave me thinking about the possible implications for days later... .
Comment by Ross on 9 March 2010:
BP, I am in awe of the theologians & the classical philosphers that they adapted. I don't have the capability to contribute at their level but am looking for methods of accessing clearer secular world views. Following the trail of cheap penny lane tunes, be it the narrative of war, or of the bankster, or the politico gangsters has revealed fertile ground. Same story as scientific inquiry ... identify it and then ask why and enjoy the ride but (unlike the scientist) without pretending you can signifcantly alter the human or natural condition. cheers
Comment by Unpopular Truth on 9 March 2010:
Ross, your point is very valid about plane usage in the USA, but the original article talks primarily about growth in non USA areas of 'airframes' as you put it. I don't see the number of planes being used militarily dropping off either, either US or Worldwide.
Your points would be very valid for a domestic only producer of airplanes, but when we're talking only the usage of titanium, the middle east, south east asia, and likely africa in 50 years or so, will need all that raw material to get more tin cans in the skies.
Comment by Ross on 9 March 2010:
Unpopular truth, long term you might be proved correct. In the immediate the negative effect is pronounced.
Aircraft manufacturer market forecasting is eternally optimistic and has always proved radically wrong, even in boom times. Last year passenger traffic was down 2% off a bad year earlier, Airbus needs 4.6% annual average over 20 years to make their passenger plane projection numbers work and increased scrapping and younger fleets.
Airbus last year came out with the big 5.7% average growth forecast in freight tonne km for the next 20 years. This was the justification for the headline +3,440 freighters over that period. But only 850 of those were new aircraft, with the remainder converted from passenger aircraft.
But the reality at the time the numbers were developed was :
http://www.aircargoworld.com/Resources/Archive-2009/June-2009/Cargo-Market-Soft-To-2011-Says-IATA
IATA usually talk things up and although there has been some recovery it is still small and patchy by region. In EU there is no recovery and they may as well hand what is left to the trucks rather than losing even more money keeping the few freighters flying regionally.
And I can say to you that the international express business is losing share and they have been the ones subsidising and buying new planes for the decade up to 2 years ago. Just like in domestic and post international shippers, when hit with recession, have finally rationalised after going looking for enterprise cost savings and what they have cut will never come back to the market. The document shipment is going the way of the telegram and the speed-price paradigm or transport vs warehouse paradigm has changed in such measure that they are even slowing service speeds in the ocean liners carrying containers.
Another effect to consider is this http://en.wikipedia.org/wiki/PAMELA_Project