India Is Building. Who Supplies the Raw Materials?
There is a figure that few people know, but that is remarkably telling for long-term investors in commodities. India currently consumes around ninety kilograms of steel per inhabitant per year. The United States consumes around two hundred and eighty kilograms. The difference between those two numbers, multiplied by more than 1.4 billion Indian inhabitants, gives an impression of the scale of structural steel demand still waiting to be met in the decades ahead.
India is not an abstract investment theme. It is a country carrying out, right now, the largest infrastructure catch-up in the world. New railway lines, metro networks, highways, ports, airports, housing developments and industrial parks are rising at a pace that would have been unthinkable twenty years ago. Every one of those projects requires steel. And steel requires raw materials.
What urbanisation actually requires
When an economy urbanises, demand for materials changes fundamentally. In rural areas, people live in relatively simple structures with limited infrastructure needs. In the city, multi-storey buildings, asphalt, concrete foundations, steel load-bearing structures, electricity networks, water mains and sewerage systems are all needed. All of that infrastructure contains metals, and steel is the most widely used of them.
India's urban population has grown by hundreds of millions of people over the past ten years. That growth continues. The International Monetary Fund and the International Energy Agency both estimate that India's steel demand will grow structurally over the coming decades, driven by both population growth and the closing of an infrastructure backlog. That demand is not cyclical. It does not disappear if the world economy has a disappointing year. These are the basic needs of a society in its construction phase.
From steel demand to raw material demand
Steel is made from iron ore and coke. Coke is made from metallurgical coal, a specific type of coal whose chemical properties make it suitable for use in blast furnaces. At present there is no industrial alternative to this process at scale. Anyone investing in the growing demand for steel in India and the wider region is thereby investing indirectly in demand for the raw materials that steel production requires.
What makes this interesting for the investor is that those raw materials are to a large extent produced in politically stable countries outside Asia. Australia, Canada and a handful of other mining nations supply the metallurgical coal, the iron ore and the other essential metals that Asian blast furnaces and factories need. The producers of those raw materials benefit from Asian demand without the legal, political and currency risks that direct investment in Asian markets brings with it.
Acquisitions as strategic positioning
A pattern we observe in the mining sector is that the smartest companies position themselves actively for structural demand developments before the market has fully priced them in. They acquire assets while the market is sceptical about them, build up their production profile while the competition hesitates, and benefit when long-term demand rewards their patience.
Acquisitions in the commodities sector are too often judged on the short term: how much debt is the company taking on, what are prices at the moment of the deal, what do analysts say? Those questions are relevant, but they miss the heart of the matter. The question that counts is this: what are these assets worth if structural Asian demand unfolds over the next ten to fifteen years as the fundamentals suggest? An acquisition that looks expensive at the time of the deal can prove to have been an exceptionally good decision ten years later.
What this means for the investor in Curaçao
The connection between India's infrastructure catch-up and investments accessible to residents of Curaçao is less remote than it appears. The portfolios we manage for our clients are diversified globally, including across listed commodity producers in stable jurisdictions that benefit from precisely the structural demand described here. In many cases those companies are listed on leading exchanges in Australia, Canada, the United Kingdom or the United States, are subject to strict reporting and governance requirements, and offer exposure to Asian commodity demand without the risks of direct investment in emerging markets.
Anyone who would like to understand how we give shape to that diversification in practice, and which criteria we apply in selecting commodity producers for our client portfolios, is warmly welcome to get in touch for a conversation.
Disclaimer. This article is published by Beaver Funds for general informational and educational purposes only. It reflects the personal views of the author at the time of writing and does not constitute investment advice, a recommendation, an offer, or a solicitation to buy or sell any security or financial instrument. References to specific companies are illustrative and should not be interpreted as buy or sell recommendations. Investing involves risk, including the possible loss of principal. Past performance is not a reliable indicator of future results. Readers should consult a qualified financial advisor before making any investment decision based on their personal circumstances. Beaver Funds is supervised by the Centrale Bank van Curaçao en Sint Maarten (CBCS).
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