It’s time to build: Here’s what that might mean for commodities

In August 2011, venture capitalist Marc Andreessen published an article in the WSJ entitled Why Software Is Eating The World. Marc argued that, despite much deep seated scepticism of company valuations “many of the prominent new Internet companies are building real, high-growth, high-margin, highly defensible businesses”, before then outlining several examples of how software was eating the world across industry sectors. He concluded the article by calling on investors and others to embrace the opportunity:

“Instead of constantly questioning their valuations, let’s seek to understand how the new generation of technology companies are doing what they do, what the broader consequences are for businesses and the economy and what we can collectively do to expand the number of innovative new software companies created in the U.S. and around the world. That’s the big opportunity. I know where I’m putting my money.”

The rest is history. Tech company valuations did pretty well over the subsequent decade, and have only (so far) suffered just a minor hick-up in recent months

In Marc’s latest article, It’s Time To Build he laments the lack of preparedness among Western institutions, the collective “failure of imagination” but what draws his scorn in particular is the “failure of action, and specifically our widespread inability to *build*” (emboldened sections from me):

You see it in housing and the physical footprint of our cities. We can’t build nearly enough housing in our cities with surging economic potential — which results in crazily skyrocketing housing prices in places like San Francisco, making it nearly impossible for regular people to move in and take the jobs of the future. We also can’t build the cities themselves anymore. When the producers of HBO’s “Westworld” wanted to portray the American city of the future, they didn’t film in Seattle or Los Angeles or Austin — they went to Singapore. We should have gleaming skyscrapers and spectacular living environments in all our best cities at levels way beyond what we have now; where are they?

You see it in education. We have top-end universities, yes, but with the capacity to teach only a microscopic percentage of the 4 million new 18 year olds in the U.S. each year, or the 120 million new 18 year olds in the world each year. Why not educate every 18 year old? Isn’t that the most important thing we can possibly do? Why not build a far larger number of universities, or scale the ones we have way up? The last major innovation in K-12 education was Montessori, which traces back to the 1960s; we’ve been doing education research that’s never reached practical deployment for 50 years since; why not build a lot more great K-12 schools using everything we now know? We know one-to-one tutoring can reliably increase education outcomes by two standard deviations (the Bloom two-sigma effect); we have the internet; why haven’t we built systems to match every young learner with an older tutor to dramatically improve student success?

You see it in manufacturing. Contrary to conventional wisdom, American manufacturing output is higher than ever, but why has so much manufacturing been offshored to places with cheaper manual labor? We know how to build highly automated factories. We know the enormous number of higher paying jobs we would create to design and build and operate those factories. We know — and we’re experiencing right now! — the strategic problem of relying on offshore manufacturing of key goods. Why aren’t we building Elon Musk’s “alien dreadnoughts” — giant, gleaming, state of the art factories producing every conceivable kind of product, at the highest possible quality and lowest possible cost — all throughout our country?

You see it in transportation. Where are the supersonic aircraft? Where are the millions of delivery drones? Where are the high speed trains, the soaring monorails, the hyperloops, and yes, the flying cars?

From PPE to food Americans and many other countries around the world know shortages for the first time in their lives. Marc concludes that the only way forward post covid-19 is to build.

Our nation and our civilization were built on production, on building. Our forefathers and foremothers built roads and trains, farms and factories, then the computer, the microchip, the smartphone, and uncounted thousands of other things that we now take for granted, that are all around us, that define our lives and provide for our well-being. There is only one way to honor their legacy and to create the future we want for our own children and grandchildren, and that’s to build.

The economic fallout caused by the covid-19 pandemic is forcing governments around the world to come up with policies for stimulating the global economy. Infrastructure investment is a tried and tested method to boost economies in the short-term while also providing wide societal benefits in the long term. The kicker when it comes to a post covid-19 world is that infrastructure builds redundancy and resiliency. Both things that are in short supply.

According to the G20 Global Infrastructure Outlook the world is on-trend to face a $15 trillion gap between the infrastructure investment needed and the amount provided by 2040.

For Western economies the focus is likely to be on repairing their countries ailing infrastructure and large scale transport projects. In America and many other countries that could be rebuilding and repairing the road and bridge network, refurbishing hospitals and other vital infrastructure that has been found wanting during the present crisis.

Along the road

For countries like China where large scale infrastructure investment has arguably met diminishing marginal returns some time ago, the focus is likely to be on technology that gives them a competitive edge.

In the past few months China’s local governments have outlined plans for new infrastructure projects to offset the economic impact of the covid-19 outbreak and cultivate new growth drivers. New infrastructure projects include 5G base stations, ultra-high voltage grids, intercity transit systems, new energy vehicle charging stations, big data centers, artificial intelligence and the industrial internet.

Elsewhere in Asia infrastructure is also likely to be the first tool in government armory to get their economies moving again. Even before covid-19 India had promised $1.5 trillion of infrastructure spending over five years, including expanding the energy, road and railway network. This investment is likely to accelerate and expand across other countries in the region over coming years.

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What commodities stand to benefit the most from this infrastructure splurge? Copper and other base metals are the most likely candidates. The red metal in particular is an essential ingredient in almost all infrastructure investment, from wiring a hospital to national power grids to transport.

Construction companies looking for raw materials will find that much of the output of base metals has been shut-in due to covid-19. According to GlobalData, 12% of lead output, 13% of copper, 15% of nickel and 24% of zinc has had to be taken offline due to concerns over the spread of the virus.

It’s also put the construction of new mines on hold. Progress has also been halted on 23 mines under construction, including the $5.3 billion Quellaveco copper mine in Peru, one of the world’s biggest copper mines under development. The 180,000 tonnes project was due to commence operations by 2022.

If it’s time to build, it’s time to own copper or companies that mine and process it. We now look back on the early 2010’s as just the start of a technology boom. In ten years time we could be looking back at the early 2020’s as a new commodities boom, one driven by government directed infrastructure investment.

Equity markets are probably not at their point of maximum despair. But that time will come, probably towards the end of 2020. Copper and other base metal miners may be the ones that will stand to benefit. The infrastructure investment bazooka, a weakening in the US dollar and the wake left behind from recent central bank liquidity will be a strong tailwind.

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