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New Silk Road Could Open Up Massive Investment Opportunities

New Silk Road Could Open Up Massive Investment Opportunities

Part 3: Challenges, Rivalries, Prospects for Success, and Investment Implications.

Note:

In Part 1 of “The New Silk Road,” we examined the China’s plan for rebuilding the silk road, stretching from Europe to Asia.

In Part 2, we looked at currently proposed projects, and geopolitical rivalries that could stall and hamper progress.

In Part 3, we examine the geopolitical rivalries, prospects for success, and investment implications.

Progress on the Silk Road

If the rush by nations to join the Chinese sponsored Asian International Infrastructure Bank (AIIB) is any indication, the world is becoming ever more engaged with China’s New Silk Road.

To westerners used to lengthy, multi-decade delays in giant government projects, progress on the Silk Road project is taking place at an astonishing pace. Hardly a day goes by without an announcement of some new project that is set to soon break ground.

On May 7th, President Xi met with his counterpart in Kazakhstan, to sign major agreements to develop high speed rail lines between Kazakhstan, Russia, and ultimately China. The China side of the rail line to Kazakhstan is already completed.

Following hot upon that deal, the next day, on Moscow’s Victory Day Celebration, the Chinese President Xi met with President Putin in closed door meetings, where hundred billion dollar deals were sealed in just a few hours, including the high-speed train from Moscow to Beijing.

On May 13th, China Railway Group won a $390 million contract to build the railroad, along with two Russian railway companies, with regional development plans set to take place in 2015.

On May 10th, Xi’s three day visit to Belarus culminated in another major agreement, with Belarus becoming a new partner in the high speed rail extension. It almost seems as if the Chinese President Xi has multi-billion deals falling out of his pocket everywhere he goes, and he goes everywhere.

AsianInfrastructureDevelopment

Geopolitics

There are many who say that the New Silk Road is the first shot in a competition for dominance in Eurasia. Others claim the start of a new cold war. George Soros is among those who go even further with alarming claims of an imminent nuclear war between the US and China. Why the sudden alarms for an obscure area of the world? Here's an indication of the global significance some experts have traditionally claimed for the region.

"If China succeeds in linking its rising industries to the vast natural resources of the Eurasian heartland, then quite possibly, as Sir Halford Mackinder predicted... in1904, ‘the empire of the world would be in sight,” wrote Alfred W. McCoy, a history professor at University of Wisconsin-Madison, on June 8.

Although no one has a crystal ball in matters of war and peace, history clearly shows that since the onset of the cold war, the great powers have become adept at avoiding direct conflict with each other.

Related: Oil Markets Could Be In For A Shock From China Soon

US Secretary of State John Kerry met Putin in May, and the message was not about the end of strife between their two countries, but the need to avoid mistakes that could lead to direct conflict. The only agreement announced at the meeting, was the establishment of early warning systems and a hot line, as the first steps in avoiding accident that could lead to further conflict. In that sense, better and earlier communications, keeps people from getting jumpy and pushing the wrong buttons.

As to the Asian pivot, it’s expected that the US will also push for early warning and improved communication systems with China, for the same reason, to avoid accidental conflicts emerging into something more serious.

No doubt, the bellicose rhetoric from both sides will continue, partly as the regular saber rattling we’ve all become accustomed to and partly for home consumption (see recent example below).

“There should be no mistake: The United States will fly, sail, and operate wherever international law allows, as we do all around the world,” US Secretary of Defense Ash Carter said in response to China’s recent arms buildup in the South China Sea. He also added that the United States intended to remain “the principal security power in the Asia-Pacific for decades to come.”

Without mentioning China, Carter also makes his view clear that the US takes a dim view of Beijing's strategy in the region, and his statement was intended to make clear that the US has no intention of backing down.

"We already see countries in the region trying to carve up these markets…forging many separate trade agreements in recent years, some based on pressure and special arrangements…. Agreements that…..leave us on the sidelines. That risks America’s access to these growing markets. We must all decide if we are going to let that happen. If we’re going to help boost our exports and our economy…and cement our influence and leadership in the fastest-growing region in the world; or if, instead, we’re going to take ourselves out of the game,” Carter said in a speech to the McCain Institute at Arizona State University in April.

It is not impossible but far from likely that the US and EU would level war or sanctions against one of their largest trading partners, upon whom, much of their economies depend.

Iran is good indicator of the response to new Eurasian opportunities, where global business is lining up, eagerly awaiting the easing of sanctions in order to jump in. A similar response is likely to take place on a much larger scale with the launching of the Silk Road, where the global business community is eager to join.

It’s important to note that it won’t just be Europe and America competing in the race, but so too will emerging new and very wealthy competitors from Asia and the Middle East. It’s hardly a coincidence that the Kuwaiti Sovereign Funds, one of the biggest in the world, has opened offices in Beijing a few years ago, with an eye on financing energy deals. Others from the global oil clan will not be far behind.

Reportedly, China has held open an invitation to the US to join its sponsored Asian Bank, as a founding and governing board member. China also hold open an invitation to Japan to become a founding member. But the US has not been so welcoming. The US sponsored Trans Pacific Partnership pointedly leaves out China and Russia. In response to questions about future membership, an unnamed US State Dept. representative reportedly responded: “Anyone but China.”

“The United States …has mixed feelings toward China's rising international status. It remains ambivalent concerning China-proposed initiatives such as the land and maritime Silk Road Initiatives and the Asian Infrastructure Investment Bank. …however, … there is a wide belief among the American think tanks that no convincing reasons exist for the United States not to support or participate in these initiatives,” wrote Fu Ying, China’s Vice Minister for Foreign Affairs, on June 9.

Related: A Glut For Natural Gas Too?

There is no legal barrier to America becoming a major governing partner with China in Eurasian trade, while also continuing to oppose China's recent aggressiveness. Despite the rising tensions, the US remains one of China's largest trading partners. As a governing partner in the Asian Infrastructure Investment Bank, the US would enhance its leadership in the region, enable western business to take advantage of newly offered opportunities, while helping to underwrite Eurasia's much needed development. It would also avoid the embarrassment of western business rushing to join the project, as seems likely, despite their government's disapproval. The sticking point, as Secretary Carter made clear, is who will lead.

Yet, as we learned from the Godfather, it might be wise to: "Keep your friends close; keep your enemies even closer."

Project Feasibility

Any large, complex economic development project like the ‘Road’ comes with a high degree of risk and delays associated with projects that cross multiple international boundaries, face a myriad of conflicting laws and regulations, and are based upon long term payoffs in a highly uncertain future.

Like many economic development projects, the underlying assumption is that the project will result in increasing demand. But China’s new empty cities are a testament to the idea that “if you build it, they might not come.”

No doubt, development financing is needed in Eurasia. A new high speed rail system across the region will likely help boost European trade with Eurasia and the Far East. It’s also likely that a number of cities and regions along the route will see growing economic activities. But what will succeed is far from certain.

Investment Implications

The backbone of the system will be an interconnected network of high speed railways set to open up the territories to transport, migration, agriculture, commerce, and industries.

As the American west was opened to development by new railway systems built through sparsely populated regions, one of the first industries to benefit was mining that spawned the famous gold rush fever. This time around the rush will likely be led by global mining giants in search of much more than gold and precious metals.

In terms of energy, Eurasia is home to many large oil and gas producers, including Russia, Iran, Azerbaijan, Kazakhstan, and Turkmenistan. Our top prospect here would be global engineering giant, Schlumberger (NYSE: SLB), which recently acquired the largest drilling and exploration company in the region.

Related: Could Natural Gas Dominate Global Transportation Soon?

The area is also home to huge mineral reserves, including precious and industrial metals, uranium, and coal. An example is Mongolia with its recent discoveries of some of the world's largest copper and coal mines. Global mining giants are likely to be big winners, like BHP Billiton (NYSE: BHP) and Rio Tinto (NYSE: RIO).

For a number of reasons, I strongly favor the builders and suppliers, the pick and shovel approach to investments, as far less risky than the long term and more speculative bets on economic growth prospects. From that perspective, that Russian/Chinese agreement offers evidence of some of the best investment prospects, for both short and long term returns.

The agreement for the Russian/Chinese high speed railway between the two countries calls for China to supply the project with: 20 percent of financing, and 60 percent of engineers, labor, technical assistance, and equipment. The first contract agreed to involved China's government-controlled China National Railway Ltd, a $360 million contract to develop the railway between Moscow and Kazan, with plans to extend to Beijing.

China, the world's leading developer of high speed train networks, recently announced the merger of its two largest train builders, China CNR Corp. and CSR Corp., intended to boost exports of rail technology. Following the announcement of the merger, the companies’ stock rose by twenty percent before trading was halted. The newly formed company (CRRC Corporation Ltd), with a market cap of $26 billion, will be listed on the Shanghai exchange in place of CNR and CSR, that will both be delisted.

CSR recently announced a bid for Canada's Bombardier Co. (TSE: BBD.B), one of the world's leading manufacturer of high speed locomotives, trains, and airplanes. At around $5+ per, share, the newly listed company, CRRC, with a market cap of $25 billion, is a top prospect.

For years, the Kremlin has been lobbying Europe about a planned economic corridor that would extend from Vladivostok to Berlin, and with that plan now incorporated as part of the Silk Road project, Russian Railways becomes another hot prospect.

Other top prospects include Siemens (FRA:SIE), Germany' giant manufacturer of automated switching systems, an essential component in high speed rail systems, and already a partner with Russian railways.

Conclusion

As to the importance of Asian trade to the US, we'll leave the last words to Secretary Carter. In his speech at the McCain Institute, he laid out the administration’s official policy.

…(The) ” Asia-Pacific…is the defining region for our nation’s future”… “Half of humanity will live there by 2050″ and that “more than half of the global middle class and its accompanying consumption will come from that region.”….”There are already more than 525 million middle class consumers in Asia, and we expect there to be 3.2 billion in the region by 2030…President Obama and I want to ensure that… businesses can successfully compete for all these potential customers. ….Over the next century, no region will matter more… for American prosperity.”

Disclosure: Robert Berke does not own or have any business relationship with any of the companies mentioned in this article.

Coming Soon: Future articles will continue to follow the Silk Road's progress, opportunities, prospects, competition and continuing rivalries.

By Robert Berke of Oilprice.com

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  • Arbuthnaught on June 12 2015 said:
    We will see how the New Silk Road turns out. The Central Asian "Stans" are some of the poorest countries in the world. High speed rail can only be financially viable in high population density areas. High speed rail across the trackless wastes of Central Asia vast parts of Russia could end up being money down the drain. While I am fundamentally an optimist and would like to see developement in all of the New Silk Road countries for the general betterment of mankind, vast sums could be wasted by chronic corruption. Lets hope not.
  • Mivel on July 17 2015 said:
    Tbh, I don't see the difference. There already exist three rail roads connecting China and Europe. One to Germany (as far as I remember), one to Poland and another one somewhere on Balkans. The fourth one is ofc a great idea but it's not revolutionary as it's presented.

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