Commodity Trade Cycle: Indian infrastructure investment opportunities; check transformation in space, time and form
Commodity Trade Cycle: The infrastructure needed would add value to commodities by transporting the commodity through space i.e. from the production source to the end user. Investments here would entail building infrastructure in railways, airports, waterways and roads. With a population of the size of India, the transportation infrastructure needs to move both commodities and human capital efficiently. The more efficient the transportation infrastructure the greater the economic value added.
By Taponeel Mukherjee
In the primer on commodity trading titled “The Economics of Commodity Trading Firms” by Craig Pirrong released by Trafigura, the author discusses commodity trading as “value added by identifying and optimizing transformations in commodities that reconcile mismatches between supply and demand in space, time and form”. For an infrastructure investor in India the commodity trading description mentioned above lays out the template as to the potential investment opportunities available. “Transformation in space” Opportunities through “transformation in space” implies infrastructure investment opportunities in logistics. The infrastructure needed would add value to commodities by transporting the commodity through space i.e. from the production source to the end user. Investments here would entail building infrastructure in railways, airports, waterways and roads. With a population of the size of India, the transportation infrastructure needs to move both commodities and human capital efficiently. The more efficient the transportation infrastructure the greater the economic value added. Transportation investments are needed across the spectrum such as urban transportation, rural transportation and connecting inland cities to sea ports amongst others. The biggest takeaway for investors is that compelling investment opportunities exist in an economy with a high population and high consumption need. The government needs to ensure that the right steps are taken to build on the existing work being done.
“Transformation in time”
Infrastructure investment opportunities through “transformation in time” exist through the entire spectrum of storage. This would go all the way from storage of agricultural produce, special storage needed for specialized products such as pharmaceuticals, warehouses for e-commerce firms, liquid storage and dry ports to link sea ports with consumption points. Storage infrastructure investments in India are an urgent requirement. From the “farm to fork” model that requires investment in cold storage to the high paced e-commerce warehouse space, opportunities abound for the prudent investor. Investments in storage will require different business models for sure. Financial viability can often diverge from the economic benefits that accrue, hence Public Private Partnerships and Viability gap funds might be needed. The key is investment opportunities exist in creating storage infrastructure across the supply chain and across industries.
“Transformation in form”
Investment in infrastructure that looks to transform commodities in form to add value is something that again provides for interesting investment opportunities. For instance, food processing provides an example of “transformation in form”. The infrastructure to transform a fruit from its raw form to a processed form creates an additional product that has a demand separate from the raw product. In addition, investments and development of food processing infrastructure grows the economy and creates jobs around a more sophisticated supply chain.In a non-agricultural product such as steel, significant investments in infrastructure around processing can help India provide inputs for steel using original equipment manufacturers globally. An economy such as India has the capacity to be a significant contributor to global trade through the creation of an economically feasible processing industry across products. It is important for investors to look for opportunities where the infrastructure gaps are.
The most important factor that will create value across the commodity trading cycle and hence will both boost investment and infrastructure creation will be the creation of infrastructure that grows all three forms of transformation - space, time and form. One without the other cannot deliver the full potential. For sure this is an example where the whole is significantly larger than the sum of the parts. As an example, the value from processed mangoes goes down significantly without proper storage and transportation. Hence exceptional food processing infrastructure without adequate transportation and storage infrastructure limits the value creation. For both infrastructure investors and the government, it is an economic imperative that infrastructure creation takes a balanced approach. If the balance between infrastructure that assists in transformation through space, time and form is lost, we can end up with excess capacity that cannot be utilized leading to non-performing assets. For sure given the infrastructure creation needs that face India, innovation and improvement on the capital structure aspect is of essence. Companies and projects need to be extremely efficient in financing themselves, but that said operational planning and efficiency cannot be discounted. Hence creating an efficient commodity trading cycle provides infrastructure creators a worthy mirror to consider while making investment decisions.
(By Taponeel Mukherjee. The views expressed in this article are personal. The author heads Development Tracks, an infrastructure advisory firm.)