Commodity Watch: Infrastructure’s Backend

AHMAD AL-SATI
PORTFOLIO MANAGER

Ahmad is the President and portfolio manager for Gemcorp Capital Advisors LLC, based in New York. 

Ahmad has spent most of his career in the global credit markets. Prior to Gemcorp, Ahmad was President of Pandion Mine Finance and RiverMet Resource Capital, LP - a fund focused on investing in precious metals, where he was responsible for managing the investments and the day-to-day operations of the registered investment adviser. 

$3.7tn per year needs to be invested in infrastructure globally to satisfy the demands of population and economic growth up to 2040¹. Of the aggregate amount a $15 trillion gap exists that must be funded by private and public capital. And all of this infrastructure needs (lots of) commodities. 

Governments in the U.S. and Europe have made a concerted effort recently to increase infrastructure spending through legislation such as the CHIPS Act and the Gigabit Infrastructure Act. These laws are expected to result in trillions of spending on infrastructure. China already spends almost 10% of GDP (over $1.5tn) on infrastructure. 

Private-public partnerships are also emerging. The Partnership for Global Infrastructure and Investment (PGII), announced at the most recent G7+ summit, is an example. Utilizing public and private funding, PGII seeks to deploy $600bn in infrastructure investments into low- and middle-income countries to encourage infrastructure buildout. 

Infrastructure is also an area of interest for investors as it provides consistent and differentiated returns, and asset managers have been raising infrastructure funds to invest in the asset class. At the end of 2023, infrastructure funds had $328.9bn in dry powder after raising $87.75bn in 2023 and $176.08bn in 2022².

Both government and private sector efforts, however, are focused on the front end of infrastructure—building physical and digital assets. On the other hand, there has been limited investment in the underlying materials and commodities that constitute infrastructure (the “backend” of the supply chain).

Infrastructure is effectively assembled raw materials: cement, steel, plastics, energy, and critical minerals. Bridges, airports, and ports are obvious examples. But so are renewables. A 100-MW wind farm requires some 30,000 tons of iron ore and 50,000 tons of concrete and 900 tons of plastic. A typical lithium-ion battery contains about 25 pounds of lithium, 30 pounds of cobalt, 60 pounds of nickel, 110 pounds of graphite, 90 pounds of copper, and 400 pounds of steel, aluminium, and plastic.

Ultimately, we cannot conjure infrastructure from PowerPoint presentations, Excel models or government legislation. To achieve our infrastructure goals, we must procure the raw materials and components necessary to meet our infrastructure needs. 

Bottlenecks in the commodities that ultimately make up infrastructure will adversely impact investments in infrastructure by causing delays, increasing costs and forcing trade-offs, which in turn may result in lower yields and returns for infrastructure investors. A comprehensive capital solution across the chain is required and investors and allocators will be well served understanding and paying attention to the entire infrastructure supply chain from critical mineral to an AI data center.

¹ Source^: Global Infrastructure Hub 

² Source: Preqin