South African Infrastructure

Brian Hicks

Updated March 31, 2008

Forget the Final Four this week.

Sure, I’ll be watching my native Kansas Jayhawks take on UNC, like millions of others around the globe. But I’m already looking ahead to the world’s biggest sporting event in 2010 . . . and the massive investment opportunities it brings.

In South Africa, where the World Cup will be held in a little over two years, they’re already scrambling to make sure visitors from all over the globe won’t be sitting in the dark as they watch their national heroes compete.

Africa’s largest economy is expected to grow at just under 4% in 2008, doubling the international average and nearly quadrupling the U.S. outlook (around 0.5%, if not flat or negative).

In relative terms, at least, South Africa is booming.

But so is energy consumption, and the country’s national utility company execs are sweating bullets.

Energy Crunch Spells Infrastructure Investment Boom for South Africa

In February, national officials announced a five-year, $7.6 billion plan to beef up Eskom, the state-run energy utility. This came on the heels of a January energy crisis that crippled the country’s platinum production facilities for five days.

With 80% of the world’s production of the precious metal, South African platinum giants like Impala Platinum Holdings (OTC:IMPUY) and Anglo Platinum Limited (OTC:AGPPY) can’t afford to sit in the dark, and neither can the wide range of industries they supply.

So, February brought government calls for huge industrial consumers like Impala and Anglo Platinum to cut their consumption by about 10%.

In mid March, Public Enterprises Minister Alec Erwin said that most such companies had complied, but that other businesses and households hadn’t cut their energy appetites enough to balance supply and demand.

"This means that we are unfortunately forced to move to scheduled load shedding as from 31 March 2008 to ensure that there is greater equity in dealing with the capacity constraints," Erwin said, lamenting the fact that the nation hadn’t pulled together to achieve a 3,000 megawatt reduction his ministry asked for.

So South African energy consumers face load-shedding, a process where service will be interrupted for two to two and a half hours every other day in order to lessen the burden on power production plants.

Taxes are also likely to increase, pressing the pocketbooks of average South Africans, between 40% and 50% of whom still live in poverty.

The scenario sounds grim, but in a world of gloomy financial news, South Africa’s energy quandary actually presents one of the best investment plays of the next decade.

International Infrastructure Companies Profit from Overhaul

South Africa is hardly the only nation confronting pivotal power generation choices. The world’s richest countries are now re-examining nuclear energy and of course taking on huge solar, wind, and marine power projects to diversify away from scarcer coal supplies and China’s competitive hunger.

So I’m bullish on Swiss power automations company ABB (NYSE:ABB), an underappreciated counterpart to Siemens, (NYSE:SI), as it moves forward on hundreds of millions of dollars in South African orders.

As the Zurich-based company recognized the importance of a local base, it created ABB South Africa. That branch has racked up $368 million in contracts since August of 2007, giving it prime placement in the mining industry not only in South Africa but also neighboring countries like Angola and Namibia.

Most importantly, ABB is also the go-to company for South African national utility Eskom, which has awarded ABB South Africa with a $21 million order for a transmission system to help regulate energy loads more evenly.

The latest news from Johannesburg says Eskom is still deliberating on whether to kick off April with a massive load-shedding scheme.

"Our national supply system is currently operating under constrained conditions and in order to manage the situation we need to reduce the demand of electricity to manageable levels," official Erika Johnson told media over the weekend.

As of Monday, load-shedding hadn’t kicked in yet.

But the bull market for energy infrastructure needs is intact around the world, and my Global Growth Stocks subscribers have already ridden ABB shares to triple-digit gains in under a year before recent market woes discounted the stock.

I have more global plays like this in the pipeline, making profits on unstoppable momentum trends even while the Fed flounders and the Dow takes a beating.

To learn more and not miss one more stock pick, click here:



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