URSABLOG: Foiling a Coup

I came back from holiday this week to find the dry bulk market “taking a breather” as my chartering colleagues put it. A combination of weather disruptions in the US Gulf, restriction of coal exports from Indonesia for tax and compliance reasons as well as the news of a coup d’etat in Guinea were giving charterers the upper hand. Maybe the freight desks of the big charterers were feeling a little energised after their own summer breaks, and were trying to take advantage of the soft sentiment while it lasted. Well, the storm in the tea cup has passed soon enough. Grain exports from the US are starting to resume again, and Guinea exports continue as usual. The freight market has not crashed, and is back on track again, and we are back to business as usual. In fact the sale and purchase market has not paused at all, and from the negotiations I know of, and the deals I have seen, buyers are as keen as ever, in some cases surprising even reluctant sellers with their determination to get a ship.

None of this surprises me, and it shouldn’t surprise anyone else who has been following the dry bulk market closely. The fundamental balance between demand and supply is too weighted in favour of owners for any correction to be anything other than momentary. The cargoes coming out of the US Gulf still exist, and weather disruption does not destroy their chances of being exported, it just delays them. Accounting problems for Indonesian coal exporters – the problem is that they have not been selling enough coal to domestic companies – will be resolved soon enough. And the demand for bauxite – aluminium ore – is too strong to stop exports flowing. This last point is indeed worth a little further comment, especially as it illustrates the likely resilience of demand for cargo moving forward.

A military coup d’etat in a small country in Africa is big enough news these days, mostly because they don’t seem to happen very often any more. It is bigger news when the country sits on unimaginable mineral riches. It is even bigger news in shipping, as we now know why kamsarmaxes are called kamsarmaxes. The political story is fairly simple and commonplace: Alpha Conde, the democratically elected president, has been in power for 10 years now in Guinea. He wanted another term, and changed the constitution to do so, which shows remarkable energy, considering he is now 83 years old. Certain elements of the military, led by Colonel Mamdy Doumbouya (a former French legionnaire), felt that this was taking dedication to one’s country a little far, so they have stepped to create a military junta before handing the country back to a democratic process that they are comfortable with. So far so normal.

Alpha Conde took over from Lansana Conte, on a mandate to reform the dysfunctional state exploited by a few for its mineral wealth, creating political and legal strife. He has certainly improved the extraction and exporting of minerals, but hasn’t improved much the lives of the people or Guinea.

Bauxite production has gone from 16.3 mill tonnes in 2015 to 82 mill tonnes in 2019, and now commands 20% of world production.

The announcement of the coup did shake up the global aluminium market, a little bit at least. Shares in aluminium producers increased, as speculation that higher raw material prices would lead to higher prices, and therefore better profit margins. Even China, the biggest producer of aluminium worldwide, and by far the world’s biggest importer of bauxite, issued a rare public rebuke of the coup, all the more surprising when you consider that China makes a point of not commenting on the domestic affairs of other nations. But, it quickly became apparent that Colonel Doumbouya understood the importance of keeping production going and the ports open for export, which is what has indeed happened.

And it’s not just bauxite that is at stake, even though there is an estimated 40 billion tonnes of reserves waiting to be mined. There is also 2 billion tonnes of high quality iron ore in Simandou, the rights of which have been passed from Rio Tinto to Beny Steinmetz, who has since been stripped of them and, to add insult to injury, has been sentenced for five years in a Swiss jail for bribing the wife of Lansana Conte, the president before Conde. The rights have since passed to SMB Winning:

Founded in 2014, the SMB Winning Consortium brings together three global partners in the areas of bauxite mining, production, and transportation: Singapore’s Winning Shipping Ltd., a leading Asian shipping company; UMS, a French transportation and logistics company that has had a presence in Guinea for over 20 years; and Shandong Weiqiao, a leading Chinese aluminum production company with 160,000 employees and an annual revenue of US$45 billion. The Republic of Guinea is a partner and shareholder of up to 10%.

You will understand that it is this company that is behind the spectacular growth in bauxite production and exports since 2014.

I cannot comment too much on the appropriateness of a military coup, or the conduct of the previous president of Guinea. I can however say that whoever is in power there will have to keep the ports open, and production going, because China has invested much in the country, both economically and politically. The reason for this probably lies in their desire to find other sources of iron ore and bauxite other than from Australia, the rather more stable but also resource rich state that has stood up to, or picked a fight, with China. China continues to invest to secure its own supply chain from more diverse sources, and Guinea is a helpful addition to their portfolio. And it’s not just China; Rusal, the Russian aluminium producer also imports from Guinea, and also keeps a watch on where they can import from in a fluid geopolitical environment.

It’s a nice illustration about how tonne mile demand will continue to increase as supply chain diversification continues apace. This is not about disruption due to COVID, but about maintaining control over the means of production, and by extension the raw materials it requires to build those cars, planes and other necessities of modern life. It is ironic, to me at least, that a Communist country has learnt this lesson from a critique of capitalism by Marx himself.

But in the end, the breather we have just experienced – in the freight market at least – is momentary and insignificant. A change of government in Guinea illustrates the point: a coup to change the President has had no effect whatsoever in mineral exports, and in fact the junta has made sure that this business at least carries on as normal. What should be clear now is that the demand for dry bulk carriers will not be foiled, in the short and medium term at least (by this I mean weeks and months), and those making investment decisions should neither be waiting for a dip to buy into, or a peak to sell out of. Both are still a long way off.?

Simon Ward

www.ursashipbrokers.gr