URSABLOG: The Next Wave

It is hard to view the future with optimism when the daily onslaught of news concentrates on the latest disruptions to the geopolitical environment, whether it’s the tweets from Trump, the parliamentary stasis on Brexit, or the rise of trade conflict around the world. Warnings from the IMF (and elsewhere) that trade growth is being damaged by the continuing standoff between the US and China, and that economic growth is about to slow, or worse, overlook the quiet progress taking place elsewhere. It is an ill wind that blows nobody any good, and whilst the jury is out on whether America is being made great again other countries continue to pick up the slack, as new trade routes are being developed. Leaving aside belts and roads, the very fact that the disruption of the old systems has led to a growth in tonne mile demand that continues to leave shipping markets in a state of volatility and confusion.

This was brought home to me as I was sitting down to an after-class glass of wine with one of my brother lecturers last night. We were discussing how quickly teaching material was going out of date as far as trade routes are concerned. He teaches tanker chartering, and even before the Trump sanctions on China Cosco tankers, he told me that trade flows were changing so quickly that it was hard to keep up. But it was a report by Standard Chartered on what they call ‘Trade 20’, the rising stars of global trade, that really made me think.

Banks like to think in terms of money and numbers, unsurprisingly enough, and their definition of trade will therefore include services, which don’t usually move in ships. Those of us in the more more physical business of shipping like volumes of cargo moved between many different places, and the signs are encouraging for the long term.

I commented last week that despite the environmental restrictions on carbon emissions, India’s use of coal will rise from 1 billion tonnes to 2.61 billion in thirty years, driven mostly by an insatiable demand for energy from a rapidly expanding economy. This is obviously good for bulk carriers of course, but there are other things going on.

Understandably China grabs our attention in shipping, probably because it has been central in our minds since at least 2003, if not before. We obsess over any signs of growth or contraction, pore over the Chinese housing market, and worry (or otherwise) about air, and other pollution. But India will command our attention a lot more in the future.

It is famously the world’s largest democracy, and the more autocratic bemoan the lack of economic progress. But the future is coming quicker than many thought. Firstly, economic growth is likely to be more consistently higher than China’s from now on. Secondly, population growth is stronger than both China, struggling to recover from the after effects of the one child policy, and the US. Democracy - unfashionable these days I know, but I’m still a believer – combined with steady, incremental economic and population growth, is leading to a sustainable increase in conditions in India, with many millions being lifted gradually out of poverty, and the consequent development of a middle class at ease, and familiar, with the outside world.

Recent reforms weaning the country away from an agrarian political and economic system have made all those things a middle class wants, like starting businesses, constructing new homes, raising finance – as well as the side effects of more taxes, easing the import and export of goods – within reach. Just like the tango, it takes two to trade, and India’s location, geographically and culturally, between the US and China, leads to many opportunities for all three countries, not to mention the surrounding economies of Pakistan, Bangladesh, and South East Asia, to take advantage of this rising giant.

Other countries are equally coming out of the shadows. Vietnam, despite, or maybe because of its proximity to China, has seen exports grow strongly over the last few years. On top of that it signed a landmark trade deal with the EU in June this year that will eliminate 99 per cent of all tariffs, leading to a 15 per cent boost in EU exports to Vietnam, and 20% in the other direction. This is by next year by the way.

Moving away from Asia there are also stars beginning to shine too. Kenya is one of Standard Chartered’s biggest hopes. But it is funnily enough simple economic and social policies, the Kenyan government’s ‘Big Four’ that mark it out for trade growth potential. These policies are:

-         Boosting manufacturing activities

-         Achieving universal health coverage

-         Improving food security

-         Supporting the construction of affordable housing

These policies are deeply unfashionable, but they seem to be working, and certainly the dynamism and enthusiasm of the Kenyans that I met when I was in Mombasa last year seems to augur well for their future.

One of the countries that didn’t make it into the ‘Trade 20’ was Nigeria. As Africa’s most populous nation, and with growth showing no signs of slowing, it would seem that it should be. But there are problems that are holding it back.

It surprised me to learn that Indomie noodles has propelled Tolaram, the company that produces them, to become the largest food company in Nigeria, even larger than Unilever and Nestle. Tolaram, together with China Development Bank and China Harbour Engineering Company (both state owned enterprises) and the Nigerian Ports Authority and Lagos state will build a new port in Lagos, in a 800 hectare free economic zone in Lekki. This will make Lagos the new hub of West Africa, and trade will surely improve. Apart from the Chinese element (and money – they will own 52.5% of the project), and the fact that Tolaram is based in Singapore with and Indian heritage, the project could turn out not to be as successful as they expected.

The problem is not the port, it’s the surrounding area. The roads are poor, the infrastructure is non-existent: lorries and trucks can wait up to a week before being allowed in to pick up trucks.

Haresh Aswani, the managing director of Tolaram in Africa is very enthusiastic about the port and hopes it will transform Africa’s largest economy. However other comments suggest headwinds, and also why Standard Chartered have not given Nigeria their Trade20 blessing. The Financial Times reports:

Mr Aswani agreed that “roads are the main priority”, particularly the access road the project will share with its next door neighbour, billionaire Aliko Dangote’s massive new oil refinery.

The government has promised to build three of the six roads needed for the project to work, Mr Aswani said, and he thinks that it will build the other three.

He said working with the government had not been easy. There were quibbles over the shares for both the state and federal administrations, and more than three dozen permits, which took years to resolve.

“I will never deal with government again,” he said. “Give me the permits and just let me run the business.”

Never deal with government again? This is a natural reaction from a frustrated businessman I suppose. But what is also clear is that if a government creates the policies and encourages the things necessary to develop trade, as in Vietnam, India and Kenya, then a country will go forwards. What is even more surprising perhaps is that it is social policies, like healthcare and food security, as well as economic liberalisation, that assist this journey to sustainable prosperity.

Those of us in shipping remain above the fray of course. We have no stake in the economies of other countries, we are just those enabling trade to happen. But when the FFA market wobbles when a tweet is sent from the White House, or the VLCC market turns itself inside out on the back of sanctions, it is worth remembering that the future may well be driven by other patterns, so we should always keep an eye out for the next wave.

Simon Ward

www.ursashipbrokers.com