Improvements in Ports mean higher GDP
Shipping is at the heart of the global economy. Activity has increased despite increasing levels of consumption taking place via services or software. It is certainly conceivable that a time will come when the clear majority of economic spend will be on products and experiences that are not tangible in the ‘real’ world. However, we are sometime from this manifesting. Until then, as the economy becomes increasingly linked, shipping plays the crucial role for Frontier Markets of bringing an increasingly wealthy population the goods it demands. In exchange, Frontier Markets use shipping to send exports around the world, be they primarily oil as is the case in the Gulf countries or textiles as it is in the case of Pakistan.
The shipping industry is truly terribly managed. They are constant victims of over or under capacity with very poor forecasting abilities coupled with long lead times for the production of shipping vessels which has resulted in a mess for the industry. 2017 however, was a great year for the industry after 6 straight years of losses the industry generated $7bn in profit. Shipping companies despite strong tendencies towards ineptitude managed to muster some profit on the 1.9mm vessels currently in service around the world. Over 50% of the world’s ships today are over 20 years old, are grossly inefficient and costly to operate, but shipping companies lack the capital to commit to wholesale improvements in their fleet.
In 2017, three major mergers were completed; Maersk’s acquisition of Hamburg Sud, Hapag-Lloyd’s acquisition of UASC, and Cosco acquisition of OOIL/OOCL. The industry is consolidating from over 20 players out of the global financial crisis to likely a maximum of 5 by end of this decade.
2018 has not started so well. There is the looming challenges of a trade war due to Trump’s bluster and retaliatory responses around the world. In addition, Maersk announced slowing growth and Djibouti seized DP World’s port in Doraleh.
All of the above has not impacted the importance of ports for Frontier Markets. Access to ports are critical in being able to successfully trade with the world. Much of China’s one-belt one-road initiative is anchored on utilizing a mix of seaports and inland ports (road/rail hubs) to get products as fast as possible to the market. Any Frontier Markets country that is unable to build or access a reliable port will have its growth paralyzed. Port congestion remains a critical issue for regions like India and Western Africa where ships can have turnaround times as high as 15 days in places like Cote D’Ivoire.
Quality of Ports Infrastructure is a critical measure in the World Economic Forum’s ease of doing business ranking and is maintained by the World Bank, you can access the dataset here. This metric has been maintained over the past 10 years. Surprisingly, 10 of the countries within the Frontier Markets’ universe have had port infrastructure that has deteriorated over the past 10 years. The countries that have seen a decline a surprising basket of countries, places such as Tunisia, Mauritius, Kuwait and Jamaica witnessed the steepest decline in port infrastructure. Those countries that experienced the most significant improvement were Peru, Costa Rica, Bangladesh, Croatia and Columbia within our universe (you can see the full list below).
The countries who showed the most deterioration in port infrastructure on average exhibited annualized GDP per capita growth of 2.0% versus 3.8% annualized for this showing the most improvement in port infrastructure. What this means is rather obvious, but a way to make money nonetheless, which is if you have conviction in a government to execute on port expansion plans (eased if a China or Russia are involved), then you can be relatively certain that economic growth will follow. What is important to note, is that the median quality of port infrastructure is 4.1 and it is the same within the bottom 20, similarly within GDP per capita the median within the top 20 is 21,000 and among the bottom 20 it is also 21,000. This indicates that the relative change is the main indicator of growth, not the absolute level of quality or wealth. This is important. The top 20 and bottom 20 are shown below.
The full results are shown below. This is the type of investing that we are passionate believers in, simple trends that are intuitive but are so rarely capitalized on by investors, who tend to go towards shiny objects. When you combine simple measures like changes in port quality with major port projects in the world and planned electricity generation projects, you have a clear map to economic growth, time and time again. The key is assessing the probability of the government to follow through with projects. Every time someone goes to India we hear disappointment at how little has changed, whereas those that go to Indonesia or the Philippines have been consistently been positively surprised that things are in fact improving. Trust in government and the partners involved is key to this analysis.
As always, any questions please let us know.