Bloomberg News

Maersk Lured by $1.5 Trillion Asia-Africa Trade: Freight Markets

September 13, 2011

Sept. 14 (Bloomberg) -- A record surge in trade between Asia and Africa to as much as $1.5 trillion by 2020 is prompting companies including AP Moeller-Maersk A/S and Deutsche Post AG to expand shipping links between the continents.

Chinese and Indian demand for commodities from coal to copper and African purchases of such items as automobiles and rice are set to fuel the fivefold rise in trade from $304 billion in 2010, said Anil K. Gupta, who holds the Michael Dingman Chair in Global Strategy & Entrepreneurship at the University of Maryland in College Park.

“Africa has the resources that Asia needs,” said Gupta, who is a visiting professor for the Fontainebleau, France-based business school INSEAD, co-wrote the book “Getting China and India Right” and studied in India. “Africa now has an historic opportunity to transform its development, and Asia has begun to look at Africa as a market of high growth potential.”

The strengthening ties are part of what HSBC Holdings Plc calls the new “Silk Road” connecting emerging markets and supporting global growth as U.S. and European expansions falter. Shares in Grindrod Plc, Africa’s biggest shipping company, and Kumba Iron Ore Ltd. stand to benefit from the trade links to Asia, says private bank and asset manager Investec Plc.

The prospective growth in imports and exports must overcome a legacy of political instability in Africa that has constrained expansion. Most nations in sub-Saharan Africa had a gross domestic product per head of less than $1,000 in 2009, according to the 2011 Africa Progress Report, produced by a group chaired by former United Nations Secretary-General Kofi Annan.

$2-Billion Fleet

Maersk, Denmark’s biggest company, said it’s spending more than $2 billion to create a fleet of the 22 largest container ships to connect West Africa and Asia. The so-called West Africa MAX vessels are each about 249 meters (817 feet) long, more than three Airbus A380 superjumbo jets.

“It’s a route that gets a lot of attention internally at Maersk, and it’s one of the fastest-growing,” said Sonny Dahl, director of West Africa services for Copenhagen-based Maersk.

Durban, South Africa-based Grindrod’s shares have risen about 12 percent to 14.77 rand ($2) since the company said on Aug. 22 that it was in talks with a potential strategic partner. They remain below a May 2008 high of 28.40 rand on declining shipping rates worldwide, said John Arron, an analyst at Barnard Jacobs Mellet Holdings Ltd. in Johannesburg.

Shares of commodity producers benefitting from exports to Asia are up as well. Kumba Iron Ore, based in Pretoria, South Africa, has risen 34 percent in the past year. The company, the world’s fourth-largest supplier of seaborne iron ore, sent 69 percent of its exports to China in the first half of this year.

Commodity Demand

The Africa-Asia trade relationship “in the medium term is going to be about commodities,” said Malcolm Gray, a fund manager in Cape Town at Investec Asset Management Ltd., an Investec unit that oversees $94 billion. In 15 years, Africa may provide “a manufacturing capability and labor to the then much more affluent Chinese and Indian markets,” he said.

Investec funds held about 2.9 million Grindrod shares and more than 200,000 Kumba shares as of June 30, according to data compiled by Bloomberg.

African resources include a copper belt running through Zambia and the Democratic Republic of Congo that holds 10 percent of world reserves of the metal. Exports of coal are getting under way from Mozambique, which says it has 23 billion metric tons of reserves of the fossil fuel.

Trade between Asia and Africa, which together account for three-quarters of the world’s 7 billion people, rose more than 400 percent from 2001 through 2010, data from the United Nations and the Population Reference Bureau show.

Average annual economic growth of about 5 percent in Africa and 7 percent in Asia spurred the record jump, Gupta said.

More Capacity

DHL Global Forwarding, a unit of Bonn-based Deutsche Post, the biggest carrier of air and sea freight by volume, and Marseille-based CMA CGM SA, the third-largest container line, are among other companies expanding links between the two continents.

“There has been a considerable amount of capacity enhancement between India and Africa in the past two years,” said Sandeep Pingle, director of marketing and sales for India at DHL Global Forwarding in Mumbai.

Maersk predicts about 15 percent annual cargo volume growth on Asia-Africa sea routes during the next five years.

That outlook signals the company expects trade between the continents to weather threats from Europe’s sovereign-debt crisis and a struggling U.S. economy. The risks have unnerved investors, wiping $6 trillion off stocks worldwide this year.

The prediction also indicates an expectation that trade growth will overcome a history of political upheaval in Africa.

Political, Economic Risk

As the continent began gaining independence from European colonial powers, more than 70 coups occurred between the early 1960s and the overthrow of President Mobutu Sese Seko of then- Zaire in 1997, John Reader, honorary research fellow at University College London, wrote in the book “Africa: A Biography of the Continent.”

Such instability has yet to be eliminated. In Libya, opposition forces are battling Muammar Qaddafi’s supporters for control of the nation. Last year, soldiers seized power in Niger and Ivory Coast descended into violence after Laurent Gbagbo, the former president, refused to cede power following his defeat in a general election. Niger has since held democratic elections and Ivory Coast’s winner, Alassane Ouattara, took office.

While conflicts and natural disasters may contribute to growth disruptions in certain African countries or regions, “the fundamental trends and drivers suggest a positive growth outlook for most of the continent,” Annan’s panel said in the 2011 Africa Progress Report.

‘New’ Africa

Asia compared with the West “is less fearful of political risk because it’s more used to it, and because it’s not basing its views on Africa of 20 years ago,” said Paul Collier, director of the Centre for the Study of African Economies at the U.K.’s Oxford University. “Africa has improved its business climate, so Asia is seeing the new Africa, whereas the West is remembering the old Africa.”

The African Development Bank this month cut its economic growth estimate for the continent to as low as 3.2 percent in 2011 from 3.7 percent. Still, it forecast 2012 expansion of 5.8 percent, compared with International Monetary Fund predictions for U.S. growth of 2.7 percent and European Union expansion of 2.1 percent.

In Asia, growth has slowed from India to Thailand, a moderation exacerbated by elevated inflation and higher interest rates in the region. Even so, the levels of expansion remain among the fastest in the world, led by China’s 9.5 percent increase in gross domestic product in the second quarter from a year earlier.

China’s Influence

“African-Asian trade and investment flows are unlikely to abate for the foreseeable future,” said Harry G. Broadman, chief economist and emerging-markets practice leader at PricewaterhouseCoopers LLC in Washington. “This reflects the underlying secular trend of the explosion” in commerce between emerging markets, he said.

China is also investing in African projects from roads to ports and power plants, as part of a bargain for access to resources that is projecting its rising economic heft across the continent.

Direct investment by China into Africa rose to $9.33 billion by the end of 2009 from $490 million in 2003, the nation’s government said last year. Sino-African trade reached $127 billion in 2010, up from $10 billion in 2000, according to China’s Ministry of Commerce.

“China has taken the view that Africa provides a good market for product,” said Peter Ledger, a fund manager at Cape Town-based Coronation Fund Managers Ltd., which oversees about 240 billion rand. “It’s clearly trying to put the appropriate elements in place to support and grow trade.”

--With assistance from Michael Cohen in Cape Town, Nasreen Seria in Johannesburg and Kyunghee Park in Singapore. Editors: Anne Swardson, Heather Langan

To contact the reporters on this story: Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net Sunil Jagtiani in Singapore at sjagtiani@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net


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