Picking the best low-hanging fruit where few others look -- for cents on the dollar

What I learned this week from my trip to Dar es Salaam Port

Dar es Salaam Port, Tanzania 2021

Right now, there is a huge imbalance in trade flows between Africa and other parts of the world. For example, it costs $2,500 to ship a container filled with Chinese manufactured goods from China to Dar es Salaam. But if you have something to ship in the other direction, you can get it done for just $150.

That’s but one interesting thing I learned this week when I paid a visit to Dar es Salaam Port with an investor in the African Lions Fund. He works in logistics here and offered to bring me on a tour of the port facilities. His company ships mainly refined copper sheets and copper and cobalt concentrate from Zambia and the Democratic Republic of Congo through Dar es Salaam Port, generally to China.

I also saw them loading 60kg sacks of Rwandan arabica coffee bound for the Netherlands.

Witnessing all this brought home how little most end-users know about all the work that goes into producing and delivering the goods they buy off the store shelf, at their local café, or order from Amazon. They take the complex logistics and supply chains that keep the economy going completely for granted.

The other conclusion for me was that there’s lots of money to be made in shipping, logistics, trade finance and insurance.

The 99% copper sheets from Zambia I saw being loaded in containers are sold to refiners in China. The importers pay for them using letters of credit from banks that are earning fees by financing the trade and thus legally still own the merchandise until the buyers pay back the bank at the other end. Insurance plays an important part in such operations.

At $9,000 per ton, a 30-tonne truck loaded with copper bound for Dar es Salaam Port, plus the value of the truck itself makes for quite an attractive $300,000 target for criminals trying to hijack them.

Even so, trucking it by road is a more effective way of moving the copper from mine to port than the alternative — the old Tazara (Tanzania Zambia Railway) built in the late 1960s and early 1970s — which is not very efficient. My investor’s company ships just a certain percentage of the copper that it handles by rail, as mandated by the Zambian government.

The role of Dar es Salaam and Tanzania generally as a transhipment and logistics hub

Besides Tanzania, six other countries rely on Dar es Salaam port for moving goods in and out, namely:  Malawi, Zambia, Democratic Republic of Congo, Burundi, Rwanda, and Uganda.

The sheer volume of trade – everything from second-hand vehicles, grain, fuels, and manufactured goods – among other factors, contribute to congestion at the port. Dar es Salaam is notorious for long delays in loading and unloading cargo.

It is not uncommon for ships to spend a week or more waiting to enter the port here to unload and take on cargo. If you’re a member of the African Lions Fund Telegram Channel, you’ll have seen photos of the constant line of ships waiting offshore, taken on my morning walks.

Even so, Tanzania has seen a substantial improvement since 2008 when Tanzania International Container Services reported an average dwell time of 25 days!

As of 2019, average dwell time was reported to be 11 days. But there is still a long way to go until they realize the country’s full potential. Up the coast at Mombasa port, in Kenya, for example, average dwell time was under 5 days in January.

But even that is slow by world standards. For instance, a 5 to 7 day dwell time for Singapore port — one of the biggest and busiest ports in the world — is already considered congestion, up from the normal 2-day dwell time.

The reality is the world of physical goods is still full of complications. Different standards. Different government rules. Excise duties. Taxes. Transhipments and multiple handling. And, unfortunately, many opportunities for the influence of bribery and corruption to enter the scene.

Case in point: the head of Tanzania’s Port Authority was suspended just a few months ago due to reports of misappropriation of funds amounting to $1.5 million.

Right now, at Dar es Salaam Port, clapped out infrastructure, haphazard construction and bottlenecks are still everywhere.

But taking the “glass half full” view, that just means there’s lots of room for improvement. And it’s happening. There is a whole new section of the port under construction and being modernized.

Dar es Salaam port modernization and expansion

The target year of completion is 2024 and the Dar es Salaam Maritime Gateway Project, aims to increase the handling capacity of the port from 17.5 million tons to 25 million tons per annum.

The World Bank granted Tanzania a $345-million loan for this project. Seems an awful lot of money. But the payback, in terms of the income and fees earned on the extra 42% of cargo handled each year for decades to come is obviously huge.

I’ve noted previously that I am carefully monitoring the increase in US dollar loans Tanzania is accumulating. Another $900 million in loans have just been approved by the World Bank for four other projects.

While many carry “concessionary” interest rates, US dollar loans have the issue that the government here can’t just print money to pay them back. The hard currency must be earned .

But I suppose with the current rate of money creation in the USA the dollar’s value will inflate away rapidly and Tanzania is effectively borrowing this money at a negative real interest rate. Hopefully, these loans are genuinely put to good use and help boost future economic output, part of which can be used to repay them.

One sure benefit to investors in African Lions Fund is that all these infrastructure projects require lots of cement. And we have a sizeable position in Tanzania’s leading cement producer, Twiga. I’ve previously written extensively about Twiga.

Lots of Twiga Cement being used everywhere

Covid shutdowns combined with rising commodity prices could well be bullish for Africa

When China shut down for three months because of Covid-19 last year, global supply chains were severely disrupted. Shipping and logistics companies are still working through the second, third and fourth order consequences. These include container imbalances, crewing challenges, and rising costs.

There is now a global movement to make just-in-time supply chains more robust and better able to absorb shocks. This means holding larger inventories and buffer stocks. It will add to costs. This is inflationary.

It remains to be seen if this truly becomes the new norm. Maybe it is just talk. Time will tell. But one thing is sure. The improvement of logistics supply chains over the past several decades was a huge efficiency driver and a deflationary force. If this has reversed, we can all expect to pay higher prices for goods and services in future.

Besides this, I’ve been writing about how rising commodity prices should help most African countries’ trade balances going forward as a new bull market in commodities appears to have begun last year.

The Commodity Research Bureau (CRB) Index which tracks 19 different commodities from Cocoa to Gold is up over 50% in the past year. The Bloomberg Commodity Index is up 48% and the LME Index, which only tracks metals, is up even more, 62%.

When you look at the charts, they are all pointing in one direction since April 2020: up, up, up. Here’s the CRB index for instance.

5-year CRB index chart

Africa is abundant in natural resources, and many countries rely heavily on commodities exports. Take the six countries that Dar es Salaam port services:

  • Malawi exports tobacco, tea and raw sugar
  • Zambia relies on copper exports
  • Democratic Republic of Congo is the dominant producer of cobalt in the world
  • Burundi is a major coffee, tea, and sugar producer
  • Rwanda exports gold, refined petroleum, and tin.
  • Uganda exports lots of gold and coffee

And Tanzania is the artery that makes it possible for most, if not all, of these products to reach their destination. Not to mention that Tanzania is a major commodities exporter itself. Indeed, we just saw over $3 billion of gold exports over the past 12 months.

What’s more, as you can see from the chart, bull (and bear) markets in commodities can last a very long time. From 1994 to 2008 the general trend was up. From 2008 to 2020 it was down. If we’re seeing the beginning of an uptrend in commodities, Tanzania and Africa as a whole should enjoy a period of greater foreign exchange in-flows, rising domestic liquidity and bullish economic conditions. That’s obviously likely to be good for local stock markets.

The following chart graphs Sub-Saharan African equity market performance, using data from my colleague Christopher Hartland-Peel, against the CRB Commodity Price Index, and clearly shows the close correlation.

SSA Ex-South Africa vs. CRB Index Chart
While there are periods where the two diverge (e.g. Dec-11 to Oct-14), the performance of sub-Saharan African equity markets is clearly closely correlated with commodity price levels.

Along with the bullish demographic factors I’ve written about before, this all makes me even more bullish about the coming years for African equities. It’s definitely worth having some exposure.

Until next time,

Good Investing!

Tim Staermose
Founder
Global Value Hunter
African Lions Fund

 

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