First published on LinkedIn on 13 January 2022.
Today Scipion Capital launched a podcast I produced in collaboration with the company’s founder and CIO, Nic Clavel. Scipion Capital is an investment manager specialising in Africa with a strong focus on trade finance and commodity trade. I have known Nic for some years and I jumped at the chance for him to show me ‘under the bonnet’ of world trade and explain what is driving the disruption, prices changes and uncertainty in global markets.
Nic and I covered a lot of ground in our podcast, looking at the global economy and supply chain disruption, key markets in Africa and the outlook for soft and hard commodities, as well as issues that are impacting global trade, notably ESG.
Here are my seven takeaways from our rich discussion:
1) 2021 was a tough year for global supply chains, with the pandemic closing down factories and ports across the world, and the Ever Given shutting the Suez Canal for six days. Disruption at many African ports has been so bad that a container that used to take three days to turn round now takes 7-10 days. But in Nic’s view it is surprising world trade did not contract more than it did, which he believes is a testament to how efficiently the global supply chain was working before the pandemic hit. But it’s going to take a long time – he estimated 18 months to two years – before shipping companies start actively looking for freight, which will drive efficiency and bring down prices. He concluded: “It’s going to be an uphill struggle and I don’t share the confidence of those who think we’re going to be back to normal in six months’ time.”
2) One consequence of supply chain disruption has been the surge in freight costs, although the impact this has had on trade has varied according to the commodity and the trade flow. Higher freight costs are significant if you are transporting coffee, but not if you’re transporting copper. One TEU (Twenty-Foot Equivalent Unit) container of copper is worth around USD 250,000 versus USD 15,000-20,000 for coffee. This means that Vietnam has not been exporting its coffee to the Mediterranean region as the cost of a container has risen from around USD 1,000 to USD 7,000-8,000, destroying any margin for the exporter. This has, however, created an opportunity for West African coffee exporters, where freight costs to the Mediterranean has risen only marginally, from around USD 1,000 to USD 1,500. But within Africa, freight costs remain exorbitant. One example Nic gave: to ship a car from Japan to Côte d’Ivoire costs around USD 1,500; to ship the same car from Addis Ababa back to Japan will cost you USD 5,000!
3) One cause of higher freight costs has been the lack of containers in the right places. A major contributing factor to this shortage has been the build-up of empty containers in global ports – California, for example, has an estimated 110,000 TEUs sitting idle in its ports. This could reflect the fact that is it not in the freight companies’ interest to send empty containers back to China, as they get 10¢/tonne for empty containers and 66¢/tonne for full ones. The big winners from this price surge have been the shipping lines and freight forwarders who, as Nic described it, “have gone from being an operator in a fairly dull industry to becoming a very exciting sector enjoying solid returns.”
Containers wait to be loaded at Long Beach port as cargo ships sit idle in the distance, October 2021 (Source: The Guardian website).
4) When we discussed African politics, Nic’s outlook was upbeat and he highlighted several countries that have caught Scipion’s eye. The ‘ray of light’ is Zambia, a country which has been through difficult times in recent years, but which under its new president has made rapid progress. The new government has secured the confidence of lenders – the IMF agreeing an initial USD 1.5 billion loan – and the country has huge potential to boost its copper exports, with a new 100,000 tonne per year copper mine in development. Zambia also has strong potential to boost its exports of maize and sugar to neighbouring countries, although much needs to be invested in the cross-border infrastructure for this to be feasible. Nic predicted that South Africa would shake off Omicron – as it appears to be doing. (But with COVID, you never know.) Nic also profiled the agribusiness potential of Nigeria and Guinea, two markets that are usually the focus of oil and mining investment but which are both major producers, processers and exporters of soft commodities.
5) Looking to soft commodity prices, Nic pointed out that the drivers of price changes have varied greatly. The surge in coffee prices, for example, has been driven by a supply issue (the bad crop in Brazil) and a supply chain issue (Vietnam not exporting its crop because freight costs are too high). Food prices have also been driven up by strong demand and the rising cost of inputs, especially of fertiliser which has doubled in price. Perhaps surprisingly, given the litany of extreme weather events in the news in recent months, Nic pointed out that La Niña has actually been good for West and Southern Africa’s agricultural sectors, bringing ideal growing weather. There was a bumper maize harvest in Southern Africa, the highest on record, and another strong cocoa crop in West Africa.
South Africa had its best maize crop in 40 years in 2021, thanks to La Niña
6) On the hard commodities front, huge uncertainty hangs over the future of coal, given its contribution to Green House Gas (GHG) and other toxic emissions. But Nic’s overall view is that coal will remain with for us for longer than we think. Copper prices have retrenched a bit recently, reacting to news of Rio Tinto’s deal to develop a copper mine in Mongolia which will put huge supply on the market. But copper prices are still around USD 9,000 per tonne, which is highly profitable for miners in the DRC and Zambia. Regarding so-called ‘green metals’ (e.g. cobalt which is used in rechargeable batteries and wind turbines), Nic pointed out that these metals’ end use might be green, but the way they are produced can be anything but. This led us neatly to our final topic.
Organic cocoa farmers in M’Brimbo, Côte d’Ivoire.
7) We finished with a discussion about ESG – the most common terminology used to measure the sustainability of investments. Scipion takes a slightly different approach which it defines as ESI, or Environmental and Social Impact. As Nic pointed out, as a lender if there is no sound governance structure, there is no lending. The key is to ensure that the governance of environmental and social impact is sound and that investment has a clear impact on the local community. Nic gave the example of providing a local cocoa buyer with USD3m-4m in financing to buy cocoa in an area, which creates jobs and income. Scipion will not lend without the right governance structure, and the company works with borrowers to develop sustainability policies and processes that meet their standards. As Nic put it: ‘Our investment is impactful because we help to raise the social standard.’
We rounded off the podcast with Scipion’s quick fire predictions for 2022, including global supply chain disruption, the Kenyan presidential election, oil prices and world inflation. You can listen to these, and the full podcast by clicking here.