Shipping and logistics industry prospects for the future

A view of the Port of Colombo with its multiple container terminals – Pic by Ruwan Walpola

The current crisis (in Red Sea) is purely based on a regional political issue that is not reflective of a demand supply situation but rather a cost escalation into a conflict zone that has added on short to medium term price adjustments as surcharges. Therefore, the overall logistics costs of land and warehousing have not got impacted and they have been coming down compared to the COVID era

• Shippers’ Academy Colombo CEO Rohan Masakorala shares realistic insights to challenges and opportunities

Given the strategic geographical location, Sri Lanka remains a competitive logistics and shipping hub in the world and makes a key contribution to its own as well as the region’s economies. The geopolitics in the region as well as tensions in the Middle East have prompted stakeholders to put this hub status under fresh spotlight. Furthermore, the mega Rs. 63 billion exit offer to minority shareholders of logistics giant Expolanka Holdings Plc has stirred much discussion on the future prospects of Sri Lanka in the logistics and shipping industry among stock market analysts, brokers and shareholders too. Tensions surrounding the Red Sea have seen a spike in freight rates and some are drawing parallels to the hay days for logistics soon after the COVID-19 pandemic which caused significant disruptions to supply chains. The Daily FT spoke with Shippers’ Academy Colombo CEO and maritime specialist Rohan Masakorala to get a realistic assessment of both opportunities and challenges. Here are excerpts.

 

Q: How do you see the current Red Sea development affecting the freight market?

In my opinion this being a geopolitical issue, the crisis will continue in the medium term. The volatility will remain for the foreseeable future as the current tensions are escalating. The freight market reflection is purely due to cost and delays incurred by the shipping lines, which is recovered through surcharges. For example, an average long-haul voyage via the Cape of Good Hope in South Africa will cost an additional USD 1 million on bunkers alone. In my view, the west bound cargo will continue to see the current increased level of freight which is around 300% higher compared to six months ago. However, this is nowhere near the freight rates that we saw during the COVID crisis throughout the world. The current situation is also affecting global energy prices, which is certainly not a good sign for inflation management although it has been coming down. Any ceasefire and a political arrangement will bring back the freight levels to a much lower status as it was becoming a buyers’ market before the Red Sea crisis.

 

Q: During the COVID supply chain crunch we saw freight rates hit an all-time high, do you think the market will move in that direction?

I do not think so. The pandemic was a once in 100 years phenomenon, which disrupted all global transport systems, ports, warehouses, and logistics which led to massive imbalances in supply and demand for products. The freight rates were driven by this disruption, which led to shortages in the market and allowed transport companies to thrive in the sellers’ market. That is what led to the massive profitability of the shipping and logistics industry for two years.

 

Q: How do you read the Port of Colombo’s role in the current and medium context?

The Port of Colombo has been short of capacity for well over a period of eight years. As a result, over the last three years the port’s growth has been stagnating from a peak of 7.25 million TEUs and coming down to 6.8 million TEUs. However, due to the Red Sea crisis and the disruptions of the frequencies and schedules of the container shipping business, especially affecting the Gulf ports, Colombo has seen increased transhipment activity. This again could be a temporary situation. The good news is, by the end of this year, East Container Terminal (ECT) and Colombo West International Terminal (CWIT) will add new capacity.  This will help Colombo Port to get into the growth path once again, however, one should keep in mind that the regional port competition is growing, and business friendly destinations will attract more shipping services. As always pointed out, I believe that Sri Lanka will have a challenge as we do not have a fully opened shipping and logistics economy.

Sri Lanka has a future in terms of logistics, but it needs reforms. However, these reforms are not forthcoming as anticipated...Without the critical mass in logistics in Sri Lanka business climate, where global players are not visible in the market, companies such as Expolanka will have a limited role to play when volumes are stagnant and the conducive environment for investments is restricted due to protectionism. So, while the logistics market is promising, if the business climate in Sri Lanka is chained down to protect a few, the overall outcome is quite questionable

Q: What are the fundamental differences in the current situation versus the COVID-19 market conditions?

COVID-19 was a result of a major imbalance between demand and supply. It also was not restricted to ocean transport but was linked to trucking, rail and retail distribution as well. It also had an impact on manufacturing and services related to shipping due to economies around the world closing activities for long periods. The current crisis is purely based on a regional political issue that is not reflective of a demand supply situation but rather a cost escalation into a conflict zone that has added on short to medium term price adjustments as surcharges. Therefore, the overall logistics costs of land and warehousing have not got impacted and they have been coming down compared to the COVID era.

 

Q: What impact can this bring on global inflation and global markets?

 The global inflation that really took place over the last two years was due to the COVID disruptions and many other economic fundamentals linked to it. The year 2024 is considered a year that will bring in controls on inflationary pressures. Towards the end of the year, markets are expecting central banks around the world to reverse interest rate hikes. However, the IMF and the World Bank have indicated that the Red Sea crisis may have an impact of up to 0.4% on inflation if the situation continues, which will have a further impact on consumer markets which in turn will have a real negative impact on freight rates around the world. Another factor is, in addition to the Middle East crisis, the Ukraine situation and the instability in Africa together with the Chinese market growth slowing to 5%, the global market recovery process will not see a major directional move. This is evident as global organisations, such as the IMF and the World Bank have been revising growth targets downwards. The optimistic factor is, South Asia led by India is expected to grow as one of the fastest growing regions in the world. If Sri Lanka gets its act together, it can be the beneficiary of this developing situation.

 

Q: The biggest listed company in the Colombo Stock Exchange Expolanka Holdings Plc announced a de-listing recently. What is your opinion and advice?

 My view is that this is a move to get back to private ownership which will bring in a considerable level of foreign exchange to the Sri Lankan economy. In my understanding, Expolanka will remain in Sri Lanka and probably invest into the logistics sector as the Port of Colombo is now developing major logistics facilities, with the involvement of both China and India. When I saw the Expolanka shares trading at Rs. 400, it was a pure reflection of the COVID period profitability. That was a temporary situation. In fact, I had advised my colleagues sometime back, to exit the market when it was around Rs. 200. As I see it, the freight market is in a downward trend for the foreseeable future (excluding the Red Sea crisis) and the offer made is probably way above the stock value that would see in a couple of months. So, in my opinion, it is a good offer for the majority of shareholders who can now divest into other shares as it is expected to bring in more than USD 200 million into the market with the delisting.

 

When I saw the Expolanka shares trading at Rs. 400, it was a pure reflection of the COVID period profitability. That was a temporary situation. In fact, I had advised my colleagues sometime back, to exit the market when it was around Rs. 200. As I see it, the freight market is in a downward trend for the foreseeable future (excluding the Red Sea crisis) and the offer made is probably way above the stock value that would see in a couple of months. So, in my opinion, it is a good offer for the majority of shareholders who can now divest into other shares as it is expected to bring in more than USD 200 million into the market with the delisting

Q: In terms of logistics does Sri Lanka have a future?

Yes, Sri Lanka has a future, but it needs reforms. However, these reforms are not forthcoming as anticipated. About eight months back, President Ranil Wickremesinghe submitted a cabinet memorandum to recommend reforms as in his own words the memo read, “Sri Lanka has protectionism in the sector and that we need to be open like Hong Kong etc.” A committee was supposed to look into these reforms, but to the surprise of reformists, nothing has happened. This in turn will deprive the country of new FDIs in the sector beyond the ports logistics. In fact, Expolanka being the largest logistics company had repeatedly pointed this factor to the Government. Without the critical mass in logistics in Sri Lanka business climate, where global players are not visible in the market, companies such as Expolanka will have a limited role to play when volumes are stagnant and the conducive environment for investments is restricted due to protectionism. So, while the logistics market is promising, if the business climate in Sri Lanka is chained down to protect a few, the overall outcome is quite questionable.