Seaports, like airports, are considered high quality, low risk monopoly infrastructure assets. Both port types traded around 20x EV/EBITDA prior to Covid. Seaport volumes are correlated with broader economic growth. This article investigates the key impacts of Covid on seaports and trade volumes.
The chart below shows global merchandise trade volumes over the last 20 years. The two key shocks over this period are the global financial crisis (GFC) and Covid events. While both events saw similar peak falls in trade volumes (circa 20% year on year declines), they are actually quite different. The GFC had a much longer impact on volumes. Year on year volume growth was negative for 14 months (Oct 2008 to December 2009). In contrast, Covid at this stage, is looking like a much shorter duration hit to merchandise trade volumes (more like six months). This makes a huge difference in terms of the profitability and financing stresses to ports (as well as the valuation impact).
Digging deeper into the data, the major developed economies took a 30% hit to trade. On published data, China did not have a material reduction in trade volumes.
Looking at Australia, containerised trade has held up reasonably well. The following charts compare container volumes this year compared to volumes in 2019. There was a 10% dip in container volumes over April and May with a catch up over July and August. Overall container volumes have been steady in in Australia across the 2020 calendar year and are now broadly tracking in line with the year before.
From an investors’ perspective this is a fantastic result. I am sure most airport owners would be looking at this resilience with longing.
Part of the explanation of the resilience of ports is the differential between the goods and services sectors of the economy. International trade in goods (i.e. things) largely comes across the border in ports (airfreight is much smaller). Services are traded in person (think tourism, international students) or over the internet.
The latest Australian GDP statistics show that the GDP contribution from goods fell 3-4% whereas from services fell a massive 17-18%.
It is difficult to consume services in the middle of a lock down! Whereas goods continued to be consumed and facilitated by e-commerce transactions despite physical stores being closed. This resilience in goods feeds through to strength in volumes through Australia’s seaports.
Diverting somewhat from infrastructure, there have been interesting numbers published on the accelerated adoption of e-commerce (in the absence of other options during lockdown). As a percentage of retail sales e-commerce has been growing as a larger and larger share of total consumer spend at around 1% per year. During the Covid lockdown, 10 years worth of growth was pulled into the space of 8 weeks. The question will be whether habits have been formed or whether we will return to trend.
Reflecting the global hit to energy demand, bulk shipments of oil imports and coal exports fell dramatically over the year. Presumably as state border closures ease and domestic travel and tourism resume – the oil import side of this will rebound. In fact, with Australians forced to forgo their overseas travel (at least for the next 6-12 months depending on the speed and effectiveness of the global vaccine roll out), perhaps we are about to see the return of the family road trip and a consequent boom in oil/petrol demand.
Overall port volumes are excellent core infrastructure investments and have demonstrated impressive resilience through the Covid shock.