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Risk Outlook Q4 2021: Corridors for tomorrow

In this edition of Risk Outlook Q4 2021, we examine opportunities and challenges of emerging trade routes between Asia and the Mediterranean.

Aerial view of agricultural field with train

Opportunities and challenges of emerging trade routes between Asia and the Mediterranean 

The container shipping industry grabbed headlines and the attention of governments around the world throughout much of 2021. In March, a container ship blocked Egypt’s Suez Canal, causing a massive traffic jam. Meanwhile, amid global supply chain chaos, container rates soared (see Figure 1). By the third quarter, container prices from China and East Asia to the US topped US$20,000 per 40-foot unit, up from US$4,500 a year ago. The rising costs led many shippers to seek cheaper alternatives for transporting goods — a shift that may contribute to the reshaping of trade routes originating in Asia in years to come.

Figure 1: Freight rates, October 2021
 


Source: Drewry

 

Container shortages and port congestion that the industry is calling containergeddon were mostly driven by “Asia-to-rest-of-the world” trade flows. Although the Belt and Road Initiative (BRI) — China’s investment in countries along the old Silk Road linking it with Europe — retains its rationale, trade flows and economic development continuously evolve. Viable alternatives are generally available, as seen by shippers’ success in finding substitutes for container transportation.

In addition, terrorist threats increased globally in 2021, and 27 armed robbery incidents were reported between the Straits of Malacca and Singapore from January to September. These accounted for half the total number of incidents registered in Asia. With 24,000-plus container ships transiting the Malacca Strait every year — about 66 per day — any piracy-related disruption could have a large impact on supply chains.

Finally, the rise in container ship rates is also having an impact on logistics. For example, the volume of refined sugar shipped using containers from Brazil — the world’s largest producer — fell by 48% in June and July 2021 compared to a year prior, and shippers have started switching from container ships back to dry bulk vessels.

The following sections will explore how current export trends and anticipated infrastructure are shaping the Indian Ocean and surrounding regions, ahead of new forms of transportation becoming available.

Infrastructure challenges hinder new transportation links from Asia

Poor logistics and energy infrastructure — particularly in Western Asia — drive transportation-related investment towards the sea and air industries. The absence of a reliable regional inland transport network; geopolitical tensions, for example, on the Korean peninsula; and several geographical constraints have supported investment in port and airport infrastructure. This has contributed to the establishment of a diversified, long-range market base, allowing shippers to skip several mainland bottlenecks. According to Moody’s, corporate infrastructure and project finance securities connected to ports and airports in the Asia Pacific region account for the largest share in comparison to other regions, amounting to 11% of the worldwide total. By contrast, in Latin America, 22% of such securities are destined for road projects.

However, the establishment of new corridors and development of existing infrastructure is proving challenging. Corporate defaults, construction delays, and evidence from cost overrun estimates on ongoing projects suggest that the infrastructure of tomorrow still has challenges to overcome.

The case of India is illustrative. The Ministry of Statistics and Programme Implementation (MSPI) regularly publishes a quarterly report detailing the status of all central government projects with a value of US$20 million and above (see Figure 2). The MSPI found that out of 1,779 projects, only 12 were ahead of schedule, 241 were on schedule, and 559 had been delayed. Regarding the remaining 967 projects, the government had been unable to establish the original or anticipated date of completion. Some 27% of all projects presented cost overruns — amounting to, on average, 61% of the original cost.

Certainly, the pandemic has contributed to delays and is a factor in why certain projects are not considered bankable. Reasons for time overruns reported by project sponsors in the MSPI report include:

  • Delay in land acquisition.
  • Delay in obtaining forest and environmental clearances.
  • Absence of infrastructure support and linkages.
  • Delay in tie-up for project financing.
  • Delay in finalization of detailed engineering.
  • Change in scope.
  • Delays in tendering, ordering, and equipment supply.
  • Law and order problems.
Figure 2: Central government projects in India: Unexpected increases in time or costs (%)
Source: MSPI

Railway projects commissioned by the Indian government account for about one-third of those incurring delays, and have already cost 59% more than originally planned. Power projects also rank poorly in terms of extra expenditure, costing on average 31% more than budgeted.

Indonesia also intends to invest heavily in transport. Under the government’s National Medium-Term Development Plan (2020-2024), the country is aiming for a US$430 billion expenditure on transport — a 20% increase on the US$260 billion targeted for the previous plan period. The government expects the private sector to contribute about 42% of the investment, up from 31% from 2015 to 2019. Long-term financing is likely to remain one of the key constraints. Bankability issues reflect uncertainties around risk allocation between private and public participants, land acquisition, contracts, and the multiple layers of regulation. These difficulties are mirrored in Indonesia’s relatively low share of corporate infrastructure and project finance rated debt in the Asia Pacific region, which accounted for 9% of the total, as of 2020, even though the area hosts the majority of the world’s population with relatively positive demographics. This suggests a significant opportunity for sponsors, investors, and new actors if adequate protections are in place to expand project finance.


Emerging Arab-Mediterranean Corridor provides openings for Indian agribusiness

Indian commerce increasingly targets Europe; recent initiatives are viewed with more optimism than previous economic expansion programs. The Arab-Mediterranean Corridor seeks to connect India to European markets via the pre-existing road and rail infrastructure in the Middle East.

The key here is the recent rapprochement between Israel and its neighbors. The cooling of tensions has enabled the construction of railways at a rapid pace from ports in the United Arab Emirates (UAE), Saudi Arabia, Jordan, and the Israeli port city of Haifa. Departing from the Israeli coast, produce from India can be shipped across the Mediterranean to Greece, and then further inland to the end markets of continental Europe.

Indeed, India aspires to lever the emerging economic corridor to forge an arc of commerce from Delhi to Germany. A crucial variable is that India will not be the sole actor seeking to reconfigure the Arab-Mediterranean Corridor. However, given the existing framework in place to meet the region’s export and import demands, India would only need to extend the transport links from Abu Dhabi to Mumbai. The majority of the infrastructure is already in place, as evidenced by several active ports in the UAE. Much of the Israeli rail network for this endeavor is complete, and there remains only around 300 kilometers of railway to be constructed in Jordan and Saudi Arabia. Once the corridor is fully operational, Indian produce could become available in mainland Europe within 10 days — creating an economic ecosystem of valuable potential for Delhi.

Increased access to European markets is not the only perk for India, in this context. The attachment of the country to the pre-existing infrastructure creates potential for establishing additional value chains along the corridor that will be especially valuable for the agriculture sector. Agricultural exports from India remained undeterred by the pandemic, totaling US$35.1 billion in the financial year ending 2020, down slightly on the US$38.54 billion figure reached in the financial year ending 2019 (see Figure 3).

Figure 3: Export flows of India’s agricultural products by value in 2019
Source: Chatham House

Agricultural expansion is further supported by recent Indian government policies and initiatives in the sector. With a budget of US$1.46 billion, the Production-Linked Incentive Scheme for Food Processing Industry aims to develop global food manufacturing companies proportionate to India's natural resources, and to support Indian food brands in international markets. Further, as a means to increase farmer incomes and the growth of the agricultural economy, the Indian government released funds in June 2021 for farm mechanization. Initiatives included the establishment of custom hiring centers for farm implements, purchase of farm machinery, and creation of high-tech hubs in a number of states.

Country insights


Future capacity: Will mega food parks feed the Middle East?

It is increasingly likely that India’s emerging agricultural sector could become a formidable force in the Middle East’s supply and demand. This is made more probable due to the anticipated impacts of the climate crisis, as the Middle Eastern region is warming at twice the global average. The region is expected to experience prolonged heatwaves, an acceleration of desertification, and more frequent and longer droughts. As these challenges combine to further stress the Middle East’s environment, crucial commodities — including food and water — could become increasingly scarce. India, as the fourth largest agricultural producer, has the potential to become the food basket of the Middle East, especially as the region’s attempts to pivot to Sub-Saharan countries, such as Sudan, have not proven to be as successful as envisaged.

India is likely to commit to investing a further US$7 billion in mega food parks. Of the 37 mega food parks that have been approved, 22 were operational in January 2021. Additionally, the country is working closely with Israel to expand agricultural output. The strategic partnership forged with the UAE aims to boost bilateral trade by 60%, while supplying new infrastructure initiatives is valued at US$75 billion. When combined with the Emirati enterprises constructing and purchasing new ports along the Indian Ocean, it is clear that the food insecurity forecasted for the Middle East is an important driving force behind the establishment of the Arab-Mediterranean Corridor.


Ports pioneering the way

The creation of the Arab-Mediterranean Corridor does, however, present a geopolitical challenge for India. Forging an ever-closer economic union with Saudi Arabia may harm Indian-Iranian relations, bringing India into the regional power competition in the Middle East. Furthermore, several logistics hubs have already been co-opted into the Belt and Road Initiative. Under a 2016 privatization deal, a Chinese state-owned company bought a 51% stake in the Greek port of Piraeus for US$313.6 million and committed to mandatory investments worth about the same amount over five years to buy an additional 16% stake. In October this year, the Chinese investor was allowed to realize a 67% stake, although it had finalized only a third of the mandatory investments. The Greek government acknowledged this was partly due to litigation and bureaucracy.  

Due to competition between India and China, India will likely need to build a port of its own in the Eastern Mediterranean, or acquire an existing port. The chance to diversify export points also remains. Despite the complications that may arise, the arc from India to Europe — via the Middle East — presents a viable opportunity. Turkey may be a suitable location to establish links, as Ankara is dependent on import of raw materials, and the industrial pattern of the two countries has potential for synergies. Ties between India and Turkey faced challenges when Narendra Modi’s government stripped Jammu and Kashmir of their special status in August 2019, because of Turkey’s relationship with Pakistan. Earlier this year, however, both countries’ foreign affairs ministers met in Dushanbe, in Tajikistan, vowing to improve their relations with a focus on economy and trade. At present, India remains Turkey’s main trade partner in South Asia.

In 2016, India’s government set the ambitious target of doubling farmers’ income by 2022. With approximately 44% of the workforce deployed in the agricultural sector, its contribution to the GDP was less than proportionate at 14%, highlighting huge potential in this area. Increasing demand and global prices led scientists to obtain early maturing varieties of pulses. The increase in the minimum support price may also help the government achieve its ambitions in this regard.

In November 2021, President Modi repealed three farming laws, following a year of sustained protests. Farm unions in the country view the decision from the government as a success, as concerns of increased privatization of the agribusiness sector (which could lead to a reduced income for farmers) mandated a collective response from farmers.


Conclusion

With seeds of prosperity sown, striking a fair balance upstream is crucial for trade flows

The ongoing diversification of India’s export network during the second half of 2021 showed the potential for expansion of the country’s agribusiness sector. In July, the first commercial consignment of Mishri cherry from Kashmir was shipped to the UAE, potentially paving the way for similar deals to add to India’s ever-growing horticulture export portfolio. In the previous month, 24 metric tons of groundnuts were exported to Nepal from the nearby Indian province of West Bengal in the east of the country. Groundnut exports from Eastern India increased by more than 45% in the third quarter, compared to the rolling five-year average beforehand. The planting of winter crops in November 2020 increased by 10%, year-on-year, with a 28% increase in the area under pulses. The total acreage under pulses increased to 8.25 million hectares from 6.45 million hectares over the course of the pandemic.

Reforming a system that feeds almost half the country’s population presents enormous challenges, especially given the threat of strikes and riots. Indian farmers are concerned that farm bills approved by the government in December 2020 will make the current subsidized system irrelevant, and eliminate the minimum assured income from their farming. According to the government’s calculation, that is despite only 6% of farmers actually benefiting from the system. On the other hand, for farmers of some states — such as Punjab and Haryana — the system worked well with the federal government purchasing around 75% to 80% of paddy rice and wheat. The Samyukta Kisan Morcha (SKM), a coalition of over 40 Indian farmers' unions set up to coordinate nonviolent resistance, has been leading agitation since last year. Protests will likely continue, particularly in the states of Punjab, Haryana, Rajasthan, and Uttar Pradesh, where at least eight people were killed in October after a vehicle hit and killed four farmers, as they were returning home from a protest. The SKM alleged that a son of union minister, Ajay Mishra, was in the vehicle that ran over the farmers. Four members of the minister’s convoy were killed in a subsequent mob lynching.

Even distribution of benefits and decision making will likely remain crucial in creating an alternative corridor for tomorrow's freight — decongesting what has been for a long time the only viable route. The creation of new corridors and sustainable investment in sectors related to trade development and logistics could ease the procurement of strategic goods and help diversify the economies of producer countries and transit geographies.

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