Sri Lanka aims to create an Asian shipping hub capable of competing against Singapore and Dubai by pouring $3.4 billion into expanding ports with Chinese help, after the island’s container volumes surged to a record.
President Mahinda Rajapaksa’s goal of capitalizing on the end of a 26-year civil war to build a trade gateway to emerging markets makes shares in John Keells Holdings Plc and Aitken Spence & Co. Plc a buy, says NDB Aviva Wealth Management Ltd. Port revenue may almost triple to 72 billion rupees ($658 million) in 2015 from 2010, Standard Chartered Plc estimates.
“Sri Lanka can transform its economy by boosting its ports infrastructure,” said Samantha Amerasinghe, a Colombo-based economist at Standard Chartered. “Peace provides an opportunity to take advantage of a historic shift that will put the island at the center of the biggest trade routes of the future.”
The government forecasts rising cargo levels will enable transportation, including ports, to make up 40 percent of gross domestic product by 2020, a fourfold gain from last year. Economic growth reached a 32-year high of 8 percent in 2010 amid Chinese investment in roads and harbors. The Colombo All-Share Index is up 175 percent in the past three years, the world’s biggest gain.
Rajapaksa, whose armed forces defeated separatist rebels in May 2009, is seeking to take advantage of Sri Lanka’s position 31 kilometers (19 miles) off India’s southern coast. There lie the main shipping lanes linking the Far East, West Asia, Africa and Europe.
Deeper berths, new terminals and increased efficiency in the capital, Colombo, and in southern Hambantota city will allow bigger, super-post-panamax ships to dock and transfer cargo more quickly to and from smaller vessels that carry goods for India and other emerging markets.
The government is seeking to close the gap with Singapore, the top container port in 2009, and Dubai, which ranked seventh, according to data from London-based Cargo Systems, a unit of Informa Plc. Container volumes in the city-state were more than seven times higher than in Colombo, which ranked 32nd.
John Keells stands to gain from managing a terminal at Colombo port and a 30 percent stake in Maersk Lanka Pvt. Ltd., a joint venture that includes Copenhagen-based A.P. Moeller-Maersk A/S, said Bimanee Meepagala, who helps manage the equivalent of about $250 million at NDB Aviva Wealth Management, in a phone interview on July 7.
Shares in John Keells, Sri Lanka’s biggest company by market capitalization, have climbed more than 32 percent in the past year. Aitken Spence, the island’s biggest resort operator, which also has a ports unit, has risen 35 percent.
Hayleys Plc, which has a transportation and logistics arm, and logistics and travel business Expolanka Holdings Ltd. are also worth buying, said Meepagala. All the recommended companies and NDB Aviva Wealth Management are based in Colombo.
“As good proxies to the country’s postwar recovery with solid balance sheets and experienced management teams, we are confident that both John Keells’ and Aitken Spence’s port business will continue to be the key beneficiaries in the long run,” said Louis Lu, an analyst at Aberdeen Asset Management Asia Ltd. in Singapore.
China has tightened its embrace of Sri Lanka by committing at least $3.7 billion since 2005 for projects from ports to a power plant. The island has attracted rising powers since the 16th century for its access to pivotal maritime links, leading to colonization by the Portuguese, Dutch and British until independence in 1948.
China pledged $306.7 million in 2007 to the initial phase of the tax-free port in Hambantota, the highest among donors that also included the Asian Development Bank, Japan and Denmark, figures from Sri Lanka’s Ministry of Finance & Planning show.
The island expects an $808 million loan from Export-Import Bank of China to help pay for the next leg, Sri Lanka Ports Authority engineer Agil Hewageegana said yesterday.
Container volume in Sri Lanka surged 22 percent in 2010 to 4.16 million 20-foot equivalent units, according to the ministry. Last year’s level was a record, Sri Lanka Ports Authority Chairman Priyath Wickrama said in a June interview. It is expected to rise 10 percent in 2011 and as much as 20 percent next year, with target capacity for the capital and Hambantota combined set at 12.8 million units by 2015, he said.
“Hambantota is the most suitable location to feed the Indian subcontinent,” Wickrama said. “A combination of Colombo and Hambantota will compete with Dubai, Salalah and Singapore.” Salalah is the port of Oman.
Colombo’s three existing terminals currently account for the island’s entire cargo volume. Hambantota is still under development, according to the ports authority. The goal is for five Colombo terminals by 2015 with a total capacity of 10.8 million 20-foot equivalent units, it said.
China’s investment has led to concern in India, Sri Lanka’s biggest transshipment market, that the possibility of closer naval ties between China and the island may erode India’s regional power.
Bahukutumbi Raman, a security analyst and retired counter-terrorism chief of India’s main intelligence agency, described China’s interest in Hambantota as “more strategic than purely commercial” in a 2009 paper for New Delhi-based South Asia Analysis Group.
At the same time, India’s drive to pour $1 trillion into upgrading power and transport networks also offers shipping lines increased opportunity to dock there directly.
Sri Lanka’s 18 percent share of Indian transshipments may fall as Indian ports improve and its government tries to match the lower prices offered by the island’s terminals, Standard Chartered said.
Still, the relationship between China and Sri Lanka will remain an economic one for the foreseeable future, said Rohan Gunaratna, head of the Singapore-based International Center for Political Violence and Terrorism Research.
“Both China and India are competing and investing in building an Indian Ocean maritime presence,” Gunaratna said. “The world should not misperceive China’s investment in Sri Lanka as political and a military partnership. Sri Lankan leaders are sensitive to India’s geostrategic and geopolitical concerns.”
An expected surge in Indian trade levels is also likely to outweigh any decline in transshipment market share, and Sri Lanka’s giant neighbor continues to face a capacity crunch, said Aitken Spence Shipping Ltd. Chairman Parakrama Dissanayake.
New Silk Road
“India provides the bread and butter for the development of the container port sector in Sri Lanka,” he said. “India is not a threat. India will be handling more container volume, which will help countries like Sri Lanka capture part of it.”
A doubling in exports of items ranging from raw materials to pharmaceuticals is part of an Indian government strategy for boosting trade to $1.1 trillion by 2014, taking freight volumes to at least 1.3 billion metric tons from 574 million last year.
Rajapaksa’s ports plan aims to tap that prospective gain as well as to deepen trade ties between emerging markets. Such links help form what HSBC Holdings Plc and Royal Bank of Scotland Group Plc call the “new Silk Road.” They support global growth even as the U.S. struggles to cut an unemployment rate of 9.2 percent and Europe battles a debt crisis.
So-called South-South commerce along the new Silk Road could account for 40 percent of world trade by 2030 from 18 percent currently, according to Standard Chartered. The trend offers Sri Lanka “immense” potential, economist Amerasinghe said.
The nation’s central bank left interest rates unchanged for a sixth straight month in July, taking advantage of slowing inflation to support growth in the $42 billion economy. The tropical island received a record $236 million of foreign investment in the first quarter, led by the tourism industry, the Board of Investment said June 7.
Ports projects will spur more foreign investment and create about 55,000 jobs in Colombo and Hambantota, Wickrama said.
“We want Sri Lanka to be a mega port to feed this region,” he said. “We have a huge market here in South Asia.”