Coping with falling volumes at Gulf ports

10 November 2009

The global downturn has reduced traffic through the region’s ports, but the economic diversification policies of the Gulf states are helping to increase domestic demand

With the majority of the population of the Middle East clustered on the coasts, marine trade has always been pivotal to the region’s economies. And since the opening of the Suez Canal in 1869, the region has also been a key staging post on the trade routes between east and west.

During the recent economic boom, which came to an abrupt end last year, ports and shipping lines acted as crucial drivers of the region’s economic development.

As nations across the region sought to diversify away from a dependence on oil and gas revenues, the new industries that sprang up relied on the Middle East’s ports to bring in the materials and equipment they needed, and to deliver their products to customers worldwide.

At the same time, the new cars and white goods imported to satisfy the region’s burgeoning middle class were also delivered by sea.

“In comparison to other parts of the world, the Middle East still has a relatively minor role in global trade, and hence in ports and shipping, but this has changed rapidly in recent years,” says one Dubai-based shipping analyst. “The recession has caught up with this part of the world in the past year but container lines are still opening routes in and out of the region.

“Fujairah has established itself as an important bunkering site because of its position on the run up to Aden and the Suez Canal, while the rise in steel manufacturing for the construction industry has meant alumina and iron ore are being imported in very significant quantities.”

Growth drivers

According to the UN Conference on Trade & Development, the volume of imports into the West Asia region – which includes the Gulf countries – has been in double figures for five of the past six years.

Exports have been growing less strongly but nonetheless have increased each year since 2003, with the exception of 2007 (see chart).

Most of the port expansion projects under way around the region are centred on the -container market, which is now the most significant part of marine trade. In 1980, containers carried an estimated 23 per cent of all global trade. By 1990, this had hit 40 per cent, rising to 70 per cent by 2000. By next year, containers are expected to account for up to 89 per cent of all world trade.

One of the main drivers behind the surge in container traffic is China’s emergence as an economic superpower and producer of a significant proportion of consumer goods sold in the US and Europe.

While the Middle East is not yet a driver of global container traffic, its position on the main trade routes between Asia and Europe means it is able to tap into the growing market. The Middle East ports now act as pivotal trans-shipment hubs serving not only the Gulf, but also East Africa, the Indian subcontinent and parts of the Mediterranean. “Geographically, the Arabian Peninsula is at the crossroads of the world,” says Fred Doll, managing director of UK-based Doll Shipping Con-sultancy. “A lot of trade simply passes through on its way elsewhere, but the region’s position gives it the opportunity to leverage the trans-shipment market for sub-regions nearby, and the size of the Middle East ports gives opportunities to get economies of scale from their exports.”

Competition is particularly fierce for the trans-shipment market from the Arabian Peninsula, with new ports opening or under construction in every GCC state. In terms of scale, however, the Middle East currently has one unrivalled marine hub. Some 32 years after its establishment, Dubai’s Jebel Ali Port is a lynchpin of the regional economy and ranks alongside Emirates Airline as a cornerstone of the city’s emergence as a globally significant centre of trade.

“Jebel Ali is now a necessity to the region,” claims Jamal Majid bin Thaniah, executive vice-chairman and chief executive officer of the local DP World, which operates the port. “The Gulf relies on the trans-shipment traffic from Dubai.”

“Governments and economic authorities of the Middle East are all working to ramp up industrial capacity”

Fred Doll, managing director, Doll Shipping

With the port’s second terminal having opened in February this year, Jebel Ali now has the ability to handle up to 14 million 20-foot equivalent units (TEUs), twice as much as its nearest regional rival in terms of scale, Jeddah Islamic Port in Saudi Arabia.

As well as expanding the facilities at its domestic base, DP World has also established itself as the fourth-largest ports operator in the world, with interests that span the globe.

To complement the port, Dubai established the Jebel Ali Free Zone in 1985. Created initially to enhance the operations of the port by providing facilities for a few core industries, the free zone now hosts a wide range of companies from all sectors of the economy.

This has created new revenues and jobs for Dubai and consolidated Jebel Ali’s position as a logistics and services hub for the region.

“Dubai is pretty much unassailable now as the pre-eminent port and trans-shipment hub in the region,” says one regional shipping analyst. “Some of the other Gulf ports offer more tailored solutions that may appeal to specific businesses, but Jebel Ali is established and has the financial and political clout to respond to difficulties.”

Dubai’s model has been widely imitated across the region. Bahrain, for example, has established the Logistics Zone alongside its new Khalifa bin Salman Port, and Abu Dhabi is developing the integrated Khalifa Port & Industrial Zone in Taweelah.

Stalling growth

However, Dubai’s growth was halted late last year by the global recession and the collapse in international trade.

DP World’s net profits fell by 34 per cent to $188m in the first half of 2009 compared with the same period in 2008, as container volumes at the company’s ports fell by 10 per cent.

Capital expenditure has been reined in accordingly, with the development of a third terminal at the port now on hold until trade recovers. “This crisis is unique,” says Bin Thaniah. “I have never seen the market like this in 30 years in the business. Usually even in a recession ports continue to grow slightly. During the recession in the 1980s, ports grew at 3-4 per cent a year. This time it is totally different.”

Revenues at the Suez Canal, another indicator both of global trade and its economic benefit to the region, also remain far below 2008 levels, when the waterway generated a record $5.1bn. In August, the canal authority reported a fall in revenues to $371.8m, a decline of 26 per cent on the same month in 2008.

The global economic downturn, which has led to steep falls in European and US coal imports, and iron ore imports from China, has prompted a collapse in dry bulk shipping.

As the recession took hold late last year, the cost of transporting goods by dry bulk carrier plummeted by about 90 per cent, from $150,000 a day to about $15,000 a day.

With rental rates on bulk carriers so low and ships laid up across the world due to falling trade volumes, the Suez Canal Authority has had to freeze its tariffs at last year’s levels to persuade shipping lines to continue using the waterway rather than take the longer route around the southern tip of Africa.

Even as global trade flows suffer a downturn, the volume of trade created by companies in the region has been growing. The Middle East’s industrial capacity is expanding rapidly, albeit from a low base, and the diversification away from oil and gas into new manufacturing industries means there is a steady supply of raw materials and equipment coming into the region, and exports leaving.

“The governments, economic authorities and industrial enterprises of the Middle East are all working in the same direction to ramp up industrial capacity,” says Doll. “There has been a strategic decision that there is no future in [relying on] extractive industries alone.

“The presence of petroleum and natural gas gives the opportunity to expand along the value chain and supply chain for these industries. So beyond basic white goods and construction equipment, you now see imports of sophisticated industrial equipment.”

This developing manufacturing base is at the heart of several major port development projects in the region. Oman’s industrial port at Sohar, for example, is poised for huge expansion over the next decade. Work is under way on a $1.4bn pelletising plant and iron ore distribution centre being built at the site by Brazilian mining company Vale.

“The Vale terminal will bring VLOCs [very large ore carriers] to the region for the first time, vessels with 300,000-400,000 deadweight tonnage,” says the Dubai-based analyst.

Although a global recovery remains elusive, most Gulf nations are continuing to invest in their ports infrastructure during the downturn, in the hope of exploiting trade opportunities once fortunes finally do pick up again. While the regional real estate market has collapsed and the overall economic outlook is cautious at best, the region remains a net importer of most goods except hydrocarbons.

Bin Thaniah says the long-term prospects for the region’s ports remain strong.“This region is a growing part of the global economy,” he says. “There is still strong demand here for white goods and other imports. The Middle East countries can access their sovereign wealth funds during the downturn, which has assisted growth.

“However, credit is the mother’s milk of the global economy and nobody has given us an answer whether we will see further deterioration or whether we have bottomed out and things will improve from now on. You will not see boom growth; you will see natural growth. People have learned from this crisis.”

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