The Middle East has long recognised the advantages its geographic position gives it as a global logistics hub. The Gulf countries are within four hours flying time of 2 billion people in the Middle East, India, Africa and Central Asia, and sit on key East-West trade routes.

Its location has prompted governments around the region to invest heavily in transport and logistics infrastructure, offering warehousing, freight forwarding and other services. But the global economic downturn is presenting industry participants with fresh challenges.

"The current economic crisis affects the region's transport and logistics industry, especially in segments that are strongly dependent on the global economy and trade flows," says Fadi Majdalani, a partner at US consultant Booz & Company.

Dubai's Jebel Ali Port, which was constructed in the late 1970s, remains one of the biggest man-made harbours in the world, with a container yard covering more than 1 square kilometre.

Growing competition

But it is facing tough competition from new and existing ports, as well as the challenge of lower trade flows. In April, the first commercial container ship arrived at Bahrain's Khalifa bin Salman Port, which has the latest handling and IT systems, as well as six 300-metre berths. By 2010, Saudi Arabia will open King Abdullah Economic City Port, with capacity for 10 million 20-foot equivalent units (TEUs).

"GCC governments recognise the potential of the region's unique position at a strategic transport and trade crossroads," says Ulrich Koegler, principal at Booz & Company.

"The opportunity is built on three factors. The region is located at the mid-point of the Europe-Asia trade and transport lane, making it a natural stopover point for air cargo, sea freight for trans-shipments and sea-to-air cargo conversion.

"Second, the GCC is the natural gateway and hub to an emerging region much broader than the Middle East alone, reaching from Pakistan in the east to the CIS [Commonwealth of Independent States, made up of former Soviet Union countries] in the north, to the North Africa region in the west.

"Finally, the economic development of GCC countries has generated the need for more advanced logistics capabilities, as these countries have significantly deepened and diversified their production and manufacturing bases."

However, the downturn in the international economy has led to some significant new trends emerging in the region.

"Those [countries] with a strong domestic market and limited integration to global trade flows, such as Saudi Arabia or Egypt, continue to see stable growth," says Fadi Majdalani, a partner at Booz & Company.

"By contrast, countries that have sought to leverage the opportunities of increased globalisation, such as the UAE, have been negatively affected. The logistics sectors in these countries face demand stagnation, or even contraction in some segments."

According to a Booz & Company report, Not Too Late: Finding Opportunity in Middle East Logistics, which was published in May, the sector accounts for 2.3 per cent of the gross domestic product (GDP) of GCC countries.

This is low compared with the EU, where logistics accounts for 6 per cent of GDP, but the growth rate in the Middle East is expected to be 10 per cent or more in the coming years, despite the downturn. The report predicts the Middle East transport and logistics market will have a total value of $27bn by 2012, compared with $18bn in 2008.

Majdalani says the key to achieving this level of growth is the development of new rail links in the region, including the GCC rail network and projects such as the Saudi Landbridge, which will connect the kingdom's Gulf and Red Sea costs via a new rail line.

"The construction of the planned rail links across the region should generate a broad set of opportunities, with better and faster transport chains along the Gulf coast and a strong trans-Saudi Arabia transport flow," he says.

However, he warns that these new developments mean some existing transport hubs could lose out. "Although some emerging hubs, such as the Red Sea ports, some of the Gulf coast ports and airports, and the Omani Indian Ocean ports, will benefit strongly from this development, it will also put substantial pressure on ports and airports that are smaller and are not positioned as well geographically," he says.

While efforts are being made by all GCC governments to improve their infrastructure, Saudi Arabia is taking the lead on rail.

The Saudi Rail Organisation's $5bn Landbridge will link the ports at Jeddah on the west coast with Dammam and Jubail on the Gulf.

In addition, work on the $6bn Haramain high-speed rail link between Mecca and Medina is already under way.

Elsewhere in the GCC, the UAE is also relatively well placed. The World Bank ranks it among the top 20 countries in the world in its Logistics Performance Index, which measures the ease of shipping goods into and out of a country - the highest for any Middle East country. In contrast, Syria and Algeria are the region's worst performers, placed at 135 and 140 respectively.

The UAE's position has been bolstered by the launch in 2007 of Dubai Logistics City, which is part of the 140-sq km Dubai World Central development in Jebel Ali. When completed, the development will link the logistics city with Jebel Ali Port and Al-Maktoum International airport.

The logistics city will have a 41,000-square-metre cargo terminal - one of 16 air cargo terminals planned for the area - with a handling capacity of 600,000 tonnes a year.

Development plans

Despite the damage the global slowdown has done to Middle East economies, other investments in logistics are also going ahead. In June, Abu Dhabi Airports Company formed a joint venture with the local Helios SinoGulf Property Development to build a logistics and business park next to Al-Ain International airport, serving Abu Dhabi emirate's second city

The first phase of the project will cost more than AED900m ($250m), with work due to be completed in 2010.

Manama is also developing the Bahrain Logistics Zone, which will be integrated with Khalifa bin Salman Port. In November 2008, Bahrain Logistics Zone announced it was on course to attract $600m in investment from companies wanting to set up operations there.

However, despite the high level of investment, market participants are bracing themselves for a tricky few months ahead.

Some evidence of the more difficult market has already emerged. Kuwait's Agility Logistics, the Middle East's largest logistics firm, reported a fall in profits to KD160.6m ($559.5m) last year, compared with KD174.2m the previous year. Agility Logistics' revenues also fell in the first quarter of this year, to KD407m, compared with KD443m in the opening period of 2008. Profits dropped from KD40m to KD38m over the same timeframe.

Another regional logistics firm, Dubai-based Aramex International, recorded an 8 per cent drop in revenues in the first half of this year, at AED948.4m ($258.2m).

But despite the difficult nature of the market, some optimism remains. "We are beginning to see small signs of recovery in the market," says Johan Kringel, UAE country manager of Maersk Logistics, a division of Danish shipping giant Maersk Group. "While it is still much too early to tell, our best guess is that we will experience a rather noticeable upward trend during the first quarter of 2010.

"Some of this slow, gradual recovery is attributable to government infrastructure and other investments being kept at a relatively high level. Not just through direct government investments but, more importantly, through government owned or supported companies."

Koegler warns that demand for transport and logistic cannot be taken for granted, but says Saudi Arabia and the UAE are the countries that appear best placed to cope with the current market conditions.

"Only successful economic growth and diversification in other industries will determine whether transport and logistics are needed," he says.

"The current significant growth of downstream oil and gas industries, such as the petrochemicals industry, will clearly drive demand across most of the GCC countries. However, manufacturing and trade are the industries most dependent on transport logistics.

"Therefore, the GCC and Middle East countries that are able to grow those industries, such as Saudi Arabia and the UAE, will provide the basis for an attractive transport and logistics sector."