DP World turns to emerging markets

30 April 2013

The expansion of Dubai’s Jebel Ali port is central to DP World’s new strategy as it looks to increase exposure to emerging markets to drive growth in the medium term

Jebel Ali port in Dubai is one of the 10 largest ports in the world and is only set to get bigger. Its operator, DP World, is investing about $850m to increase the port’s capacity from its current 14 million 20-foot equivalent units (TEUs) to 19 million TEUs by the end of 2014. There is potential to add a further 10 million TEUs in later years. 

This level of investment comes despite sluggish economic growth in the developed world and a struggling global shipping industry. DP World reported a decline in container throughput across its global operations for the first quarter of 2013, citing “challenging” market conditions.

However, in contrast to global trends, Jebel Ali port has been running at capacity and is in urgent need of additional quay space to handle the increasing number of large ships travelling to and from Asia via Dubai.

DP World transformation

The investment in Jebel Ali will also help to spearhead DP World’s strategy to shift its focus to emerging markets. The port’s geographic position makes it ideally placed to play a greater role as a trans-shipment hub for rising volumes of trade between Asia, the Middle East and Africa, as well within the Middle East itself. 

DP World’s emerging market focus was evident last year, when the company began to sell off mature port assets in developed markets, including operations in Australia and the UK. The port operator also disposed of its Hong Kong assets in the first quarter of this year. As DP World goes through a period of transition, Jebel Ali port will play a central role in its transformation.

Currently, Jebel Ali is operating at close to full capacity and the opening of the Terminal 2 expansion next month will add much-needed extra capacity of 1 million TEUs.

A further 4 million TEUs of capacity will be available by the third quarter of 2014 at Terminal 3. In the long-term, Jebel Ali’s capacity could expand by another 10 million TEUs, when Terminal 4 is developed on a reclaimed island. A contract for the construction of the bridge connecting the island to the main port was tendered last month. The port infrastructure itself is unlikely to be developed until Terminals 2 and 3 are operating at approximately 70 per cent of capacity.

To further improve Jebel Ali’s position as a trans-shipment port, DP World must ensure the port can handle the increasing size of ships being used on long-haul routes.

Many shipping lines are operating vessels with a capacity of 14,000 TEUs, with Jebel Ali currently handling three of these ships a week. Vessels are only set to get bigger with Danish shipping firm Maersk set to launch the world’s largest ship with a capacity of 18,000 TEUs in July. By the time Terminal 4 is open, Jebel Ali port will be equipped to handle 10 of these ships a week.

The additional capacity coming on-stream is unlikely to be used up immediately, but this level of investment is deemed necessary to ensure there are no costly bottlenecks in the future in the flow of trade in and out of the port.

“We have taken the philosophy that we build up capacity before demand comes,” says Mohammed al-Muallem, senior vice-president and managing director for the UAE region at DP World. “We do all we can to cater for future growth and ensure Jebel Ali continues to play a gateway role for the UAE and the surrounding economies.”

Dubai optimism

The anticipated growth in port traffic is expected to be partly driven by a rebounding Dubai economy. Last year’s trade figures show strong levels of growth, with China and India being two of the emirate’s top trading partners. 

Dubai’s non-oil foreign trade rose by 13 per cent in 2012 to AED1.235 trillion ($336bn), compared with AED1.089 trillion in 2011. The value of exports rose by 47 per cent to AED163bn, while imports rose by 12 per cent to AED737bn. Re-exports rose by 5 per cent to AED334bn.

Supported by rising trade volumes, Dubai is cementing its position as a regional transport hub with Jebel Ali playing a pivotal role.

The port’s close proximity to the new Al-Maktoum International airport at Dubai World Central means it can offer traders a potentially more efficient and cost-effective way of transporting goods, by bringing products in by container ship to the port and then flying the freight on to its final destination. 

The development of the UAE’s much-awaited federal railway is also projected to increase trade volumes at the port. Phase 2 of the scheme, currently under tender, will link Jebel Ali to other key industrial areas within the country, including Abu Dhabi’s Khalifa Port.

The Etihad rail network is expected to be completed by 2016, and once finished Jebel Ali will be able to offer the option of importing goods into Dubai by sea and then using rail to forward them to neighbouring GCC countries.

“By 2016, we can say Jebel Ali is truly a multi-modal transport hub,” says Al-Muallem.

Rail consultant

In preparation for this, DP World is currently looking to appoint a consultant to advise how to operate the connection with the railway within the port.

“For us, this is something new, we don’t have that experience. We want to learn from experiences in Europe,” says Al-Muallem.

The prospect of Dubai winning its bid to stage the World Expo 2020 event could drive further traffic at Jebel Ali. A final decision on the host city is expected in November. If the emirate is successful, Al-Muallem predicts a “mini-boom” as Dubai prepares to cater for the influx of tourists and other visitors.

Rising trade between Dubai and the rest of the Middle East will also boost traffic at Jebel Ali port. Trade with Arab countries grew by 26 per cent in 2012, compared with the previous year, with volumes totalling AED196bn. 

In particular, Al-Muallem sees increasing shipments transiting via Jebel Ali into Iraq as the country rebuilds its war-torn infrastructure. In 2012, Iraq was the third-largest re-export market for Dubai, surpassed only by India and Saudi Arabia.

Jebel Ali’s target markets go beyond the Middle East, with the port aiming to attract traffic to and from Africa.

In March, UAE shipping line Simatech launched a new service between Jebel Ali and Mogadishu in Somalia.

“We just started the Somalia route and the operator running the route tells me that the demand is above expectations and he is adding more vessels. Africa is a market that will continue to grow,” says Al-Muallem.

DP World also operates the port in Djibouti via a joint venture with the government. Trade ties between Jebel Ali and the African port are set to grow with plans to develop a cargo village in the existing Dijibouti airport. This would allow goods to be imported from the UAE by sea and then transported by air to various destinations.

Africa gateway

Djibouti’s 1.2-million-TEU capacity port is an important gateway into other African nations, specifically Ethiopia, as well as Rwanda and Uganda.

Increasing trade flows between Jebel Ali and the African port will form an important part of DP World’s strategy to raise its exposure to emerging markets.

Investing in ports is a long-term game involving the anticipation of where and when growth will occur and ensuring adequate capacity is in place before demand peaks.

DP World is banking on that growth being in emerging markets and will use Jebel Ali as a conduit to tap into it. 

With the success of the new Somalia shipping line, coupled with economic expansion in Africa, which is set to outstrip the global average in the coming years, the ports operator looks to be on the right track.

Key fact

Dubai’s non-oil foreign trade rose by 13 per cent in 2012 to $336bn

Source: MEED

Container volumes DP World positive on long-term outlook

Despite recording lower global container throughput in the first quarter of 2013, Dubai-headquartered ports operator DP World remains optimistic about future volumes as it looks to increase its focus on emerging markets.

“We are confident about the long-term outlook of our industry and our growth prospects,” said Sultan Ahmed bin Sulayem, chairman of DP World in an statement announcing its first-quarter container volumes in late April.

Such sentiments are shared by the wider market. “From a long-term perspective, I like the company. We might see some short-term headwinds coming from lower volumes in the first half [of 2013], but other than that the long-term prospects are good,” says Samir Murad, vice-president of research at Kuwait-based NBK Capital.

In the first three months of this year, the company handled a total of 12.8 million 20-foot equivalent units (TEUs) across its global portfolio of ports; this 7 per cent lower than the same period last year.

The decline is partly due to the slowing economies in the eurozone and its impact on global trade volumes. World trade growth fell to 2 per cent in 2012, from 5.2 per cent in 2011. Grow predictions for 2013 are not much higher at 3.3 per cent.

The reduced volumes are also a result of DP World selling off a number of its assets last year. The company divested its ports in Aden, Yemen, Adelaide in Australia and its Russian operation in Vostochny in 2012. In the first quarter of this year, it also sold off assets in Hong Kong.

If these divestments are taken into consideration, DP World’s global container throughput only declined by 3.5 per cent in the first quarter.

The asset sell-off will continue to dampen DP World’s container throughput figures in the coming year, until new capacity at Jebel Ali in Dubai, the new greenfield Embraport in Santos, Brazil and the UK’s London Gateway comes online in the next year and a half, and starts to achieve significant throughput figures.

However, the asset sales have helped boost DP World’s financial results, with the company posting profit of $555m for 2012, just ahead of general market expectations.

The firm has about $1.8bn of cash on its balance sheet, coupled with an unutilised revolver facility of $1bn. This puts DP World in a good position to invest in port expansions as it looks to increase its emerging markets exposure.

The port operator’s new strategy has been welcomed by the market.

“The weak spot around the world is Europe, and they don’t have a huge exposure to Europe,” says Mark McVicar, London-based transport analyst at Nomura Equity Research.

“You would still expect DP World to hit its long-term targets of growing about 1.5 times as fast in terms of volumes as the wider market it operates in due to the skew to emerging markets.”

McVicar’s short-term profit forecasts for DP World are relatively cautious as the company digests the negative impact of the asset sell-off on its container throughput. However, by 2014 and beyond, profits are expected to become much healthier.

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