Operators of ports projects proceed with caution in the region

10 November 2009

Port projects around the region are moving ahead, but the pace of development has slowed as operators put some schemes on hold and focus on those that are the most economically viable

For all the doom and gloom in the global economy, spending on port developments in the Middle East has grown this year. According to regional projects tracker MEED Projects, the value of current and proposed port developments in the Middle East and North Africa is now $46.5bn, up from $44.8bn in November 2008.

However, the increase owes more to the progression of long-planned projects than to new schemes being launched. And although outright cancellations are rare, a significant proportion of projects are being scaled back.

Compared with other emerging markets, Middle East ports are relatively underdeveloped, particularly those of Saudi Arabia, Iran, Qatar and the eastern Mediterranean. But with the short-term outlook for cargo volumes still uncertain, developments are now only going ahead when they are closely tied to growth in the local market.

“Today, banks are reluctant to lend to any port developer unless they are absolutely convinced of the viability of the project,” says Neil Davidson, director of ports at UK-based consultant Drewry Shipping. “That’s a good thing. The more stringent the requirements for borrowing become, the more new ports will be analysed to see if they really stack up.”

Major delays

It is hard to gauge the full extent of cancelled projects, due to the lack of transparency among port developers, but at least a dozen schemes with a combined value of $11.5bn face delays.

These include the $2.3bn second phase of development at Morocco’s Tanger Med terminal, from which Singapore’s PSA International and the Netherlands’ APM Terminals have withdrawn, and the $1.3bn third terminal project at Jebel Ali in Dubai, which was placed on hold by the local port authority, DP World, in June.

“We will look at developing Terminal 3 once we have exhausted capacity at Terminal 2, taking into account both market demand and availability of financing,” DP World tells MEED in a written statement.

Other delayed projects include Port Said Port Authority’s $5.4bn facility at East Port Said in Egypt.

While it might seem logical for the pace of development to slow to reflect market conditions, some companies fear that without expansion now, ports will struggle to cope once volumes pick up. Drewry Shipping says Middle East container volumes could return to their 2008 peaks by 2011.

In 2008, ports across the Middle East were operating at 80 per cent capacity on average, and ships using the key hubs of Jeddah in Saudi Arabia and Jebel Ali faced mounting delays. In a market where the world’s shipping lines now deploy ever larger ships following ever tighter schedules that require fast turn-arounds at a terminal, any port that fails to deliver the capacity will lose customers.

“Compared with other emerging markets, Middle East ports are relatively underdeveloped”

Qatar is the region’s biggest spender on ports, with nearly $11.5bn worth of projects under way. These include the $7bn New Doha Port on the outskirts of Mesaieed, which will replace the ageing inner-city Port of Doha from 2014. New Doha Port is being built in three phases, each delivering capacity of 2 million 20-foot equivalent units (TEUs). If the project remains on schedule, it will be completed in 2025.

With the volume of its non-oil trade growing at a rate of about 15 per cent a year, Qatar urgently needs a modern commercial port. Currently, access to Doha is restricted to all but the smallest feeder vessels. The new port’s planned 17 metre draft will enable it to handle the largest container ships in use today.

New Doha Port is positioning itself to meet the country’s domestic cargo needs until 2030, rather than regional trans-shipment trade, as it sees domestic traffic as more reliable. Ports that focus on trans-shipment can quickly lose out when shipping lines switch to a rival port offering cheaper or more efficient handling -systems.

Sleeping giant

Saudi Arabiahas the second-highest regional spending on port development, at $9.5bn. Industry analysts describe the kingdom as a sleeping giant that has yet to make the most of its proximity to the global trade lanes along the Red Sea to the Suez Canal, or of its regional dominance as the largest economy in the GCC.

During the boom years of 2003-08, Saudi Arabia’s container traffic achieved average annual growth of 11 per cent. Although growth is expected to only be half that this year, the country’s Red Sea ports were struggling last year to keep pace with the increase in demand.

Two major projects were built to address these capacity shortages. By the end of the year, Jeddah International Port is due to open its third container terminal, the $440m Red Sea Gateway terminal. It will deliver an additional 1.5 million TEUs capacity, increasing overall capacity to 6 million TEUs.

Designs have also been finalised for a new port for King Abdullah Economic City, close to Rabigh. The $6bn port is expected to have an initial capacity of 1.7 million TEUs, but will expand in stages to 5 million TEUs by 2018 and 20 million TEUs by 2030.

In April 2008, Dubai-based port operator DP World signed a memorandum of understanding to develop and manage the port with Emaar, the Economic City, a subsidiary of Dubai-based property developer Emaar.

The first phase of the terminal was scheduled to open early in 2011, but is now not expected to start operations until the end of that year.

The port is being positioned as a trans-shipment hub, targeting ship-to-ship transfers of cargo from vessels plying the Far East to Europe trade routes, and acting as a base for cargo to and from the GCC, East Africa and other countries bordering the Indian Ocean.

But others in the region are focusing on the same market and competition is likely to be strong. The rivals include Egypt, which, after a faltering start, now has $6.7bn worth of port developments under way.

Port Said Port Authority plans to build a new facility at East Port Said. The project will be carried out under a build-own-operate-transfer contract and includes plans for a container terminal handling up to 15 million TEUs a year by the end of 2015. More than $5.4bn is to be invested in the project and Egypt is looking for public-private partnerships with global terminal operators.

Altogether, Egypt is looking to attract inward investment of more than $9bn to support its port expansion. But with investors often unable or unwilling to back new projects in today’s tough climate, East Port Said’s planned port is still only at the design stage.

Suez overwhelmed

In contrast, the nearby Suez Canal Container Terminal is overwhelmed with demand. The port, run by APM Terminals, increased its throughput by 13 per cent to 1.2 million TEUs in the first half of 2009, compared with the same period last year.

Much of the growth is due to carriers axing their direct services between the Far East and Black Sea ports, and choosing to trans-ship via Egypt instead.

Suez Canal Container Terminal handled 20 per cent of all eastern Mediterranean trans-shipment traffic in 2008 and now plans to take its capacity to more than 3 million TEUs by August 2010, as part of a longer-term vision to boost capacity to 5.1 million TEUs. How this will affect prospects for East Port Said remains to be seen.

Damietta Container & Cargo Handling Company, the public-private partnership that runs Damietta Port in Egypt, is also investing nearly $26m in its own expansion programme to increase capacity from 1.3 million to 1.7 million TEUs.

However, Egypt has suffered some setbacks. The launch of a new terminal at Damietta by Kuwait’s KGL Ports International, which was expected this year, has been delayed. As part of the Aqaba Gateway Group, the Kuwaiti firm has also been named the preferred bidder for the relocation of Aqaba’s North Port.

Between 1991 and 2003, Jordan became the main gateway into Iraq. Now, with plans to modernise Iraq’s ports moving slowly, Jordan is to move non-containerised cargo out of the existing Aqaba Port as part of a plan to redevelop much of its coastline.

The $700m project comprises a bulk terminal to handle up to 15 million tonnes a year, a ferry terminal, and a grain terminal able to handle 2.5 million tonnes a year by 2013. The move will not affect APM Terminal’s Aqaba Container Terminal, which is benefiting from a $70m investment to expand capacity from 700,000 to 1.2 million TEUs.

“The further up the Gulf the port’s location, the less feasible it is as a secondary hub”

Neil Davidson, director of ports, Drewry Shipping

Further east, the UAE also continues to invest heavily in developing port capacity. But while the leading regional hub, Dubai, has paused to consider how quickly it will need its planned third terminal at Jebel Ali, work continues on Abu Dhabi’s new industrial and commercial port at Taweelah.

Valued at $2.1bn, Khalifa Port & Industrial Zone is expected to open in late 2011 with a start-up capacity of 2 million TEUs and 6 million tonnes of general cargo. Over the longer term, the project’s costs could top $10bn, if plans to expand capacity to 22 million TEUs and 35 million tonnes of general cargo by 2028 go ahead.

DP World will manage Khalifa Port but, given the uncertainty about how quickly to build terminal three at Jebel Ali, analysts question whether it makes sense to expand the Abu Dhabi port that quickly.

There are also questions about the future pace and direction of port development in the inner Gulf. Saudi Arabia’s Dammam Port invested in dredging and equipment in 2008 to position itself as an export gateway for the kingdom’s Eastern Province. It handled nearly 1.3 million TEUs in 2008 and anticipates some growth in 2009. So far, five major shipping lines, including Denmark’s Maersk and Dubai’s United Arab Shipping Company, are calling into Dammam, which aims to attract regional trans-shipment cargo.

In contrast, the rival Khalifa bin Salman Port in Bahrain, which started operations in April, has yet to attract any trans-shipment cargo.

Among the other northern Gulf countries, Kuwait is also planning a $2bn port, Iran is investing nearly $1.3bn in its ports and Iraq is assessing the possibilities of privatising Umm Qasr Port and developing a new port on the Al-Faw peninsula.

The extent of activity is leading observers to question whether upper Gulf ports are adding too much capacity.

“In the past, it was commonly assumed that every Middle East country needed its own trans-shipment hub and free zone,” says Davidson. “The reality is that Dubai has achieved critical mass with Jebel Ali Port & Free Zone. And critical mass is what makes trans-shipment hubs succeed.

“There may be room for development of secondary hubs. I could see Bahrain fulfil such a role, but it will never be a primary hub like Dubai. And not every country can support a secondary hub. The further up the Gulf the port’s location, the less feasible it is as a secondary hub.”

Despite such warnings, and the caution of much of the global shipping industry, many Middle East countries are likely to carry on expanding in the years ahead.

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