The worldwide economic downturn may have hit global trade hard, but its effects have been uneven. Regions such as the US and Europe have been badly affected, but the Middle East appears to have avoided the worst of it for now, helped by economic diversification in countries such as Saudi Arabia, and reconstruction work being carried out in Iraq.

According to Singapore-based APL Logistics, a significant proportion of the world's container ship fleet is now idle. The firm says that in January, 255 ships, with a total capacity of 675,000 20-foot equivalent units (TEUs), were not in service, accounting for 5.5 per cent of the world's container capacity.

The negative market environment has hit trade volumes in a way that most shipping companies have never experienced before. The routes between Asia, the US and Europe have been hit particularly hard as consumer demand in the US and Europe continues to falter.

"It is the first time we have ever seen a negative situation," says Neil Davidson, ports director at London-based Drewry Shipping Consultants. "On the shipping lines, companies are losing huge amounts on containers every week, and this pain could go on for years."

Plummeting rates

As a result of this lower demand, freight rates on all global trade routes have sunk to record lows. In early 2008, container rates from the Far East to Europe were $1,400 a TEU; now they are less than $300 a TEU.

The drought in seaborne trade could have profound effects beyond falling freight rates, hampering investments in ports. But although no region is immune from the effects of lower demand, the Middle East appears to be among the least affected so far.

"We expect to see a 7 per cent decline in container shipments in the Middle East in 2009, compared with an average 10 per cent decline globally," says Davidson.

For now, it is the shipping lines that are suffering the most, with a sharp fall in freight prices, and most port operators are still managing to remain profitable.

"Even in the most severe downturn we have seen, companies such as [Dubai-based] DP World are still profitable - a remarkable achievement," says Davidson. "They are maintaining price levels, while freight rates have dropped through the floor."

However, the port operators are likely to come under greater pressure in the future, as more container terminal capacity comes on line in the region. "It is a cut-throat business," says Davidson. "You have the same number of ports competing for a decreasing number of containers."

As the volume of cargo on the seas has fallen, the competition between ports has become fierce. With little to differentiate them in terms of geography or facilities, the region's ports have had to cut their prices to attract clients, says Peter Richards, managing director of Sharjah-based port operator Gulftainer.

With little prospect of any significant economic recovery before 2011, there is speculation that some port expansions will now have to be scaled back or delayed.

"In the Gulf, these [expansion] projects were related to a massively booming market," says Richards. "If you remove that for an extended period of time, you have to wonder whether some of the developments that have been announced will move on in the timeframe initially thought of."

It is a difficult situation for many in the industry to come to terms with. As Richards points out, most managers in the sector will have only experienced growth, and in the Gulf it was often of the double-digit variety.

Some port expansion projects have gone ahead as initially planned. In March, the Bahrain Gateway at Khalifa bin Salman Port opened with an initial container capacity of 1 million TEUs. Operated by Dutch group APM Terminals on a 25-year concession, the port receives trade that previously went to Bahrain's Mina Salman Port, which ceased commercial activities in April and is now being developed as a US naval base.

Additional capacity will also come on line in Abu Dhabi, where the new Sheikh Khalifa Port, which is being developed by Abu Dhabi Ports Company, will be operated by DP World. Abu Dhabi plans to divert trade from the existing Mina Zayed Port to the new offshore facility, which will be located at Taweelah, about 50 kilometres from Abu Dhabi city.

The first phase is set to open in 2010, with a capacity of 2 million TEUs and 6 million tonnes of general cargo. Four subsequent phases will result in capacity rising to 22 million TEUs and 35 million tonnes of cargo by 2028.

Expansion work is also under way at several ports in the northern emirate of Sharjah, including the Indian Ocean container terminal at Khorfakkan operated by the local Gulftainer. The second phase of expansion began in 2007 and will be completed by the end of 2009, adding an extra berth alongside the existing five, and taking the total berth length at the port to 2km.

Two super-post panamax cranes - the largest available - were commissioned in March 2009, two more will be commissioned in October and a further two in December 2009, taking the total number of cranes at the site to 20.

"We are lucky in that our expansions were well under way before the downturn began to bite in the Middle East," says Richards.

Increasing competition

Work is also continuing at the Sharjah Container Terminal at Port Khalid to increase its draft from 11.5 metres to 12.5 metres, allowing larger ships to dock.

A further berth will also be added and the storage area will be increased to 39,300 square metres. Work began in the first quarter of 2008 and is expected to be completed by the end of this year.

However, the reaction to the downturn at some other major regional ports, such as Jebel Ali in Dubai, which will face competition from the new Sheikh Khalifa Port, has been different. The port's operator, the local DP World, had planned to build a third container terminal that would have increased the handling capacity of the Jebel Ali site by 14-15 million TEUs by the end of the 2009, up from 11 million TEUs in 2008.

The project, estimated to be worth $400m, is part of a longer-term masterplan to expand capacity in 14 stages to a total of 50 million TEUs by 2030. However, the operator is now reviewing its development plans in light of the economic crisis, and construction work for the new terminal is likely to be delayed by at least one year. According to sources working on the project, the capacity that a third terminal would provide at Jebel Ali will now not be needed until 2013.

The delay is the latest blow for Dubai's construction industry, which had been hoping the terminal would be one of several large-scale infrastructure projects that would alleviate the current downturn in real estate activity.

But while many ports are suffering from the global downturn in trade, the economic diversification policies being pursued by the region's governments mean that, in some areas at least, traffic will increase.

Speaking at MEED's Middle East Port Development conference in February, Lye Seng Tan, chief operating officer of Jeddah's Red Sea Gateway Terminal, said the volume of container trans-shipments in Saudi Arabia grew by an average of 11 per cent a year from 2004 to 2008, driven by increased oil and gas production and other industrial activity.

Saudi Arabia's growing petrochemicals industry, in particular, will provide more growth in the future. By 2011, petrochemicals firms based in the industrial city of Jubail are expected to produce more than 11 million tonnes a year (t/y) of petrochemicals, generating demand for about 565,000 TEUs of container capacity. At Yanbu, the country's second main industrial city under development, companies will produce a total of 5.8 million t/y of chemicals, generating demand for a further 340,000 TEUs.

To cope with the increase in traffic, Saudi Arabia's ports will need to expand, particularly Jeddah Islamic Port, which acts as the kingdom's principle marine and trade gateway.

Growth plans

Prior to the recession, the existing facilities at Jeddah Islamic Port were struggling to cope with the volume of trade passing through. In the summer of 2008, congestion on the roads surrounding the port became so severe that lorries struggled to gain access and perishable cargo rotted on ships or in the shipyard because it could not be delivered into the city. As a result, ships began to ignore the port altogether, and exports through the port ground to a halt.

In October, Jeddah Islamic Port will open additional capacity of 1.5 million TEUs, bringing its total capacity to 6 million TEUs. Along with the extra capacity at the Red Sea Gateway Terminal, which is also due to open in October, this will help to ease the problem, although the congestion on the roads surrounding the port has yet to be addressed.

Saudi Transport & Export Development Company (Tusdeer) is currently developing the Red Sea Gateway Terminal, which will have two 410-metre-long berths, capable of accommodating the Suezmax vessels - the largest ships that can pass through the Suez canal, which can carrying up to 15,000 TEUs of cargo.

Substantial projects are also being planned outside the GCC. In Jordan, the development of Aqaba port lies at the heart of the kingdom's plans to transform the city's coast into a special economic zone.

The project will include upgrades to the oil terminal and the industrial jetty, as well as the development of a phosphate terminal by 2013. Container capacity will be boosted to 1.2 million TEUs from the current level of 700,000 TEUs.

In July, the Jordan Phosphate Mines Company invited companies to bid by 28 September for a contract to build the phosphate export terminal at Aqaba. It will include a 4 million-t/y rock terminal with storage facilities, and is expected to take about two years to build.

Container volumes at Aqaba port are already growing strongly, rising by 36 per cent in 2008, according to the Aqaba Development Corporation. Much of the trade is destined for Iraq, where rebuilding work is likely to provide high volumes of port traffic for many years.

The stabilisation of Iraq's western Al-Anbar region in particular has been an important factor in Aqaba developing its role as a regional gateway, according to Imad Fakhoury, chief executive officer of the development corporation.

However, Iraq is trying to ensure that in the longer term, more of its trade is routed through its own ports. If imported goods do not have to travel overland through Jordan, it should help to cut the importers' costs. "To import anything you are paying a premium," says Richards. "The country has to develop, and to do this it desperately needs a port."

One of the most significant port developments in the region is taking place at Umm Qasr in the southern Basra province of Iraq. In July, the Iraqi Transport Ministry signed two contracts with foreign port operators to lease and develop new commercial berths at what is the country's only deep-sea port. One contract was signed with French shipping group CMA CGM, which already operates a berth at the port. The second was signed with an unnamed German-Kuwaiti company.

Capacity expansion

Under the contracts, the groups can use the berths in exchange for improving facilities at the site. The ministry says it has also agreed a deal with a local contractor to build two new docks and a container station at the port.

Complementing the developments at Umm Qasr, the government is also in talks with contractors over the design and construction of a new $3.6bn port at Al-Faw, also in Basra province. According to the Transport Ministry, the port will be the largest in the northern Gulf, with phase one creating capacity for 48 million tonnes of cargo.

These developments are unlikely to be affected by the gloom in global economics, as the scale of rebuilding work needed in Iraq means its economy is continuing to grow strongly. "Iraq is a country with a population of about 28 million people but only one sea gateway," says Richards. "Umm Qasr is doing as well as it can with what it has."

Iraq is clearly in an unusual position. The reality for most other countries in the region is that growth in trade is likely to drop sharply in the current economic environment, even if it does not decline in absolute terms. For port operators, this means there is less need to push ahead with expansion projects, but extra capacity is still likely to be needed at some point in the future.

Governments may also chose to press on with their port development plans as a way to stimulate economic activity in the construction sector.

"It may be a few years of standing still, then trying to just get back to where we were," says Davidson. "But we do expect to see a resumption of growth at some point, so these projects will still be needed in the long term."