Port vital to economic diversification in Abu Dhabi

17 October 2012

The newly opened Khalifa Port in Abu Dhabi is central to the emirate’s plan to boost trade volumes and diversify its economy away from oil and gas

Six years after initial designs for Abu Dhabi’s Khalifa Port were prepared, the facility finally began commercial operations on 1 September this year.

The port has been designed to handle some of the largest freighters in the world. The first ship to dock there was MSC Bari, which has a capacity of 14,000 containers. Just a few weeks later, the similarly-sized MSC Livorno docked at the port. A total of 2,500 twenty-foot equivalent units (TEUs) were loaded and offloaded from the ship within 24 hours, breaking the emirate’s existing container handling record, according to the Abu Dhabi Ports Company (ADPC), which is keen to promote the port’s speed and efficiency compared with Middle East rivals.

Our main focus is the Abu Dhabi economy and the Khalifa industrial zone, and to serve as an enabler for that

Martin Van de Linde, Abu Dhabi Terminals

Khalifa Port has been built at Taweelah, 60 kilometres from Abu Dhabi and 85km from Dubai, and will initially have a capacity of 2.5 million TEUs. This is a significant increase on the existing 40-year-old Mina Zayed port located in the centre of Abu Dhabi city, which is almost at full capacity. It reached 770,000 TEUs in 2011, a 50 per cent increase on the previous year.

Economic catalyst

Khalifa Port is intended to support the growing trade volumes moving in and out of Abu Dhabi, and will help the government deliver on its goal of economic diversification. It will also provide vital logistical support to the new Khalifa Industrial Zone (Kizad), situated adjacent to the port.

The Abu Dhabi government wants Khalifa Port to play a central role in bringing its 2030 Vision to fruition. Some 60 per cent of the emirate’s gross domestic product (GDP) is currently generated by the hydrocarbons industry, leaving Abu Dhabi vulnerable to fluctuations in oil price and production. In less than two decades, the government wants this to be offset by an array of non-oil and gas industries, such as metals and mining, chemicals, pharmaceuticals, aviation and healthcare equipment.

Port investments are long-term concessions of 20-30 years, offering stable but not hugely aggressive returns

Martin Van de Linde, Abu Dhabi Terminals

Abu Dhabi is already enjoying a degree of success in boosting non-oil related exports. The emirate’s ports registered a more than 100 per cent rise in non-oil merchandise trade in July 2012, compared to the same period a year earlier, according to official data. Exports of chemicals and related products rose by AED321m ($87.4m) in the 31-day period, while manufactured goods were up by AED209m.

The trade balance for non-oil merchandise, however, remains weighed in favour of imports, which accounted for 80 per cent of the total volume of non-oil trade in July. Exports represented 9 per cent of trade, while re-exports comprised a further 10.7 per cent.

A closer look at July’s non-oil merchandise trade statistics, however, shows that while year-on-year exports grew, non-oil exports fell in comparison to the previous month.

Total non-oil merchandise trade in July grew by 12 per cent compared with June, but this growth was driven by a 17.2 per cent growth in imports and a 5.2 per cent growth in re-exports. Non-oil exports actually fell by 15.4 per cent.

With the opening of Khalifa Port, it is hoped that not only will overall non-oil trade grow, but that the trade balance will begin to shift further in favour of exports.

“If you look at port volume before 2006/07, and break it down into cargo patterns, it is 99.5 per cent import and the rest of the containers go back empty. Now you see that shifting,” says Martin Van de Linde, chief executive officer (CEO) at Abu Dhabi Terminals, the operator of both Mina Zayed and Khalifa Port. “The imbalance is coming down, which is good for trade.”

Metals producer Emirates Aluminium has already helped to drive Khalifa Port’s diversification strategy. The company opened its smelter in Kizad in 2009 and shipped its first cargo from its dedicated berth at the port in 2010.

Increasing port capacity

To support continued growth in non-oil trade, Khalifa Port’s current capacity of 2.5 million TEUs can be increased to 5 million TEUs in the coming years to meet demand.

The infrastructure for capacity expansion is already in place, although the number of cranes to handle increased throughput must be increased as needed. Based on current predictions, full capacity will not be reached until at least 2015. At that point, Khalifa Port’s Terminal 2 will be earmarked for expansion.

“We could trigger additional capacity in about three to five years’ time. The first phase needs to be utilised by 60-70 per cent to trigger expansion,” says Van de Linde.

Kizad will provide a further catalyst for the diversification and growth of Abu Dhabi’s economy. The port and the industrial development are expected to add AED147bn to the Abu Dhabi economy by 2030.

Kizad will be divided into zones supporting specific industries, such as steel, paper and packaging, food, and pharmaceuticals. Once complete, the industrial zone will cover an area of 417 square kilometres, making it one of the biggest industrial zones in the world with a footprint two-thirds the size of Singapore.

Kizad zone A went live at the same time as Khalifa Port. This zone covers 51 sq km, including the port. The total cost of phase one of the port along with Kizad zone A stands at AED26.6bn.

To date, 44 clients, including those from Asia, Europe and the wider Middle East region, have signed agreements to reserve land or secure long-term leases within Kizad. The ADPC has been actively promoting the development in international markets, such as South Korea.

The primary infrastructure for Kizad A has been put in place, with some of the secondary infrastructure, such as smaller roads, still to be provided. 

“We are releasing secondary infrastructure packages to match the pre-sale of the plots. The faster they go, the faster we add to the secondary package,” says Tony Douglas, CEO at ADPC. “We are likely to go to the market with little and often.” 

Technological advancements at Khalifa Port

As well as offering increasing capacity, Khalifa Port is positioning itself as one of the most technologically advanced ports in the GCC. This, it is hoped, will help attract companies to the port as well as to Kizad.

To achieve this, intricate planning and cooperation was needed between ADPC and Bechtel, the company responsible for the project management of the port and Kizad. “It was a massive undertaking,” says Steve Kay, Khalifa Port project manager at Bechtel.

The port is built on an offshore island constructed from 45 million cubic metres of material dredged from the sea bed. Two causeways, both measuring 1.5km, and a 1km bridge, connect the port to the mainland.

During construction, an 8km environmental breakwater was built, designed to calm the waters in the approach channel and protect the corals close to the port.

Khalifa Port also boasts six of the world’s largest ship-to-shore cranes, the super post panamax cranes. Each has a lifting capacity of 110 tonnes and a reach of 65 metres, making them capable of dealing with some of the largest ships in the world.

The port is close to being fully automated, making it one of the most advanced in the region. “The terminal is very light in terms of operational labour due to the high degree of automation,” says Kay.

“Each truck entering the port has an active radio frequency identification tag (RFID) fitted. All pick-up and delivery appointments can be made online, so all the truck needs to do is roll up to the gate, and the barrier will open automatically, know where it is going and will direct the truck,” he adds.

The only operation in the port that is not automated is moving the containers from the quay wall into the container yard. Containers are offloaded from ships and placed on the quay wall by the port’s ship-to-shore cranes, before manned shuttle carriers take the containers to the yard. Once inside the yard, the process is fully automated.

“That’s a first in the Mena [Middle East and North Africa] region. There is no comparable capability,” says Douglas.

Although Khalifa Port and Kizad are central to Abu Dhabi’s domestic growth and the government’s wider economic strategy, their contribution to overall GCC port capacity is relatively small. Current regional capacity stands at approximately 51 million TEUs, and Khalifa Port will add 2.5 million TEUs. Just over 150km away from Taweelah, Dubai’s Jebel Ali port is already handling 14 million TEUs and port operator Dubai World is looking to increase this to 19 million TEUs by 2014.

Given Khalifa Port’s relatively small initial capacity, Redwan Ahmad, equity research analyst at EFG-Hermes in Dubai, believes the port “adds capacity [to the GCC region], but it is not a game changer at the moment”.

Indeed, the strategy behind Khalifa Port is not to encroach on the transhipment business currently dominated by Jebel Ali.

“It is not our intention to compete on the immediate trans-shipment market,” says Van de Linde. “Our main focus is the Abu Dhabi economy and the Khalifa industrial zone, and to serve as an enabler for that. And then, if the market demands trans-shipment to be handled, we’ll do that as well,”

Strategic investment into ports

Instead, Khalifa Port is largely a strategic investment for the Abu Dhabi government, designed to support fundamental changes to the foundations of the emirate’s economy. The government is taking a long-term view of the port’s value, rather than expecting to make an instant return on investment.

“Returns are not going to be great initially, but that might not be the key driver. With a company such as DP World, it is about how quickly you are going to make returns, whereas Abu Dhabi’s port is more strategic,” says Admad.

The Khalifa Port development was entirely government-funded, further demonstrating that Abu Dhabi has the long-term commitment, money and risk appetite to make such an investment.

“We didn’t go to the debt markets or seek external financing,” says Van de Linde. “Ports for a long time have been attractive assets for global investors to undertake, but you need to be a certain type of investor in terms of capital allocation and matching it to the profile the assets will generate.”

He adds that although port assets are attractive, they have been overvalued in recent years and a widespread repricing has taken place. “Port investments are long-term concessions of 20-30 years, offering stable but not hugely aggressive returns.”

For Abu Dhabi, port investment is a long game and central to the emirate’s strategy for future growth.

In numbers

2.5 million TEUs: The current container capacity of Khalifa Port

5 million TEUs: Maximum capacity at Khalifa Port, which is not expected to be reached until 2015

TEUs=Twenty-foot equivalent units. Source: MEED

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