Ports in numbers

$333m: Annual profit at Dubai-based DP World in 2009

46 per cent: The drop in DP World’s 2009 profit compared to the previous year

$5bn: Estimated value of New Doha Port

Sources: DP World; MEED

The ports and shipping industries have become key drivers for the region’s economic diversification in recent years. With materials to supply the GCC’s construction boom arriving by sea, along with consumer goods for the region’s burgeoning middle class residents, ports have been earmarked for a multi-billion dollar overhaul.

Questions remain over whether the Gulf has the traffic to sustain all the new port capacity under construction

Some $100bn in new port developments and expansion projects were under way across the region in early last year before the economic downturn led to a collapse in global trade.

The ports and shipping industry endured a dismal 2009. After years of strong growth, trade volumes between Asia and Europe were down by as much as 25 per cent as the free-spending times in Western economies came to an abrupt halt.

Selected Gulf container port projects
Port Country Expansion (million TEUs) Cost ($m)
New Doha Port Qatar * 2.0 5,000
King Abdullah Economic City Saudi Arabia  * 1.7 3,000
Khalifa, Abu Dhabi UAE * 2.0 2,000
Bubiyan Island Kuwait * 1.0 1,100
Shahid Rajaie Iran 1.5 600
Red Sea Gateway Terminal Saudi Arabia  1.5 450
Dammam Saudi Arabia  3.2 430
Port of Salalah Oman 4 360
*=phase one; TEU=20-foot-equivalent units. Source: MEED

The market remained stagnant throughout the year. Dubai-based DP World, the biggest ports operator in the region, reported annual profits of $333m for 2009, a drop of 46 per cent from 2008. The company said freight volumes at its international terminals had shrunk by 8 per cent.

The slump in global trade placed many of the port construction projects around the GCC in jeopardy.

Expansion stalled at Dubai port

DP World was one of the first to rethink its expansion plans. A second terminal at Dubai’s main port in Jebel Ali, completed in early 2009, took capacity at the site to 14 million 20-foot equivalent units (TEUs). Plans for a third terminal have been put on hold.

The port operator says it will continue to monitor the condition of the market. Land has been reclaimed for a third terminal offshore, but the scale of investment to develop the site cannot be justified at present with so much spare capacity at the existing terminals.

A key trans-shipment hub at the Omani port of Salalah has also suspended its plans to build three new berths adding 3 million TEUs of new capacity. Sources close to the project say that after a substantial drop in profits at the port last year, a new design scope is being considered to build the three berths as cheaply as possible.

Some countries had little option but to continue building after the downturn hit. Bahrain’s new 1-million-TEU capacity facility, Khalifa bin Salman port was close to completion when the market began to struggle. Work was also already under way on the new Red Sea gateway at Jeddah Islamic Port in Saudi Arabia and has continued.  “The new terminal is filling up now. We started operations two months ago and have already had 200,000 TEUs through. Final work will be completed within two months,” says Saher Tahlawi, director general of Jeddah Islamic Port.

There are clear signs the Middle East shipping market is bouncing back from 2009’s difficulties, says Tahlawi. The first five months of 2010 have seen a 40 per cent increase in trans-shipment traffic through Jeddah, compared with the same period in 2009. Total traffic volumes are up 20 per cent.

Ports in Kuwait, Qatar and Bahrain move ahead

Some projects are also swinging into life again. In Kuwait, a first phase contract on the Bubiyan port development worth KD328m ($1.1bn) for quay walls and dredging is set to be awarded to consortium of South Korea’s Hyundai and the local Kharafi Group. Consultants bidding for the design contract on the project have been called for interview in early July.

In Qatar, plans for the $5bn New Doha Port are advancing, with indications the scope of the first phase could be more ambitious than originally planned.

“There have been no awards yet, but they are aiming to build bigger in the first phase because it is cheaper to build at the moment. They are thinking of including a naval base in the project to attract the US 5th Fleet [currently stationed in Bahrain],” says an industry source.

Questions remain over whether the Gulf has the traffic to sustain all the new port capacity under construction. Several countries seem to be targeting the same trans-shipment business, aiming to establish themselves as new hubs for the regional market. 

When all the port projects in the region are complete for example, the northern Gulf will see Bahrain, Qatar and Kuwait competing between each other for trade. Expansion is also planned for Dammam in Saudi Arabia and Iraq is considering a new container port of its own.

Bahrain’s Khalifa bin Salman port has struggled to attract new business since opening in 2009. While the severity of the downturn affected customers’ willingness to uproot their business, Bahrain’s difficulties also suggest that currently there is not enough traffic to go round. Even when the market recovers fully, opinion within the industry is divided over whether the new ports can establish themselves as new regional trading hubs. To do so would require taking a share of the regional trans-shipment market.

In 1980, containers handled an estimated 23 per cent of global trade. By 1990, this had hit 40 per cent, rising to 70 per cent by 2000. In 2010, containers are estimated to make up some 90 per cent of all world trade.

Low returns on trans-shipments

Returns on trans-shipment, however, are low. DP World tariffs on trans-shipment containers are half what they are for domestic imports. Dubai’s large local market and DP World’s global reach make this structure profitable, but other port operators in the region do not have the scale to compete on this level.

Building capacity is easy for a government with the money to do so. Attracting customers is considerably more difficult.

Any incentives offered for shipping lines to transfer from their existing hub to a new port are largely outweighed by the huge expense and upheaval involved.

“Once you become a hub, it is difficult to move. We make a huge investment in infrastructure, cranes and buildings. Our trading companies have real-estate investment there as well,” says a Gulf-based official at one of the world’s leading port operators.

“In the trans-shipment market, there is definitely not the traffic for it [in the Middle East], though we have been saying this for years, Jebel Ali is a great facility and it is already there.

“I don’t think we will see any major shipping lines changing their base. These new trans-shipment projects don’t make sense. Governments are doing this without any regard for profit.”

For those countries whose coffers are flush with oil and gas revenues, profitability has often been a secondary concern. The principal motivation for building new ports is to create jobs and accelerate economic diversification.

Abu Dhabi and Qatar, in particular, have seized on the ports sector as a means of developing their second and third-tier petroleum sectors as drivers for industrial growth and employment.

Bids have been submitted to build the offshore terminal at Abu Dhabi’s Khalifa port at Taweelah. The first phase of the project, to be completed by late-2012, will have capacity for 2 million TEUs and 6 million tonnes of cargo (MEED 21:5:10). Subsequent phases through to 2030 would take capacity at the port to 15 million TEUs and 35 million tonnes of cargo across a 15 square kilometre site, with 26km of berth space.     

The project has been the source of much industry speculation because DP World is contracted to assist the Abu Dhabi government with running the port, as it does at the capital’s current facility Mina Zayed.

An ownership agreement is still being thrashed out in private between the two parties, but the potential for a conflict of interest is clear. One industry observer describes the situation as “leaving a fox in charge of the chicken coop”. In 2008, before the recession hit, DP World officials confided that they saw Khalifa port as little more than an overflow port for Jebel Ali.

Two years on, however, Dubai’s economy is struggling and the relationship between the two emirates has been radically realigned.

Even when Khalifa port eventually has the capacity to compete with Jebel Ali as the region’s main hub, the capital will not be able to take trans-shipment traffic from its neighbour without slashing prices to lure companies down the coast. With margins in the trans-shipment market already slim, this would only damage the national economy and distort the industry across the region.

Whatever tensions may exist beneath the surface, outwardly at least, the UAE’s two largest economies are making a show of unity.

“We are looking at a One Port Strategy with DP World,” says a spokesman for Abu Dhabi Ports Company (ADPC).

“We are still in discussion with DP World about the ownership structure, but we want to avoid competing ports. We want to serve the UAE as a whole, although how this will work is still to be decided.”

By the end of this year, ADPC will begin to market the first phase of the industrial zone adjacent to Khalifa port. A 417-square-kilometre area of land, four times the size of Abu Dhabi island, has been allocated for development. The first tenant on the site, UAE-based Emirates Aluminium, will build a 750,000-tonne smelter on the site.

By developing its industrial capacity around its oil and gas reserves, Khalifa port can complement Dubai’s supremacy in the trans-shipment market and the light industry that has gathered at Jebel Ali freezone.

Due diligence

Martin Mannion, head of UK consultant Scott Wilson, believes that this common sense approach is now being reflected across the region after the boom years, when multi-billion dollar projects were unveiled on a weekly basis.

Governments today are taking a much keener interest in financial and technical due diligence on their port developments.

“The only justification to go quicker is if they think they can get it built cheaper now, at a time when contractors are desperate for work,” he says.

Officials at the Gulf’s main port gateways seem unconcerned by the rival projects around them. Jeddah Islamic Port has had difficulties with congestion in recent years, with roads in and out of the port becoming clogged with lorries. This could quickly return once global trade recovers fully.

Further up the coast, development has begun on the new port at King Abdullah Economic City, promising purpose-built facilities without the hindrance of a sprawling city surrounding the site.

Its 13.8 square-kilometre seaport will become one of the world’s top five largest industrial ports when completed. It will have the capacity to handle more than 10 million TEUs and is expected to create 15,000 jobs when fully operational.

Officials at Jeddah are aware that their position as the incumbent gateway in the Red Sea affords them a massive long-term advantage. 

“King Abdullah Economic City will open with 1.5m TEUs, but that’s good. There is plenty of business for everyone,” says Tahlawi.

“We are not concerned; they will not take our business.”