Sohar Port CEO Andre Toet has made bold claims about his facility’s potential to become a hub for GCC food imports, and so lower the region’s food costs. His statements came on the back of several food and agriculture project announcements from Sohar in January and February, including deals for food processing and flour milling facilities at the port.

On the back of a previously announced $170m agro-bulk terminal, $200m sugar refinery and $600m polyethylene terephthalate (PET) packaging plant, Toet has positioned food as the “fourth pillar” to Sohar’s business strategy, along with hydrocarbons, metals and logistics.

Well positioned

Toet says the port, located outside the Strait of Hormuz, and with high-capacity transport links soon to be unveiled (a road link to Riyadh is due to be completed in April, while a connection to the GCC rail network is scheduled to open in 2017), is well positioned to capture a significant portion of the region’s agribusiness traffic, along with other forms of cargo.

“It will cut transit time, insurance, ships not having to go up north, and then you win,” he says. “If we manage at the same time what I call ‘ease of doing business’ – no customs checking, no border checking – then Sohar has a very nice position before the Strait of Hormuz to become a strategic hub for the container business, the car business and, possibly, if it further evolves and develops, the food business.”

Agro-bulk terminal

Sohar is allocating significant resources to this new pillar: when complete, and if fully utilised, the 4.5 million-tonne agro-bulk terminal could make up about 7.5 per cent of the port’s total capacity. In addition, the 9.3-hectare site recently signed over to the UAE’s Al-Ghurair Investments for food processing activities occupies a prime site on the waterfront, with the flour and sugar mills nearby.

It will definitely be one of the ports with a very significant handling capacity for grains and sugar

Shailesh Garg, Drewry Shipping Consultants

“This is a big capacity, not something that can be easily replicated; 4.5 million tonnes is big for a single port,” says Shailesh Garg, director and general manager at the UK’s Drewry Shipping Consultants. “It will definitely be one of the ports with a very significant handling capacity for grains and sugar. They are definitely trying to position themselves as a very aggressive player in this sector, and… compete with some of the leaders in the UAE and Saudi Arabia.”

Cost advantage

But while a major part of the Port of Sohar’s purported advantage relies on its location outside the politically vulnerable Strait of Hormuz, the cost advantage may not be as significant as hoped. According to one analyst, current low shipping costs are likely to persist into the foreseeable future, and mean there is little difference in the price to ship to ports within the Arabian Gulf when compared with Sohar.

“For Panamax vessels [ships of the maximum dimensions that will fit through the Panama canal, with a capacity of about 75,000 deadweight tonnes], two days of additional sailing would mean about $28,000 for bunker,” says the analyst. “Assuming a 50,000-tonne parcel, this would be about 60 cents on the tonne. So, in total, additional charter and bunker charges would probably be about $1 a tonne. Still, I think it may not be significant enough to cover land transportation costs and handling charges.”

The analyst suggests the added complexity of transferring cargo to land transport would also drive up costs: “Multiple handling leads to losses; whatever gains you’re making on shipping are offset by not only your additional handling costs and land transportation costs, but also your handling losses. Added up together, this may not make it a very attractive proposition.”

Red Sea competition

Only a major disruption to shipping through Hormuz – a real threat when Iran threatened to blockade the strait in 2011, but less likely today – would change the cost-benefit equation. In the absence of that threat, Sohar will face significant competition from Saudi Arabia’s Red Sea ports.

Toet acknowledges Sohar will have to work to create a compelling and seamless value proposition to compete with Gulf-based ports. The port will focus on creating a fully integrated connection to the GCC rail network, to reduce the overheads for land transportation.

“What we will do is create rail undock facilities on those terminals, so that will give them direct access to the upper Gulf,” says Toet. “And if we can make sure the train can load, depart and go seamlessly through the border up north, then we will have an extremely good product from Sohar.”

Garg also believes Sohar will have tough competition from existing ports, especially in the UAE, where food producers such as Brazil’s BRF have established major facilities. He notes that 20-25 per cent of Oman’s container traffic comes through Dubai, with shippers attracted by the lower freight rates.

Food processing

But Garg also says Sohar’s new strategy of targeting food processors may pay off. “They want to become a location of choice for people to develop food processing industries, which could be used to serve local demand, and maybe some of the neighbouring countries – and also to export to other countries, especially in Africa, as well as Iran and the subcontinent,” he says.

“They want to use this locational advantage so they can bring in grains, set up food processing industries, and then ship it to countries in East Africa, primarily. They see it as a big market for them; today it is largely being served through the UAE.”

Toet is optimistic about Sohar’s future as a food processing hub. While the Al-Ghurair facility within the port itself will be focused more on low-level food processing and packaging, the presence of the flour and sugar refineries, along with a 4,500-hectare free zone, opens up several possibilities.

Sugar refinery

“These three basic food industries [such as grains and food processing] will help us accelerate and attract other agribusiness as well,” says Toet. “If you think about downstream activities in the free zone with the sugar refinery, they are countless. Packaging juices and those kinds of things could be a beautiful thing to develop in the logistics area in the free zone.”

What for us is important is that we manage to get further downstream activities into our free zone

Andre Toet, Sohar Port

Aside from the business elements of Sohar’s agribusiness focus, this new pillar also fulfils several strategic objectives for Oman in general. Chief among these is the establishment of a strategic food reserve, in which Sohar will play a major role.

As part of the country’s reserve, Sohar’s agro terminal will be required to store 250,000 tonnes of grain, with additional targets for sugar and rice that have yet to be determined. In this, Oman is in step with the other GCC states, which have all established strategic food reserves to guard against unrest and price shocks.

“This storage capacity they are trying to develop is not only to maintain the supply chain, but also to insulate them in terms of any price fluctuations in the short-to-medium term, so they are not overly exposed,” says Garg. “They were really hurt in in 2008-09 when food prices shot up, with 12-15 per cent inflation or more in some countries.”

Job creation

Another strategic element is job creation, a high priority for all GCC countries, faced with increasingly youthful populations. There is job creation potential within food processing industries, as well as downstream activities in general, and Toet says the port could create as many as three downstream jobs for every one upstream role.

He adds that one of Sohar’s general strategies is to develop its downstream capacity, describing its upstream capabilities as “well-equipped”.  As well as creating more jobs, downstream activities consume less energy than upstream, making them more competitive.

“What for us is important ­– because from a land point of view the port is really filling up – is that we manage to get further downstream activities into our free zone from metals, hydrocarbons, logistics and food,” he says. “To really make use of all the upstream we have in the port, [we need] to make sure we attract downstream activities to the free zone. That will be our strategy.”

Additional element

While it may be tempting to read Sohar’s move towards agribusiness traffic as an attempt to diversify away from oil amid lower crude prices and, in Oman, increasing extraction costs, Toet is clear the port’s fourth pillar is an additional element. “This is really an add-on,” he says.

Garg agrees, saying oil will always be a major driver of business for Sohar and other Omani ports. But he suggests there is a move towards value-added products and away from straight oil exports. With Sohar’s forthcoming PET packaging plant, aimed primarily at the soft drink industry, the port seems focused on bringing its petrochemicals and food operations together.