The case for expansion of ports in the region

10 November 2009

Are port operators right to continue with plans to build billions of dollars worth of additional capacity in the current economic climate?

With $46.5bn worth of port development projects in the Middle East planned or under way, the market for building or expanding the region’s ports has proved to be far more resilient than the wider construction sector. Government-backed spending is going ahead despite the economic downturn, albeit more slowly than in recent years.

Three major new terminals will have opened in the GCC by the end of the year. In February, Dubai’s DP World opened a second terminal at Jebel Ali Port, bringing with it additional capacity of 2.5 million 20-foot equivalent units (TEUs) and taking overall capacity at the port to 14 million TEUs.

In April, the first vessels called at Bahrain’s Khalifa bin Salman Port, operated by Netherlands-based APM Terminals, which can handle up to 1 million TEUs a year. The port has drawn commercial shipping away from the older Mina Salman port in central Manama to a newly reclaimed site at Hidd to the west of the capital.

The year will end with the launch of a third terminal at Jeddah Islamic Port in Saudi Arabia. Developed and managed by Saudi Trade & Export Development Company (Tusdeer), the Red Sea Gateway Terminal will deliver 1.5 million TEUs of new container capacity, increasing the port’s handling capacity by 45 per cent.

Falling traffic

But how urgently is all this new capacity needed? Although the economic downturn arrived later in the Middle East than in Europe or Asia, it has hit hard. With shipping lines cutting their services on routes between the Far East and Europe by 20 per cent since last year, there is now far less trans-shipment cargo.

As a result, Middle East container traffic fell by 10-15 per cent in the first half of this year compared with the first six months of 2008. Although that is not as bad as markets such as Europe’s Black Sea region, where imports have been slashed by up to 50 per cent this year, it is still a concern for port operators.

In July, the Suez Canal Authority said it had suffered a 7 per cent drop in annual revenues to $4.7bn, compared with the previous year’s record $5.2bn. The total volume of cargo passing through the canal in 2008-09 fell by 8.9 per cent, to 811 million tonnes from 890 million tonnes a year earlier.

Adding to the problems, the downturn hit just as the world’s biggest shipping lines were taking delivery of large new container vessels, leading to even more surplus capacity.

The short-term prospects for trans-shipment appear bleak, with few signs of the economic recovery in Europe needed to boost volumes on the Far East-Europe trade route.

One small comfort for the region’s port operators is that they are not suffering as badly as those in other regions. According to UK industry analyst Drewry Shipping, the GCC and Levant market faces a 7 per cent drop in container volumes this year, making it more resilient than most.

“We anticipate a global drop of 10 per cent,” says Neil Davidson, ports director at Drewry Shipping. “The Middle East is one of the better performing regions of the world. We also expect the Middle East to recover more quickly than many other markets, with container volumes returning to 2008 levels as early as 2011, ahead of Europe and North America.”

“It amazes me when every single country in the Middle East says it is going to be a major trans-shipment hub”

Senior port manager

Even so, the decisions by regional governments to continue expanding their port capacity might seem rash. Khalifa bin Salman Port has yet to win trans-shipment business for Bahrain, and the once-bullish DP World has postponed Jebel Ali’s planned $1.5bn third terminal for the foreseeable future.

Even Jeddah in Saudi Arabia, which urgently needed additional capacity last year, anticipates an 8 per cent drop in container volumes in 2009. Tusdeer, which previously said it expected the new terminal to handle up to 500,000 TEUs in its first full year of operation, has yet to announce who its customers will be.

With all three new ports fighting hard to win business, some industry observers fear the Middle East has now swung from a position of having a lack of sufficient port capacity to having too much.

“There is no doubt that there is overcapacity in the Middle East,” says Martijn van de Linde, chief executive officer of the Port of Salalah in Oman. “Across the region, utilisation levels have fallen to 65-70 per cent, because of the huge decline in regional demand and shipping lines laying up their vessels.”

However, Davidson takes a more optimistic view. “It is overstating the case to say that Middle East ports have swung from congestion to overcapacity,” he says. “What is true is that the market has softened so that the congestion that existed in 2008 is no longer there.”

He also says it could make sense for ports to expand now. If regional terminals have struggled to cope with demand in recent years, any early return to economic growth in the next year or two could bring renewed congestion.

Capacity shortage

A year ago, capacity was under immense strain at both Jebel Ali Port and Jeddah Islamic Port, with the level of traffic creating delays and bottle-necks. The two ports handle both domestic and regional trans-shipment traffic, and both struggled to cope with the demand created by the booming economies of the region.

Container volumes at GCC ports grew at an average rate of 12 per cent a year from 2004 to 2008, rising from 15 million TEUs to 24 million TEUs.

Dubai’s ports outperformed their rivals throughout this period, with annual growth averaging 16 per cent. But a lack of capacity has held back Jeddah’s growth. The port increased its overall throughput by 8 per cent in 2008, but its trans-shipment throughput fell by 3.3 per cent to 1.46 million TEUs after some shipping lines switched their business to less congested ports in the region.

Before the oil boom began in 2003, most Middle East ports were handicapped by under-investment. A handful of world-class trans-shipment hubs – including Jebel Ali, Port of Salalah and Khorfakkan Port in Sharjah – stood out, but most ports suffered from having shallow draft, poor handling efficiency, under-investment in technology and crumbling infrastructure.

With the economic growth between 2003 and 2008 came a boom in regional trade, and governments started to redress the long-standing problems. All of the countries in the region have tried to increase the value and volume of their exports, with companies expanding their output in everything from aluminium goods to petrochemical products to counter the deluge of consumer imports.

Saudi Arabia’s chemicals and petro-chemicals industries alone are expected to generate at least 900,000 TEUs of containerised goods a year in the short to medium term. And with 14 per cent of the world’s traded goods passing through the Suez Canal, Jeddah Islamic Port and the planned King Abdullah Economic City Seaport at Rabigh are ideally placed to take a share of the regional trans-shipment market.

Some observers argue that modernising and improving efficiency at ports is essential for countries to achieve their industrialisation goals. If the current global recession achieves one thing, it could be that future port development is more closely targeted and less speculative than it was in the recent past.

In the current market, financial backing is only available to projects that demonstrate they can take advantage of proven demand. Now, more than ever, port developments must take a clear look at what business bases they are going to target.

“It amazes me when every single country in the Middle East announces it is going to be a major regional trans-shipment hub like Dubai,” says one senior port manager. “This is how white elephants are created.

“Hub ports can only exist where there is a reason for them to exist. There are several logical hub ports. The planned King Abdullah Economic City Seaport will handle growing Red Sea trans-shipment. Salalah handles Indian Ocean trans-shipment. Bandar Abbas is a hub for the Iranian market, and Tanger Med a hub for North Africa.”

But although every country in the GCC, and many beyond it, have plans to develop their ports infrastructure, not all projects are going ahead.

Delays are more common than outright cancellations of projects. Jebel Ali’s third terminal and Morocco’s Tanger Med II are just two of more than a dozen high-profile Middle East port projects on which progress has slowed. According to regional projects tracker MEED Projects, $11.5bn worth of regional port construction projects face significant delays.

Many industry executives have welcomed the new sense of realism brought by the financial crisis.

“White elephant port projects are not healthy for anyone, including shipping lines,” says Robert Hambleton, chief commercial officer at Suez Canal Container Terminal. “If there is too much capacity, it creates a rates war, which then reduces future ability to invest. It creates a negative spiral.”

The regional projects that are moving forward are closely targeting specific market opportunities. Sharjah-based Gulftainer aims to complete work on the new 400-metre berth at Khorfakkan Container Terminal by the end of this year. Keith Nuttall, the company’s group commercial manager, says the extra capacity is essential if the port is to be able to handle its customers’ ever larger ships in the future.

In June, Port of Salalah announced it would add three new berths to increase capacity from 5.5 million TEUs to 9 million TEUs.

Salalah is expanding in partnership with one of its largest customers. Two of the three berths will be a 50:50 joint venture with shipping line APL, a subsidiary of Singapore-based Neptune Orient Lines.

But even this project is less clear-cut than it initially seemed. Having aimed to open APL’s dedicated 1.6 million-TEU terminal in 2011, Port of Salalah is now reviewing the timescale of the project.

“The expansion is not cancelled,” says Van de Linde. “We will complete the design stage in two or three months, and are still committed to the new berths, but we are looking at the timing. When port utilisation levels return to 75-80 per cent – probably next year – we will look at starting construction, working to a delivery lead-time of about 18 months.”

Cyclical industry

After six years of double-digit growth, when ports were full to bursting point and rising consumer demand for imports appeared relentless, the downturn has sent shockwaves through the Middle East ports sector.

But trade is cyclical, and the region’s cargo will return to growth. The question for port operators and their shipping customers is how much, and when?

The UK’s Ocean Shipping Consultants anticipates that worldwide container volumes will fall in 2009 and 2010, but will pick up after that, reaching a growth level of 6-8 per cent by 2015.

If that happens, the region will need new capacity and will have to start preparing for it soon. It takes between 18 months and two years for ports to approve, award and deliver new berths.

Achieving a balance between container capacity and market demand is never easy, but in today’s volatile climate, it is particularly difficult. “Many port developers genuinely don’t know how fast they need to progress,” says Davidson.

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