Ambition or extravagance?

03 Nov 2015
Kick off: Doha's new Hamad project will be under pressure to get everything in for the 2022 World Cup

Kick off: Doha's new Hamad project will be under pressure to get everything in for the 2022 World Cup

A recent clutch of Middle East projects build on the region's flare for larger-than-life, writes Stevie Knight

A dazzling array of port projects dominate the Middle East: more, in some cases, than is warranted by the numbers of residents.

Take Abu Dhabi’s aim for 15m teu by 2030 when in fact it has a population of around 2.7m, only a fifth of which are UAE nationals. Or Qatar New Port’s 6m teu Hamad development: the entire population is barely 2.4m and of these, 90% are temporary foreign workers: even given its 2022 World Cup focus, this seems distinctly out of kilter. But is it really an unreasonable exercise? That depends on what the point is, explains Alistair Mackie of HFW: “Some are playing a very long game and looking at strategic benefits for the country.”

Most of the regions’ new facilities have enticing bedfellows: vast industrial parks which come with welcoming tax relief. “Ports want to stop being too reliant on transhipment - the lines, which are under huge pressure to cut costs, can simply walk away if there’s a cheaper deal next door. But if their clients have bought into an industrial zone it should slow them down a bit as well as lifting volumes.”

Therefore Abu Dhabi’s $7.2bn Khalifa Port is relying not just on its own high-tech, semi-automated equipment but on the 417 km2 Kizad industrial zone to help accelerate the port away from its present, comparatively modest 1.38m teu throughput.

However, it’s not that these tax-break trading areas exist to boost the ports, but rather that the ports are there to back up the industrial areas, explains Shailesh Garg of Drewry. “The Gulf economies are in the middle of trying to diversify their economic base; they don’t want to keep depending on oil. So these zones are acting as a catalyst for the aims and objectives of the various governments, not simply to add volumes to the port.” For example, Abu Dhabi is looking to its Khalifa-Kizad complex to eventually contribute up to 15% of the country’s non-oil economy. “The output won’t just supply the immediate population, it should result in a healthy export stream.”

 

Pack leader

Despite this, one of the big problems for port development in the Middle East is just how far Dubai’s Jebel Ali is ahead of the rest of the pack – putting a spurt on when it senses competition behind. “It’s fourth terminal is probably really the most significant development in the area,” says Mr Garg and if the recently inaugurated Terminal 3 is included, the port will have almost doubled its capacity in just five years, bringing it up to 29m teu by 2019.

Although its detractors are quick to point out that it isn’t geographically that well placed, Jebel Ali continues to generate its own momentum and like a very compact black hole the more it sucks in, the more it grows. “The sheer volumes are so high at Jebel Ali that it’s actually hard for lines to avoid the port,” says Mr Garg. So although other countries are looking to bend the volumes their way, “they might have difficulties when it comes to changing the traffic flow”.

Having said this, the Hamad facility being constructed next to the older, now congested port at Doha, Qatar, has a rare opportunity: it is going to use the 2022 World Cup as a springboard for its 26km2, 6m teu aims as well as tackling one of its more entrenched stumbling blocks – endemic construction inflation. So, its 17m depth aims at reducing the delays and demurrage charges presently hampering Qatari’s building programme, although capacity will still be under pressure as the spectacle approaches and of course it runs the risk of disgruntled regulars and a steep fall in its wake. 

Back to the boxes: while the World Cup will help put it on the map, both Mr Mackie and Mr Garg are slightly dubious about big volumes hitting the quay right away. Although Mr Mackie is clear it’s got potential, Mr Garg says: “Qatar seems to expect that once this beautiful, state of the art facility is built, it will simply pull in cargo from other places.” So, even though the new project may help Qatar get back some of the traffic presently routed through Jebel Ali’s deeper water, “given today’s half million teu volumes, to be honest, I feel its projections are a little optimistic”, he concludes.

But it’s not just the hardware on offer that puts Dubai ahead, “it’s the soft infrastructure” says Mr Garg. He adds: “Anyone, given enough funds, can put together the hard infrastructure, but when you talk of ‘Dubai’ everyone knows what you mean: ease of business. It’s shaped Jebel Ali’s port and free zone to become one of the most successful in the world. Other ports will find it very difficult to replicate that.”

 

Saudi's drive

Saudi Arabia, the country with the GCC’s largest population and, arguably, the most culturally difficult from the Western point of view, has been building a 70 square mile city from which to deal with the world.

The ruling family has realised the country needs a ‘softer touch’ both when it comes to foreign business and its own, rapidly expanding educated youth who want to have western-style freedoms and comforts. Bringing the two together has been an inspired move: since wholesale change was never on the cards “Saudi gone for an ‘island’ approach with more relaxed attitudes contained in the King Abdullah City and Economic Zone”, explains Mr Garg although he says it's anyone's guess how long these attitudes will remain ‘contained’.

While it will take longer to tell if Saudi’s King Abdullah City social engineering experiment is working, what about the port and its 20m teu ambitions? “Although already handling ships, the new port is facing initial inertia and it’s not picking up quite as quickly as expected,” he admits, “but given three to five years it should gain traction.”

In fact this is the same pattern across many of the region’s newer projects: look behind Khalifa’s “fastest growing port in the Middle East” headlines and last year's rise comes to around 236,000 boxes: good but not the trajectory necessary for its 2030 vision of 15m teu – although Phase One has been pitched at a more realistic 2.5m teu plus 12m tonnes of general cargo. And yet more capacity is coming onstream: the Oman International Container Terminal at the Port of Sohar has started with 800,000 teu: last year saw the shift of commercial cargo from Port Sultan Qaboos in Muscat and despite a few challenges, the expanded container Terminal C is up and running. On its side it has a good position outside the Straits of Hormuz and is busy building up hinterland connections with the aim of reaching 6m teu. 

Despite all this, King Abdullah Port may be among the winners, especially if it can provide a faster and flexible customs processes, resulting in lower dwell times at entry says Mr Garg. He explains there’s some low hanging fruit: “A container can be delayed by 10 or 20 days in a Saudi port due to stringent customs and inspections. There’s far less hassle if it makes first entry into Dubai – despite the extra cost involved in going through by truck.” Therefore Saudi might reclaim some of its own volumes simply by shortening the process.

Mr Mackie adds that the ‘herd factor’ can’t be underestimated: “It’s a very competitive market so when it comes to new facilities, gaining any momentum going to be difficult. However, there’s comfort in numbers so industrial zones help: customers tend to feel happier when there’s others around as they don’t feel so exposed, there’s less reason for the government to forget about the port and stop investing. So once you get a couple of anchor tenants, others tend to follow.”

 

Oil concerns

The elephant in the room is the oil price. Even given that these industrial zones will eventually pick up traffic, is there enough money now to see it all through? Various governments may have to develop more pragmatism, says Mr Garg. “Until now we haven’t seen any big dent in the area’s ambitions, but already some of the oil sector projects have taken a hit, although we haven’t seen it extend to transport infrastructure – as yet. But given this extended dip in oil revenue I think some regions, especially Oman, Qatar and Saudi Arabia, will have to go back to the drawing board and re-evaluate which projects take priority.”

He adds that even though some countries such as the UAE are not so apparently dependent on oil and gas, “investment money tends to come from other oil producing neighbours” so even they might find it necessary to tighten the strings. Emptying purses might also give rise to another dynamic: if Oman and others start to look at new ways of raising finance similar to PPP deals or bond issues then it may mean tackling the tranche of opaque GCC laws and regulations that can put off overseas investors.

One of the region’s typically ambitious plans is to link the six GCC members by a 1,940 km railway, but so far, only Oman and Saudi are on schedule with others slipping out of the 2018 completion.

However, again, there are other elements at play beside sheer commerciality. “Saudi especially sees the Straits of Hormuz as a weakness to their basic food security: it’s always been aware of what might happen if the strait gets closed – this has been part of the reason for its railway and ports projects as they will give the country more entry points,” says Mr Garg. 

It seems they might go to extreme lengths to afford security, 950km in fact. There are stories in the local media that suggest a $80bn canal from Khour al-Adid to the Arabian Sea, bypassing the Strait entirely.

 

Iran's revival may not be 'earth shaking'

There’s another big player about to re-enter the Middle East field: Iran. But will this distort the present game? Mr Garg says that the main port of Bandar Abbas lost around 800,000 of its then 2.4m teu when the sanctions came down but even despite this, its present throughput is 1.8m “so there’s a pent up demand waiting to explode”.

However, it might not have an earth shaking effect straight away: Bandar Abbas’ probably needs something of a revamp “and since it was constrained just before the sanctions, if the returning demand results in really high utilisation levels it won’t suit the lines”. He adds that Iran will probably respond by augmenting the present infrastructure rather than building anew, “but they don’t tend to move so fast, so I don’t expect anything to happen inside two or three years”.

Despite this, the big operators are sniffing around says Mr Mackie:“Iran has a huge middle-class population but it’s been isolated for so long a lot of the bigger players will be very interested in the potential.” Mr Garg adds since a lot of cargo – presently going through Dubai – will probably start to reroute back to Iran, there’s whispers that DP World could be thinking about re-entering the arena. “It may be that they have an idea how much cargo is slipping through Dubai on its way to Iran already and think it worthwhile trying to get hold of that flow when it switches back,” he says.

But this isn’t all there is to Iran, and other players’ interests have remained alive despite the sanctions. For example, the Chabahar port project is being supported by India who wants to use it to provide an energy and mineral bulk corridor from Central Asia and Afghanistan. The carrot for Iran is that Chabahar could spur growth and move it away from a ‘war economy’ linked to damaging trades such as drug trafficking.

However, while Iran may be about to return to the fold, other places, such as Yemen, have suffered from both sides: Aden has been shut down since March, only recently reopening with the retaking of the city by pro-Hadi forces while the container terminal at Hodeidah has been virtually destroyed by Saudi coalition airstrikes. However, Mr Mackie says it’s not just Yemen: “The growth of Isis, particularly in Syria, inevitably creates additional security concerns. I suspect if you are a port operator you will be worrying about that.

“Keeping a facility open can support a government and maintain a country’s integrity so there’s lots of rewards for operators willing to keep going. But equally you could be looking at attacks on the ports themselves simply because they are so central to the stability of the economy. If you want to destabilise a government, you destroy the infrastructure.”

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