Overcapacity, politics and the price of oil are set to collide in the Middle East, writes Stevie Knight.
Cattle aren’t often a metaphor for independence. However, this July’s airlift of 165 pregnant dairy cows to Doha by Qatar Airways sent a clear message to Egypt, United Arab Emirates, Bahrain, and most of all, Saudi Arabia, that Qatar is not about to buckle under this or any boycott.
Whether the diplomatic rift is fully resolved or not, what makes this bovine signal interesting for the region’s ports lies what it could mean for longer term shipping patterns.
Shailesh Garg of Drewry explains that the Saudi-led bloc’s isolation of the country “really wasn’t expected to last... it’s happened before and so this time we thought it would blow over in a few weeks, and things would return to
Instead, Qatar is digging in. Until June, Jebel Ali and, to a lesser extent, Khor Fakkan, acted as the country’s container transhipment hub with edible produce coming in by road via Saudi. “It’s almost certainly dampened, if not led to a drop in overall Jebel Ali’s figures,” says Martin Mannion of
Nearby Sohar in Oman is an obvious beneficiary, though the country’s playing it close to its chest. Oman has earned a name as ‘the Switzerland of the Middle East’, so it’s carefully preserving its neutrality and is coy about how much it’s gained. However, Mr Garg guesses “around half Qatar’s flow is being diverted via Oman – if things continue as they are, it could make an extra 100,000 teu in a year”. Not huge, but still interesting.
Ensuring food supplies
Still, food security remains Qatar’s biggest issue. The relationship with India, already a grain provider, was hastily firmed up during the summer and the country’s national line, Milaha Maritime, started running a weekly feeder that takes in Kandla, Mundra and Nhava Sheva.
That rotation is also stopping at the new Hamad facility. While some die-hard conspiracy theorists point to overly auspicious timing, most put it down to coincidence as the port has been functional for some time... although the official inauguration of its 17-metre deepwater port has certainly buoyed Qatar’s assurance in its ability to deal with Saudi et al.
An alternative to the congested city port of Doha, “Hamad has been a truly massive undertaking with as many as 14,000 contractors on site at one time”, says Mr Mannion. The first phase has resulted in the ability to handle 1.7m tonnes of general cargo and 1m tonnes of cereals, plus an initial capacity of 2m teu with an eye on a full 7.5m teu at full build.
While taking a while to get going, the changing routes are probably helping it ramp up operations: “Ship calls have increased from 30 to 87 per month... a low base but it’s growing - and it should continue,” he says.
More, other players that simply had no place in Qatar’s import cargo map before June “have flowed in to fill the vacuum” left by the blockade, says Mr Garg. For example, along with services to Sohar and Salalah in Oman, Shuwaikh in Kuwait and Karachi in Pakistan, Milaha has also introduced a reefer shuttle connecting Hamad Port to Izmir, Turkey where, he adds, “it might well bring in new opportunities”.
So, Qatar is surviving. “I’m not saying it’s not a problem, but they are maintaining normal levels of service,” says Mr Garg. “It’s costing them more there’s no doubt, but things haven’t exploded, and Qatar is doing its best to show it can manage.” Even when negotiations are finally settled, cargo might not simply snap back into its old place. “Qatar might want to keep its options open in the form of alternative gateways and routes,” he concludes.
While Qatar’s diplomatic rift with Saudi et al lends a bit of drama to the story, the Middle East is ringing with empty promises. In fact, many of those large projects which used to be a signature of the region have fallen away since the oil price dropped – total infrastructure contracts in the Gulf dropped 44% in 2016, and the ambitious GCC cross-gulf railway has receded to a pipedream.
It’s hit the most oil dependent countries harder than those like Kuwait and Qatar which have gas to sell, as gas is governed by long term contracts “and it’s being seen as a cleaner, more environmentally friendly fuel, so demand is rising”, says Mr Garg.
By contrast, Saudi’s recent bid to replenish its coffers by “selling off the family silver” especially Saudi Aramco (forecast to raise $2tr), is disquieting to the traditionalists. However, it has helped open the door to all sorts of privatisation projects unthinkable five years ago.
But it hasn’t - yet - helped buoy the sliding volumes.
"Because Saudi Arabia’s been abandoning its big projects, a lot of labourers are leaving and there’s much less of a floating population to drive demand through places like Dammam,” says Mr Garg.
The figures bear this out. Dammam handled around 1.8m teu during 2016, and total throughput in the first eight months of 2017 was around 1.1m teu. Still, “volumes have shown some improvement over the last couple of months” says Mr Garg, estimating that total volume for 2017 could reach 1.7m teu so the net decline will probably be held back to between 5% and 6% against 2016.
The loss, however, isn’t evenly spread. Saudi’s flagship project, King Abdullah Port, boasted volume growth of 14% year-on-year in the first six months of 2017, reaching 821,694 teu for the first half. Before there’s too much excitement about private projects saving the day, Mr Garg notes that King Abdullah is primarily a transhipment hub and the 2M Alliance (MSC and Maersk) are the main customers. He points out that King Abudullah has therefore benefited from a shift of traffic from Salalah and other hubs.
Despite this, Saudi Arabia is painfully aware that it has to wean itself off its oil dependence or remain at the mercy of the market. As ports and their related industrial zones are an intrinsic part the effort to broaden the Saudi economy “they still stand to benefit from better rail connections and investment in infrastructure, modernisation of industry, customs and so on”, says Mr Mannion.
Other Gulf states have also been having a rethink about their budget. Even Dubai’s massive Jebel Ali facility has been affected; its volumes fell from 1.6m teu in 2015, to around 1.5m teu in 2016. “While it was due another terminal by 2018, that’s now wait-and-see,” says Mr Garg. “The whole region is slowing its pace."
Further, as Mr Mannion points out, even huge transhipment hubs have to dance to the tune of increasing ship sizes: the impact results in a cascade of modifications. “The bigger ships mean longer reach, taller heavier container cranes, deeper dredging, and that means strengthening the quay; the larger offloads and peaks mean the container yards need to be updated to cope. But it doesn’t mean the total annual volume is any higher, despite the pressure on the terminals.”
However, he’s sanguine about the port’s medium-term prospects: “Jebel Ali has a dominant position and most lines are quite settled there, so while the 2016 figures were down, we still expect it to grow by around 2% a year over time... it should catch up again with its plans.”
Still, Mr Mannion points out that the UAE’s Khalifa is mounting a good-sized challenge: the $700m Container Terminal 2 will add 2.4m teu a year to the existing capacity of 2.5m teu once the first two phases are completed. Notably, the 35-year concession has been won by China’s COSCO on the heels of a 50-year agreement between Abu Dhabi Ports and the Chinese Jiangsu Investment Company to attract $300m into Khalifa’s Free Trade Zone, Kizad.
Interestingly, Abu Dhabi Ports (ADP) has recently taken over the concession at Fujairah after DP World relinquished it, with an investment promise of around $270m covering handling kit, IT, yard facilities, 1 kilometre of quay and berth deepening to 16.5 metres to enable upgrades that will bring capacity to 1m teu by 2030 (Khalifa itself is expecting 15m teu by the same date).
Fujairah’s not that far away, just outside the corner of the Hormuz Strait: 256 nautical miles or 474 kilometres by sea but only 225 kilometres by road, making it possible for the two facilities to work together. However, according to Mr Garg it might have been a case of ADP snapping Fujairah up before anyone else could turn it into a competitor.
Both Mr Garg and Mr Mannion agree the Gulf region holds a lot of convincing arguments for success... only matched by its overcapacity. Mr Garg concludes: “Everybody has so many options, there’s Sohar, Duqm, Abu Dhabi, and Hamad all trying for the same business, and even Jebel Ali’s expanding its Freezone. I’m sure someone is going to lose out.”
OMAN ON AN UPWARD TRAJECTORY
The multipurpose Duqm port in Oman is courting the Chinese who’ve responded with a $265m loan agreement. Despite being a little off the beaten track, it seems they’ve been tempted by unrealised potential.
Although functional, Duqm is not yet operating at peak capacity. More, “beyond feeders and some project cargo, the port’s struggled to get container traffic as it’s come up against Sohar and Salalah”, explains Drewry’s Shailesh Garg.
Bulk might be part of the medium term solution as exploiting the country’s mineral wealth is part of the sultanate’s objectives. “There’s interest in bringing in limestone, silica and aggregates from the port’s hinterland for the rest of the GCC and even possibly China too,” he says. Certainly, a large-scale mineral terminal and rail link is already being investigated.
However, to support longer term goals it is also looking at an expanded container terminal with an initial capacity of 200,000 teu in 2019/20, ramping up to 3.5m teu on completion. So far, it’s suffered something of a chicken-and-egg conundrum with slow industry uptake in its 2,000 kilometres squared special economic zone. So, if the terminal upgrade is to bear fruit, it will need to develop its SEZ substantially “and this will take a lot of money” says Mr Garg. China’s deep pockets may help.
Meanwhile, in Oman’s north, Sohar is making headway. It’s to have a new 25-metre deep bunkering and storage terminal for oil and petrochemical trader Trescorp, and recent initiatives in its freezone will pull 100,000 tonnes of cotton fibre in and push 75,000 tonnes of finished yarn back out. Sohar is also benefiting from a solid automotive stream, having attracted a 200,000 capacity car assembly plant. Further, the port’s developing food hub - which plays right into the region’s food security issues – is gaining ground: India-based agribusinesses have just set up a $39m, 200,000 tonne capacity rice and pulse processing facility.
Although still pretty small in comparison to the largest Gulf behemoths, there’s also been substantial box growth at Sohar: it handled 620,000 teu in 2016, up from 540,000 the previous year. Although its volumes have been boosted by cargo relocated from the closing of Muscat city port, it’s also been steadily forging links with Asia and, importantly, nearby Iran, another reason for a quiet solidarity with Qatar.
The port has been ramping up with remote-controlled quay cranes, appointment slots and auto-gates at its Terminal C and has decided to implement a box upgrade: Terminal D will be a new, 5m teu, fully-automated facility raising Sohar’s overall capability from 2m to 7m teu so yet more capacity is due online in 2019.
Likewise, Oman’s Salalah port has its own plans. Despite increased competition and alliance rearrangement resulting in a 15% drop to 2.57m teu in 2015, 2016 saw a sharp 29% return to 3.325m teu – which has given the port heart for an expansion from 5m teu to 7.5m teu.
HAMAD’S SPORTING CHANCE
If it doesn't get scuppered by allegations of corruption, sport could provide a catalyst for port growth, driving not just the stadium construction for the 2022 World Cup and connecting roads, metro and general infrastructure but also the future Hamad Port development.
According to Drewry’s Shailesh Garg, as Qatar still needs to bring in investors to get the port and its associated industry really flying “they might start thinking about using the port’s industrial zone to help keep the momentum going, or risk a vacuum once this World Cup is over”.
In his view, Qatar is well placed to subsidise a manufacturing base with cheap, gas-produced electricity, perhaps even securing a food hub to lend it independence. The final score depends on FIFA.
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