Ports could face overcapacity

Competition for market share is heating up among Middle East ports as some facilities in the region grow faster than the industry average. Published in MEED, 3 March 2015

The past few years have been difficult for the ports and shipping industry. A lacklustre global economy means trade levels are underwhelming. Shipping companies have been banding together into alliances to deal with the changing market, often using larger vessels and sailing less frequently. Meanwhile, port operators are finding themselves under pressure to invest in new equipment to accommodate the bigger ships.

“The increasingly large ships and complex alliances have led to much greater operational demands being placed on port operators,” says Tan Chong Meng, CEO of Singapore-based operator PSA. “This is a structural shift that will affect all ports as ships across all shipping routes continue to upsize.”

Falling costs

For those wanting to move goods by sea, there are benefits to all this, as the overcapacity has meant costs have been falling. In mid-February, the Baltic Dry Index, which measures the cost of moving raw materials by sea, hit an all-time low of 516 points.

“Demand for cargo ships has recovered since 2009, but it has failed to catch up with the growth in supply,” says Julian Jessop, head of commodities research at London-based Capital Economics. “As a result, spare capacity in the industry has kept freight costs subdued.”

But even if shipping supply is outpacing demand, trade levels are at least still increasing. According to the UN Conference on Trade & Development (Unctad), global container traffic grew by about 5 per cent in 2012 and a further 5.6 per cent in 2013. Despite a dip in 2009, volumes were up 26 per cent in the five years from 2008 to 2013. The global growth rate is thought to have been about 5 per cent again last year, according to Dubai port operator DP World.

The volumes passing through major Middle East ports have been rising at a similar pace, up by 6.5 per cent in 2012 and 5.5 per cent in 2013, according to Unctad. Overall, they rose by 34 per cent in the five years to 2013. The Middle East and North Africa (Mena) region’s share of the world market has remained fairly consistent at about 7.7 per cent of all container traffic for the past few years.

However, some Gulf ports have also been growing faster than the industry average. DP World says throughput at its UAE container terminals, which include Jebel Ali, as well as the far smaller Port of Fujairah, grew by 11.8 per cent last year to reach 15.2 million 20-foot equivalent units (TEUs).

Despite DP World’s expansion internationally, the Jebel Ali port is still the centrepiece of its portfolio. The facility ranks as one of the 10 largest container ports in the world, according to the American Association of Port Authorities, which lists the 100 busiest. Jebel Ali is also the 24th in the world for general cargo.

Other regional ports that make it into the list for container traffic include Jeddah Islamic Port in Saudi Arabia, Salalah port in Oman, Bandar Abbas in Iran and East Port Said in Egypt.

Port demand

Projections for the future suggest port operators should plan for a steady pace of growth over the next five to 10 years. Ocean Shipping Consultants (OSC), part of the Netherlands-based Royal Haskoning DHV group, is predicting that overall container port demand in the Gulf, Arabian Sea and Red Sea regions will rise by about 33 per cent between 2015 and 2020, a similar level to the rate of expansion over the past five years. That will mean throughput rising to 53-60 million TEUs by 2020. OSC says the following five years should see a further 26 per cent expansion, taking throughput to 64-76 million TEUs by 2025.

To put that in context, last year, OSC estimates that 40.5 million TEUs went through these ports, up from 38.1 million TEUs the year before. In both years, about half the total, 46-47 per cent, was accounted for by trans-shipment traffic.

Competition is tight among ports for such trade. The Port of Salalah authorities say its trans-shipment container volumes are likely to decrease in 2015, due to a combination of the competition from other regional ports and the rationalisation of services as a result of alliances between major shipping lines.

That competition between ports is only likely to increase in the years ahead. According to regional projects tracker MEED Projects, the total value of port schemes across the region is $67bn. The largest markets are in the Gulf. In Kuwait, there are $16.2bn-worth of port projects, followed by Saudi Arabia with $11.9bn, the UAE with $11bn and Iraq with $9.5bn.

Biggest projects

The biggest ongoing schemes include Khalifa Port, which is attached to the Khalifa Industrial Zone Abu Dhabi (Kizad); and the port that forms part of plans for the King Abdullah Economic City in western Saudi Arabia, close to the industrial city of Rabigh. These schemes are worth $10bn apiece, according to MEED Projects.

The scale of these developments is vast. Khalifa Port, for example, will have an annual capacity of at least 2.5 million TEUs and 12 million tonnes of general cargo in its first phase. Once all the development phases are completed, that will increase to 15 million TEUs and 35 million tonnes of general cargo.

Other major schemes include the $8.4bn Grand Faw Port project in Iraq, the $8bn Mubarak al-Kabeer Seaport on Bubiyan Island in Kuwait and the $7.4bn New Port Project in Qatar, which was renamed Hamad Port in late February. The latter will be able to handle 2 million TEUs a year along with 2 million tonnes a year of general cargo in its first phase to be completed in 2016. By 2025, when fully operational, the capacity should reach 12 million TEUs a year.

Just as importantly, many existing ports in the Gulf are also being expanded. OSC estimates that overall container capacity among the six GCC countries will grow from 51 million TEUs in 2014 to 70.6 million by 2020. Among the ports where capacity is likely to expanded, Salalah port could add 5.6 million TEUs of capacity by 2020, Khalifa Bin Salman Port in Bahrain could also expand to 2.5 million TEUs and, most significantly, Dubai’s Jebel Ali port could increase its capacity to 20.5 million TEUs.

Wider region

The investment in port infrastructure is limited to the Gulf, however. There are also major projects under way in other parts of the region, including Morocco, where a phase two expansion of the Tangier-Mediterranean Container Port will more than double capacity at the site to 8.5 million TEUs. In Jordan, work is continuing on a new port at Aqaba, and at Djen Djen in Algeria, a container terminal is being built to act as a trans-shipment hub for the western Mediterranean. Further along the coast, a third container terminal is being constructed at Alexandria in Egypt, which is due to be completed by December 2020.

Not all these projects are likely to go ahead on the timescale planned, with those in Kuwait and Iraq looking particularly susceptible to political disputes and budgetary constraints. Even so, the region is likely to have a large increase in port capacity in the coming years. Indeed, given that so much is planned for a relatively limited geographical area, there is the danger that too much will get built and some port operators may have to get used to empty wharf space and idle cranes.