Gulf’s $46 Billion Ports Bring Capacity Seeking Market: Freight

Persian Gulf states risk creating a glut in container capacity as they spend $46 billion on port projects amid sputtering global economic growth.

More than 35 ports stretching from Kuwait at the head of the Gulf to Oman on the Indian Ocean plan to add space for as many as 60 million standard containers in little over a decade, more than doubling capacity from the current 50 million boxes.

The plans will extend an oil-funded infrastructure splurge that’s also set to endow the Gulf with some of the world’s biggest airports. Unlike those hubs, which will serve a global market, its ports rely on a local population of 40 million people and lack the urbanized hinterland that helps sustain major global harbors such as Rotterdam and Hong Kong.

“You have a fragmented group of nations each seeking to establish a large-scale port, and the danger is that there’s no overall coordination,” said Neil Davidson, senior adviser on ports at Drewry Shipping Consultants. “The key question is how robust demand will be over the next 10 years, and that really depends on oil revenue and the spending power it brings.”

Gulf ports are expanding even as shipping lines rein in supply after a glut of vessels led to a price war, causing losses of at least $6 billion. Capacity cuts prompted rates on Asia-Europe routes to more than double to $2,732 per 40-foot container in the week to March 1, according to Drewry estimates.

Close Competitor

Abu Dhabi is leading the charge with its new Khalifa port, scheduled to open in the fourth quarter with capacity for 2 million containers, increasing to 15 million by 2030.

Yet the complex, built on a man-made island and with an industrial zone two-thirds the size of Singapore, is situated just 25 miles south of Dubai’s Jebel Ali, the world’s ninth- biggest container port and the busiest outside East Asia.

Further west, Qatar, the top exporter of liquefied natural gas, is spending 19 billion riyals ($5.2 billion) on a port with a planned volume of 6 million containers, due to open in 2016. Little over 100 miles away in Bahrain, Khalifa Bin Salman Port, run by Denmark’s A.P. Moller-Maersk A/S, could double capacity to 4 million boxes in two or three years, said Hassan Almajed, director of the country’s General Organisation of Sea Ports.

Abu Dhabi, holder of 7 percent of known oil reserves, will spend $7.2 billion on the first phase of Khalifa, which it says will focus on terminating cargo, reducing any overlap with Jebel Ali, where goods are trans-shipped from one vessel to another.

‘Complementary’

Mohammed Sharaf, CEO of DP World Ltd. (DPW), the world’s No. 3 container-terminal company and the operator of Jebel Ali, says there’s room for both ports, even as his company boosts capacity at the Dubai site 36 percent to 19 million boxes by 2014.

“If anything, we’d like to see infrastructure built more quickly,” Sharaf said in an e-mailed response to questions from Bloomberg News. “We see the development in Abu Dhabi as complementary to what we’re doing. Shipping lines are ordering bigger and bigger vessels to achieve economies of scale and ports need to meet those new needs and meet them efficiently.”

Abu Dhabi Ports Co. Chief Executive Officer Tony Douglas concurs, suggesting the Gulf’s economies and populations will grow quickly enough to sustain the expansion of its ports.

“At the moment there isn’t enough capacity in the region,” he said in an interview. “Unless economies in the region slow down, it’s unlikely there will be overcapacity.”

Colonial Inheritance

The expansion of ports is also being driven by the Asian boom, said Nasser Saidi, chief economist at Dubai International Financial Centre, with India accounting for 11 percent of Gulf trade in 2010, versus 2 percent in 2001, and China 10 percent, up from 4 percent, according Qatar National Bank (QNBK) figures.

“Much of our infrastructure is based on what the old colonial powers wanted when the idea was ‘we sell you goods, you sell us oil,”’ Saidi said. “Today’s world has changed and we need to think of where we stand in the global supply chain.”

Still, the International Monetary Fund says GDP growth in Gulf Co-Operation Council countries will slow from 5.3 percent this year to 3.7 percent in 2013, and that “even with high oil prices, fiscal sustainability is an immediate issue,” with “tighter and higher-quality government expenditure” warranted.

While population growth and higher living standards should spur imports of everything from foodstuffs to luxuries, Gulf nations will remain “pretty small,” and “even if they become more prosperous, that alone does not create a very compelling case for trade,” said Jarmo Kotilaine, chief economist at Jeddah, Saudi Arabia-based The National Commercial Bank.

Iran, Africa

Plans among GCC nations Saudi Arabia, the U.A.E., Qatar, Oman, Bahrain and Kuwait to end their reliance on petrochemicals may soak up extra container capacity. Abu Dhabi aims to derive only 40 percent of GDP from oil by 2030 compared with 60 percent today, and Khalifa will be surrounded in by enterprises including the Gulf’s largest smelter, spurring box traffic.

Arabian ports are also positioning to tap future demand from neighboring areas with underdeveloped infrastructure, such as Iran, Iraq, Pakistan, Afghanistan and East Africa.

While Oman has a short stretch of Gulf coast, it’s focusing expansion 650 miles to the south, where the port of Salalah will lift capacity by 50 percent to 9 million boxes as early as 2016 if demand continues at the current rate, according to CEO Peter Ford. The facility, part-owned by A.P. Moller-Maersk, expects to handle 4 million boxes this year, a 23 percent gain on 2011.

“We’re ideally positioned to connect East African, Indian, Red Sea and Gulf markets with Europe and Asia,” Ford said in an interview. “But I do see developments where it’ll be difficult to fill the capacity. That’s a great risk for those countries.”

At the other end of the Gulf, Kuwait aims to build a port able to handle 1.33 million containers a year which could later tap a hinterland spanning Syria to Iran, though the plan has led to tensions with Iraq, which wants to develop its own facility.

Overall, though, there’s too much capacity, said maritime consultant Juergen Sorgenfrei of IHS Global Insight, so much so that the Gulf risks repeating errors made in the Mediterranean 20 years ago, when ports such as Gioia Tauro in Italy mushroomed without ever becoming major centers for trans-shipment.

“Today it’s nothing, and we’re going to see the same thing in Arab states if they create overcapacity,” Sorgenfrei said. “There will be winners and losers.”

To contact the reporter on this story: Tamara Walid in Abu Dhabi at twalid@bloomberg.net

To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net

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