DP World Digs London Gateway as Economy Slows: Freight Markets

DP World Digs London Gateway as Economy Slows
A scale model shows the DP World London Gateway port currently under construction. Photographer: Luke MacGregor/WPA Pool/Getty Images

DP World Ltd. is preparing to spend 1.5 billion pounds ($2.5 billion) on Britain’s first deepwater port in at least 20 years at a time when the economy has yet to recover from the last recession.

The world’s fourth-largest port operator is dredging about 106 million cubic feet to accommodate the world’s biggest ships at London Gateway, about 25 miles (40 kilometers) east of the capital. It’s designed to win clients by combining a harbor terminal with an onsite distribution center, luring wholesalers and retailers away from older ports such as Hutchison Whampoa Ltd.’s Port of Felixstowe, about 50 miles northeast.

DP World is pinning the investment on Britain’s need for more modern facilities that will help companies save on transport costs at a time when U.K. economic growth is set to trail global expansion. If completed as planned, London Gateway would expand the U.K.’s capacity for ultra-large container ships and become Europe’s sixth biggest port, based on 2009 rankings.

“The U.K. is a mature slow-growth container market,” said Mark McVicar, an analyst at Nomura International Plc in London. Still, “for reasons of proximity to London, over the long term it will work” and “it could be an important and incremental profit contributor.”

McVicar has a “buy” rating on Dubai-based DP World. Its shares have fallen 9 percent in the past three months on concern cooling global trade will reduce demand at ports.

Cost Savings

DP World is pressing ahead with the project even as the global economic expansion cools. While the company has committed about 400 million pounds for work such as dredging and reclaiming land, the pace of development may depend on how quickly it wins clients. It said in February the onsite distribution facility will save clients “significant” costs and cut about 65 million freight miles a year.

Gross volumes at its ports rose 11 percent in the first half of the year to 26.2 million 20-foot containers, or TEU, often used as the industry measure, DP World said in a statement yesterday. That matched growth in the fourth quarter and compares with a 14 percent increase for all of 2010 versus 2009.

“We’re still on track,” DP World Chief Executive Officer Mohammed Sharaf said yesterday when asked about London Gateway on a conference call. “The essential infrastructure work is going on, but we have still not decided on a date. We can speed it up as and when we see the market comes back, or slow it down. It will all depend on how the market reacts and what the situation is in the market.”

IMF Forecasts

Growth in world trade will ease to 8.2 percent this year and 6.7 percent in 2012 from 12.4 percent in 2010, the International Monetary Fund forecast on June 17. The IMF also cut its forecast for 2011 global economic growth to 4.3 percent.

At the same time, the U.K. economy is struggling. Gross-domestic-product growth slowed to 0.2 percent in the second quarter from 0.5 percent in the three months through March, data released yesterday showed.

“As we go into the second half of the year, there is some uncertainty around the global economy, making it difficult to forecast how global trade will develop,” Sharaf said.

Britain is trailing recoveries in other industrial economies: Gross domestic product is about 3.9 percent below its peak in the first quarter of 2008. The U.S. and Germany have already recovered all the ground lost during the recession.

London Gateway will directly support as many as 1,500 U.K. jobs a year during construction and about 12,000 once operational, according to a report by Oxford Economics commissioned by DP World. Shipping Minister Mike Penning said in February that the plan has the government’s “full support.”

Biggest Ships

Neil Davidson, a port adviser at Drewry Shipping Consultants Ltd. in London, said London Gateway will increase Britain’s capacity for so-called ultra-large container ships. Among them is A.P. Moller Maersk’s Emma Maersk, the world’s biggest, with a carrying capacity of 14,770 containers.

Maersk has ordered 20 Triple-E class container ships this year that can carry 18,000 containers each to help meet increasing trade demand between Asia and Europe. The first of the vessels is expected to sail in 2013.

“It’s a very big order book, and they will inevitably be deployed in the Asia-to-north-Europe trade route,” Davidson said. “So we know that all the bigger ships are coming to U.K. ports in increasing numbers in the coming years.”

A fully realized London Gateway would have a maximum capacity of 3.5 million containers. At the same time, other ports are expanding: Felixstowe is increasing its capacity of 3 million containers by 50 percent.

Expansion Proposals

Including London Gateway, there are nine active or dormant proposals to develop new or expand existing deep-water container terminals. They have the potential to add the equivalent of 14 million containers to total capacity, according to Drewry.

U.K. trade is benefiting from growth in emerging markets such as China, a bright spot for the economy. In the three months through May, U.K. exports by volume rose 8 percent from a year earlier, while imports increased 3.3 percent, according to data from the country’s statistics office. Retail sales were up an annual 0.9 in the quarter through June.

Freight traffic rose 12 percent to 8.3 million containers in 2010 as volumes rebounded from a 16 percent drop the previous year during the global financial crisis, according to Drewry. That compares with a peak of 9.4 million in 2007.

Drewry expects volumes to grow as much as 5 percent a year, meaning Britain’s ports may be dealing with more than 12 million containers by 2020. That compares with a current potential capacity of 10.5 million.


DP World inherited London Gateway when it bought Peninsular & Oriental Steam Navigation Co., at the time the U.K.’s No.1 port operator, in 2006. The purchase also gave it stakes in container terminals at Southampton, the U.K.’s second-largest port, and Tilbury on the River Thames, the distribution hub for the London 2012 Olympic Games.

The port operator is 80 percent controlled by state-owned Dubai World, which roiled global markets in 2009 when it said it was seeking to reschedule debt payments. Dubai World reached an accord with creditors to restructure about $25 billion in March.

Hutchison Whampoa’s Felixstowe is the U.K.’s largest container port, handling more than 40 percent of British imports and exports a year. The terminal tested two berths that can handle ultra-large container ships in February that are due to open this year.

In the U.K., most large ports are located in or near coastal cities, limiting the space for expansion or building neighboring logistical facilities, Nomura’s McVicar said. That results in containers having to be sent to distribution centers sometimes more than a hundred miles away.

“If you talk to DP World, their view is, ‘We expect to be able to attract volume from existing ports because of the quality of service,’” he said. “The cost to the shipper of moving stuff from Hong Kong to Oxford Street will be lower. Which is very different from adding more capacity in somewhere like Felixstowe because you’re not changing the proposition.”

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