| More than meets Dubai - Understanding the HUB role |
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For the past decade, the story of container movement in the Middle East has been about one location — Dubai. Looking more into the details of ocean freight, you'll now understand why Dubai will remain as one of the fastest growing places for airfreight too. That’s from the outside looking in, where it’s hard to ignore the fact that Dubai’s Jebel Ali port has blossomed into one of the world’s top eight busiest container gateways. Yet Dubai’s emergence in the cargo world, and into the public consciousness, has hidden the fact that cargo hubs have sprouted throughout the region. What’s more, several new hubs appear on the brink of developing into important conduits of trade. The question is whether the development of these multiple hubs threatens to undermine or complement Jebel Ali. When deciding what impact the growth of container terminals in places like Salalah, Jeddah and Port Said have going forward, it helps to think of the region in a nuanced manner. The Middle East is not one homogenous market, best served by only one dominant hub port that can cater to any and all traffic. The region is actually composed of many niche markets, each with its own specific flow of imports and exports, and bound by geographic limitations. For instance, Jebel Ali has emerged not just because of its renowned free market principles. It’s also a good place from which to feed to other ports in the Persian Gulf, because it sits relatively close to the gulf’s entrance. Compare that to Salalah, which sits on the opposite side of the Arabian Peninsula from Jebel Ali and offers a completely different proposition — a place to transship cargo without deviating from the main sailing route between Asia and Europe. While Jebel Ali combines the benefits that carriers seek — a place to transship as well as a market that generates import and export cargo — Salalah is almost a purely transshipment hub. Then there’s Jeddah, which could conceivably become a Red Sea counterweight to Jebel Ali. It has the distinct advantage of also being on the trunk line between Asia and Europe. But unlike Salalah, it has the potential to tap into Saudi Arabia’s massive potential as a containerized goods market. But Jeddah, while seemingly enjoying a geographic advantage over Jebel Ali, has policy challenges that Dubai doesn’t. “We would be happy to have services into Jeddah,” said Biji Thomas, transport manager for Schneider Electric, a French maker of power equipment. “But Saudi Arabia has customs issues that Jebel Ali doesn’t. It takes five days to clear a container in Jeddah where you get same-day clearance in Jebel Ali. Maybe in the future that will change.” In other words, there’s no one perfect port in the region. And that’s the point: the Middle East should be thought of as a series of separate markets bound by some common factors. If one were to imagine the Middle East nations as a classroom of students, Dubai is often looked upon as the best student in the class when it comes to logistics. But there are other students in that classroom, each with their own ambitions, and they are learning from the best. “Port operators in this region aren’t talking about capacity,” said Shankar Subramoniam, general manager of Dubai-based Clarion Shipping Services. “It’s about value-added services.” Indeed, ports are growing all around the Persian Gulf — in cash-rich locales like Kuwait, Bahrain and Abu Dhabi — that could either compete with Jebel Ali or effectively handle its overflow. Outside the gulf, there are transshipment hubs other than Salalah, like Khorfakkan, which handled 2.75 million TEUs in 2009, an increase of 10 percent on 2008. Roughly 75 percent of Khorfakkan’s volume is transshipment, and the port serves a wide variety of shippers in the Indian Subcontinent and eastern Africa as well as the Middle East. Khorfakkan, which like Dubai is in the United Arab Emirates, has an appeal that bridges the advantages of Jebel Ali and Salalah. It doesn’t require vessels to transit the Strait of Hormuz, the entry point to the Persian Gulf, while still providing access to the U.A.E. market. But it does require more of a deviation than Salalah and lacks the developed logistics market that Dubai has. Again, there are always tradeoffs. Jeddah vs. Jebel Ali. The most interesting trend to follow is whether Jeddah can become an honest-to-goodness foil for Jebel Ali. Volume at Jeddah increased from 1 million TEUs in 2000 to 3.3 million TEUs in 2008. Though it dropped to 3 million TEUs in 2009 due to the economic downturn, various operators are increasing capacity from 3.2 million TEUs in late 2009 to an expected 6 million in 2011. That’s just a fraction of what Jebel Ali handles. But unlike other ports in the Middle East, there’s scope in Jeddah for containerized volumes to skyrocket because of Saudi Arabia’s large and affluent population. Jeddah handled roughly two-thirds of the country’s volume, but it was largely transshipment volume because its location on the Red Sea lies more than 500 miles inland from the country’s biggest market, the capital Riyadh. Saudi Arabia is planning a freight rail line that would link Jeddah to Riyadh, and eventually to the Persian Gulf port of Dammam, creating a link between the gulf and the Red Sea. Why is this important to Dubai? Because about 65 percent of the goods transiting through Dubai are either headed to or from Saudi Arabia. Constraints in Saudi Arabia have made Dubai a conduit for those goods in much the same way as Hong Kong long served as a conduit for Chinese goods. “Dubai is more manageable at this time because it’s smaller and Saudi Arabia is so expensive,” said Deon Pillay, logistics commercial manager for Mars’ Gulf Cooperation Council (which includes Kuwait, Bahrain, the U.A.E., Saudi Arabia, Qatar and Oman). “But it will be a competitor to Dubai in the future. Saudi Arabia is a major contributor to what’s going on in Dubai.” While general logistics costs in Saudi Arabia can be more expensive than in Dubai, fuel costs are 60 percent to 70 percent lower and port handling fees are lower than at Jebel Ali. But there are short-term challenges that give Dubai a distinct edge. “You can’t just discharge anything in Jeddah,” said Kris van den Brande, Middle East region trade director for the ocean carrier Safmarine. “It’s not impossible, but it’s difficult.” As for whether Jeddah could lure cargo away from Jebel Ali, van den Brande said a rail landbridge would probably have to compete with the feeder network out of Jebel Ali. He also said that capacity in Red Sea terminals is such that ports there can’t necessarily cater for transshipment from other hubs. “Whether it would be possible in the short term, you can never say never, but given how customers expect cargo to be routed, it would be difficult,” he said. For example, for cargo from Europe or North America destined for Riyadh, it would be logical for it to be discharged at Jeddah and moved overland to Riyadh. That would save sailing time around the Arabian peninsula and through the Strait of Hormuz. However, current supply chains are typically centered around that cargo being discharged at Jebel Ali, feedered to Dammam (Saudi Arabia’s biggest port on the Persian Gulf and half the distance to Riyadh from Jeddah) and then moved by train to Riyadh. “There are probably a lot of customers who have their logistics services based around Dammam, not Jeddah,” van den Brande said. Much of the debate revolves around a simple issue: how willing carriers will be to bypass the advantages of Jebel Ali in order to have better transit times for large vessels on mainline services. For instance, if a carrier is serving the Middle East market on the way between Asia and Europe, does it make sense to improve transit times between major ports in Asia and major ports in Europe by not deviating to call Dubai. Or will Dubai still be worth the diversion? Transit time is important to carriers, but they can often compensate for what they lose in transit time by reaching more ports, particularly since slow steaming has become the standard on many trade routes. Neil Davidson, director of ports for London-based Drewry Shipping Consultants, said Jebel Ali offers more than transshipment. “Yes, there is a deviation, but it’s such a big market in more than one way,” he said. “Being the first and becoming dominant in transshipment is a good thing to be. But with Jebel Ali, it’s not just about transshipment. It’s also about the free zone, which is a major pull because there’s a large local population.” Davidson said another advantage of calling at Jebel Ali is shortened feeder distances to serve Persian Gulf ports, meaning you get cargo to final destinations much quicker. “There are lots of tradeoffs, but it’s basically about the balance between mainline vessel costs versus feeder costs,” he said. Davidson added that the downturn, and the subsequent wholesale move by carriers to slow steam their services, has made deviation even less of an issue. “There’s plenty of capacity available at low costs,” he said. “If capacity becomes an issue again, deviation would be a bigger issue.” Dominant Ports Or Networks? Another factor to consider is whether the region would be best served by one or two dominant ports — from which other destinations could be served via feeder — or by a network of medium-sized terminals. The answer often depends on whom one asks. “From the commercial perspective, alternative ports give you opportunities to be creative and develop new products,” Safmarine’s van den Brande said. “From an operational point of view, it’s best to link your operations into one or two ports, through which you can connect your vessels. It’s a question of finding a balance between those things. I’d personally rather see development of more direct Middle East terminals than more transshipment hubs.” He said that when Safmarine is structuring a service, there are many factors that go into the decision about where to call. “There are a wide variety of elements which play a role there,” he said. Choosing where to call in the Middle East is “largely dependent on how your existing network is working.” He said that as a subsidiary of the A.P. Moller - Maersk Group, Safmarine’s network is centered on existing transshipment hubs. “As for a new service, you can never look at it in isolation,” he said. “If you have an existing network, you would tend to favor your preferred ports. But you cannot ignore that new ports are emerging. The question then is ‘can we fit it into what we want to achieve?’ ” That means deciding if the market where a new terminal is emerging merits a direct call, and that’s largely dependent on whether it has enough originating cargo. “There are a number of ports which have developed as big transshipment hubs in the Middle East, and a wide variety of carriers have established feeder networks,” he said. Van den Brande stressed, however, that it’s important for carriers not to be too dependent on one or two transshipment hubs. “Ports, from time to time, will have problems,” he said. “A carrier needs to have flexibility.” Davidson, meanwhile, said hubs naturally develop because carriers want economies of scale. “As far as hubs are concerned, big is good because critical mass is a key factor,” like the range and frequency of feeder services, deep sea services, and connections, Davidson said. “However, the pattern of hubs is driven by location factors (like the distance to feeder markets and deviation from main shipping routes) and the size of the markets served. Dubai serves the gulf market primarily, Salalah serves the gulf, but also perhaps more importantly East Africa and the Indian Subcontinent, whilst Jeddah serves the Red Sea. So they each have a niche to an extent.” He added that volume, and subsequently direct services, would largely mirror economic development. “The volumes in the region relate to the national and local economies of each country, and so the best performing ports will generally follow the countries with the strongest economic development,” Davidson said. “However, there is an extra layer in that a lot of this cargo moves to and from these ports via transshipment hubs like Jebel Ali. So the hubs will also be beneficiaries.” Carrier Preferences. Carriers can’t simply focus on the economic merits of a particular market. Take the example of restrictive customs policies in Jeddah, or congestion issues that have hit nearly every port in the region. “Reliability is a key, as is availability of feeder networks, connections to hinterland by truck, local customs, legislation,” van den Brande said. “There’s the issue of the ability to pass through these ports with particular types of products.” He was referencing the customs issues at Jeddah, when asked whether Jeddah presented a competitive threat to Jebel Ali if Saudi Arabia establishes the proposed container rail landbridge from the Red Sea to the Persian Gulf. “All the ports (in the region) are pretty well developed,” he said. “It’s about how well they can judge the requirements. In every port, we’ve experienced some problems, but if there is flexibility when you run into trouble, then you can manage it.” Jeddah, for example, was running into congestion issues in 2008 before the downturn and before a new 1.8 million-TEU container terminal came online in December 2009. As an example of how ports beyond the region can affect development of Middle East ports, van den Brande gave the example of Maersk’s Mediterranean hub in Algeciras running into capacity problems. That has led Maersk and Safmarine to look at alternative transshipment locations, like Port Said, in Egypt, which he said “has definitely developed in recent years.” Safmarine considers Port Said, which is located on the Mediterranean, as outside of its Middle East region. But Egypt is very much a part of the mix when you take the Red Sea ports into account. And Port Said, as a transshipment hub, can definitely compete with other Middle East hubs. In fact, it might be fair to compare Port Said with Jebel Ali and Jeddah in terms of ports that are burgeoning on the strength of both transshipment and import/export cargo. Egypt has an advantage over some other Middle East markets in that it too has a huge population that appears hungry for more containerized trade. It also sits in an advantageous spot, hugging the Suez Canal and with container access from the Red and Mediterranean seas. Wherever the markets develop, van den Brande was quick to point out that shippers would always seek out direct services if possible. “There will always be a section of customers who want a direct service,” he said. “Certain segments, like auto parts, where customers need just-in-time delivery, will value direct calls.” That means ports in the region that cater to import/export shippers, and not just transshipment, will inevitably develop. Dubai’s Advantages. The global economic recession shined an unwelcome light on Dubai in 2009, as the emirate faltered under the weight of its ambitious borrowing schemes. In some ways, that negated a lot of the positive momentum the state had fought hard to win. But those in the cargo and logistics industry haven’t lost sight of the fact that Dubai retains major advantages over the rest of the region. “Is Dubai growing too fast?” said Subramoniam, of Clarion Shipping. “Remember that it serves as a hub for India, Pakistan and Sri Lanka, even for Indonesia. Dubai believes in taking risks and getting the benefits that come with taking these risks. It will complement the growth of places like India. Even if it gets a fraction of that growth, it’s important to the U.A.E.” When asked if Salalah could develop into more than just a transshipment hub (where its key customer is Maersk Line) and become a true threat to Dubai, Subramoniam said it’s not likely. “From Salalah to Muscat (the biggest market in Oman) is 1,000 kilometers and a railway would be difficult to implement,” he said. “There’s also a shortage of power in Salalah, meaning creating more logistics facilities will be a challenge. In the near future, Dubai doesn’t expect a threat from Salalah.” Aside from the geographical challenges facing some of Dubai’s competitors, there’s also a level of sophistication there that provides comfort for carriers and their customers. “There’s a supply chain mentality ingrained in the culture here much more than any other country,” said Pillay, of Mars. “Companies here see themselves as supply chain companies moving products, rather than makers of products that see supply chain as a side division.” Van den Brande, meanwhile, said part of the drive to call Jebel Ali directly comes from the fact that Far East/Middle East trade is doing well. That means carriers are increasingly structuring services where Middle East ports — and Jebel Ali and other Persian Gulf ports, in particular — are the destination, not a stopping point on the way to Europe. It’s hard to ignore the parallels between Dubai and Singapore, which has grown into the world’s busiest container port on the strength of its business-friendly climate and logistics prowess. Singapore, however, is facing increased competition from ports in neighboring countries that it previously served via transshipment, just as Jebel Ali is facing competition from ports it largely served via feeders. But while both ports might see a slight erosion of container volume growth, neither will be marginalized in the near future. As Pillay said, “it’s a carrier’s decision on which port to call, and we do see that sometimes Jebel Ali doesn’t get a call in lieu of Salalah or Khorfakkan.” Room For Everyone. A few years back, when ports up and down the U.S. West Coast were flooded with container volume, it was theorized that no one port would have a problem finding enough business. While the downturn impacted long-term growth projections, it appears there will still be cargo for everyone. The Middle East region finds itself in a similar situation. “This region has been a big focus for Safmarine,” van den Brande said. “From a market perspective, we’ve seen business picking up quite rapidly. The market has rebounded quite fast, and that goes for imports and exports. “Does development mean that you’ll definitely be successful?” he continued. “I can’t say that for sure, but the market growth is there. Several terminals are close to their optimum capacity.” Davidson said he sees development continuing, and succeeding, in years to come. “I think that other hubs in the region will grow in importance, as secondary markets develop,” he said. “In addition, it will be interesting to see to what extent the Khalifa port development in Abu Dhabi acts as an overflow/complementary hub alongside Jebel Ali.” The region’s relatively stable performance in 2009 is an indication that it is in a healthy phase of growth. “The Middle East region was the world region which suffered least in the downturn of 2009,” Davidson said. “Container port volumes were only down 1.3 percent on 2008 levels, and we are forecasting that they will grow by around 9 percent this year, meaning that Middle East container port volumes in 2010 will be around 2.3 million TEUs more than their 2008 peak of 30.8 million TEUs. So, generally speaking, container port capacity in the Middle East has remained quite highly utilized, and more capacity expansion is necessary to meet demand growth, which hardly noticed the global financial crisis. “At the end of the day, there’s room for all this development.” Source: American Shipper, Aug 10, 2010 |
