The last two decades witnessed significant growth in containerised cargo, fuelled by an increase in global consumer demand. A major contributor of the global trade growth has been China, with the country’s share in global merchandise trade increasing from 3.8% in 2000 to 12.7% in 2019.
The Covid-19 pandemic resulted in an unprecedented contraction in demand leading to a slowdown in global trade in 2020. The World Bank forecasted a 5% reduction in global GDP and 20% contraction in trade volumes due to government-imposed lockdowns and lack of demand.
The global port industry’s earnings before interest, tax, depreciation and amortisation (EBITDA) for H1 of 2020 has reduced by 16% as compared to H1 of 2019. Container volumes have declined by 2.1% in 2020 but is expected to rebound by 8.9% in 2021.
The list of the top 15 container ports in 2019 highlights China’s dominance in global container shipping with 8 of the top 15 ports located in China.
China contributed 27% of the global manufacturing output in 2019 and most of the containerised volumes from Chinese ports represent port-to-port (ie origin to destination) cargo.
Container volumes have declined by 2.1% in 2020 but is expected to rebound by 8.9% in 2021.
Port operators in the region are reimagining their operations, shifting to a broader concept of port-centric logistics, where they are part of a larger integrated ecosystem of global trade. However, the rapid increase in port capacities across the GCC region has led to a drop in utilisation, as supply growth has outpaced demand. Global trade patterns are gradually changing, with regional trade replacing the traditional east-west international routes.
These were among the key findings of Anchored in the new reality – ports perspectives, a new report by KPMG Lower Gulf, which captures the evolving dynamics of the region’s maritime sector and the road ahead for port operators.
Shahnawaz Nakhoda, partner, Ports and Logistics, KPMG Lower Gulf says: “The GCC’s strategic geographic location and state-of-the-art infrastructure has enabled port operators to play a vital role in global maritime trade. As the world battles geopolitical trade tensions and the coronavirus pandemic, ports are playing a vital role in keeping the flow of goods moving. Port operators are building a presence across the supply chain to enhance their value proposition.”
Container penetration in GCC countries is more than six times that of the world average and significantly higher than that of major developed nations in the west. The development of port-linked free trade zones has contributed to the success of the sector in the region. GCC port operators have continued to invest in infrastructure, expansion and technology, increasing throughput capacity, the KPMG report states.
Currently, the region’s annual average capacity growth is estimated to be 4.2% — double the global average capacity growth of 2.1%, as supply growth has outpaced demand in recent years. Excess capacity has resulted in a port utilisation rate of 55% compared to the global average of 62%. Increased concentration in the shipping industry and the adoption of larger vessels has resulted in demand for higher port productivity and better infrastructure by the liners. To address these requirements, port operators are increasingly investing in technology the report states.
GCC ports have higher-than-average vessel sizes, as they tend to be trans-shipment hubs. However, in the UAE and Saudi Arabia, the average duration of stay for a vessel in the port is higher than any of the other major maritime geographies, even in comparison with hubs such as Singapore and Hong Kong.
According to the KPMG report, operators are also implementing technology-led solutions to increase trade efficiency and establishing initiatives designed to overcome trade barriers. Addressing port underutilization and congestion remains a priority.
Meanwhile, climate change is emerging as a significant risk. Other emerging challenges include growing freight traffic and critical operational challenges while delivering services. To overcome these, ports are increasing investment in smart port technologies and integration of the value chain with digital platforms.
The KPMG report notes that port operators are integral to the global ecosystem of trade, with emerging markets remaining the primary focus. In terms of geographical footprint, DP World is the most diverse operator, with terminals in 31 countries across six continents.
Vertical integration between port operators and logistics service providers (both inland and by sea) either through alliances, or mergers and acquisitions, are picking up pace as port operators seek to increase their overall presence across the trade supply chain. Logistics service providers, especially smaller businesses who may not want to partner with port operators, would accordingly need to differentiate or improve their service offerings to remain competitive.
With the recent US-China trade situation having been aggravated by Covid-19, a number of multinational companies are contemplating a manufacturing exodus from China and relocating their production base to escape higher tariffs and rising production costs. The ongoing pandemic has expedited the shift as it makes sense for companies to diversify production and supply lines.
Other countries including India, Bangladesh, Mexico, Vietnam and Taiwan are emerging as suitable alternatives. The shift will have a detrimental impact on Chinese containerised volumes but benefit ports of the countries where the trade shift will occur. However, while companies are reassessing their supply chains, they will initially find it difficult to replace China due to the challenges in replicating the scale and quality of infrastructure.
As global companies look to realign their supply chains and decentralise their manufacturing capacities, China is also focusing more on high tech and high value industries to power their next growth cycle.
Increased concentration in the shipping industry and the adoption of larger vessels has resulted in demand for higher port productivity and better infrastructure by the liners.
The use of mega vessels has led to increased container handling per call, requiring higher crane throughputs and increased productivity.
To address these requirements, global port operators are increasingly investing in automation technology. Four of the top eight port operators (HP, DP World, PSA International and Cosco) are considered ‘enthusiastic adopters’ of automation – i.e. they deploy automation across a relatively high number of terminals with some degree of automation. The rest are considered as at an ‘emerging state’ with a small number of automated terminals.
The GCC region accounted for 3.4% of global merchandise trade in 2019, at USD 1.3 trillion. The UAE and Saudi Arabia account for 77% of merchandise trade of GCC members, with the UAE enjoying the highest trade value.
The GCC is making its mark in the world maritime trade due to the pace of infrastructure creation. Wealth derived from oil has been invested to create state-of-the art infrastructure over the last two decades. Countries including the UAE have invested heavily in building infrastructure such as ports and FTZs to attract FDIs.
The GCC member countries account for more than 3% of global container port traffic, with the UAE leading the containerised trade throughput, representing more than 50% of the region’s total in 2019.
The location of the GCC countries is advantageous as it is located at the entry to Red Sea and near the Suez Canal, and can be considered as gateway to Europe and Asia. This location maybe an ideal transshipment hub for container traffic on the Europe-Asia lane.
The mix of transshipment volumes is generally higher than port-to-port volumes in the GCC region. However, tariff rates from transshipment are significantly lower than that of port-to-port.
As a result, port operators need to find the optimal mix of transshipment and port-to-port volumes to maximise port profitability and productivity. Container penetration is more than six times that of the world average, and significantly higher than that of major developed nations in the West, indicating significant transshipment volumes.
Approximately 51% of container traffic in the region is handled by ports in UAE, followed by Saudi Arabian ports with 23%.
The Port of Jebel Ali in Dubai is the busiest in the region, with 51% of the throughput of the top five container ports. This dominance in container shipping is due to the UAE’s significant investment in port infrastructure and the logistics ecosystems, including Free Trad Zones.
Other countries in the region have also announced significant investment plans in their vision documents.
Saudi Arabia is planning USD 36 billion worth of investments in logistics, as part of its National Industrial Development and Logistics Programme.
Most ports in the region are owned and managed by regional port authorities, while terminals are directly operated either by the port authorities, or by major global port operators. Operators such as DP World and Gulftainer have expanded across multiple geographies. Abu Dhabi Ports, which operate ports, economic zones and logistics businesses in the region, have lofty global ambitions and capabilities for rapid expansion across geographies.
The industrial and logistics sectors are amongst the core pillars identified for economic diversification in the GCC region. To support manufacturing-led growth and to attract FDIs, there has been an emphasis on development of FTZs. Currently, there are approximately 100 FTZs in the GCC region with more planned. The development of port-linked FTZs has been one of the success factors for the ports and logistics segments in the region.
For instance, one of the key factors contributing to the success of the Port of Jebel Ali is the linking of their operations with the Jebel Ali FTZ. Several other players in the region are adapting the same model, including Abu Dhabi Ports – Khalifa Industrial Zone, Saqr Port – Salalah Port, Salalah Free Zone, RAKEZ Free Zone, etc.
Throughput, capacity and utilisation
While the region is in a decent position in terms of demand growth, the rapid increase in capacities have fuelled growth in the region’s ports, leading to a drop in utilisation across ports, as supply growth has outpaced demand in recent years.
The region’s annual average capacity growth is estimated to be 4.2% – double the global average capacity growth of 2.1%. The region is currently in a state of excess capacity with a port utilisation rate of 55% – the lowest in Asia by region and still far behind the global average of 62%.
Another factor for consideration for authorities and operators in the region has been comparatively low port efficiency, as vessel turnaround time is generally longer. GCC ports have higher-than-average vessel sizes as they tend to be transshipment hubs. However, in the UAE and Saudi Arabia, the average duration of stay for a vessel in the port is higher than any of the other major maritime geographies, even in comparison to transshipment hubs such as Singapore and Hong Kong.
One of the major factors affecting vessel days in ports is the quality of port infrastructure. Based on the 2019 data from the World Economic Forum Opinion Survey, in terms of port infrastructure quality, Singapore and Hong Kong ranked first and fourth respectively, while the UAE and Saudi Arabia ranked 12th and 42nd respectively. Another factor that contributes to Hong Kong’s low vessel days in ports is its keen focus on a ‘convenience and trade’ policy, which imposes minimum licensing controls on transported goods and an expedited customs clearing process.
To improve port efficiency, port operators, with the help of public authorities in the GCC region, are actively adopting innovative technologies and improving the customs clearance process to ease the movement of goods being imported and exported from the region.
A recent initiative is the adoption of the World Logistics Passport (WLP) framework. The WLP framework is designed to overcome trade barriers such as logistics inefficiencies, that currently limit the growth of trade in developing markets. Benefits from the project include shared expertise and process developments among partner countries, resulting in cost and time savings and faster customs clearances.
WLP connects government bodies such as customs authorities with logistics service providers to ease the process of commercial transactions.
“The GCC region has played an important role in the development of the global maritime trade routes by virtue of its strategic location on the East-West trade lanes, enabling development of state-of-the-art infrastructure. This report endeavours to capture the evolving dynamics influencing the region’s maritime sector and the road ahead for regional maritime operators,” says Dr Steffen Wagner, global head of transport & leisure, KPMG.