According to a new report by The Boston Consulting Group (BCG), entitled ‘Will Middle Eastern Ports Continue to Succeed?’, ports across the region have enjoyed success by building high-quality infrastructure to serve the large cargo volumes flowing through the region. From 2011 through 2016, the compound annual growth rate (CAGR) of container throughput was measured at 4 per cent, which exceeded the global average. Moreover, the throughput growth rates of other types of seaborne cargo have also been impressive. But as is often the case, following a period of strong growth, there are causes for concern.
Overcapacity, exposure to transshipment, and lagging port productivity threaten to slow or even reverse the upward trajectory of the region’s ports. Hence, ports in the region have to explore alternative routes to mitigate these challenges.
“Middle East ports accounts for less than 3 per cent of global GDP, while its ports handle approximately 20 per cent of global seaborne trade. This disproportionate share is the result of both geographic advantages and well-executed investments,” said Giovanni Moscatelli (pictured), Partner & Managing Director at The Boston Consulting Group Middle East.
Middle Eastern ports have aggressively added capacity. From 2011 through 2016, container capacity increased by 16 million 20-foot equivalent units (TEU). This represented an annual growth rate of approximately 7 per cent, versus 4 per cent for container throughput. The additional capacity caused utilisation at ports to fall by 9 percentage points, from 75 per cent to 66 per cent. This utilisation rate is generally considered low and puts downward pressure on handling rates, and in some locations overcapacity is severe.
Despite already low utilisation, Middle Eastern ports have announced plans to add capacity totalling approximately 57 million TEU by 2030, thereby doubling the current level. By 2022 alone, assuming the recent throughput growth continues, the new capacity will drive down utilisation by more than 8 percentage points, to approximately 57 per cent.
“It is unlikely that ports will build all the announced additions. They may reassess their plans if expected volumes fail to materialise or if they lack the financing necessary to build the full amount announced. Even so, the proposed additions are staggering to consider,” added Giovanni Moscatelli.
High exposure to transshipment
Adding to the over utilisation of ports is the risk of transshipment, which accounts for more than half (53 per cent) of the throughput of Middle Eastern ports. At ports in the United Arab Emirates (UAE) and Oman, transshipment represents the lion’s share of utilisation. To end their dependence on transshipment hubs, smaller destination ports (which serve as import-export gateways for their own hinterlands) are improving infrastructure, hiring experienced port operators, and encouraging shipping lines to make direct calls. If they succeed in attracting large volumes of direct calls, the current model of serving the entire region with a few transshipment hubs will be threatened. Decreasing transshipment volume would eliminate many of these transfers. If such a shift occurred, the overall utilisation of Middle Eastern ports would be approximately 14 to 20 percentage points lower than in 2016.
Lagging port productivity
Empirical evidence suggests that, except for the most successful and established players, productivity is lagging at a number of Middle Eastern ports. This is not unexpected given that many of the newest players are still at an early stage of development. Because these ports have been busy bringing new capacity online, commissioning larger cranes, and installing new operating systems, they have not focused on improving productivity. The region’s relatively low unit costs for labour have made cost optimisation less of a priority than in other locations.
“Ports across the Middle Eastern region have built world-class facilities and have earned the respect of port and shipping industry participants globally. To solidify these achievements, they must focus on making the right moves going forward. Imperative agendas on building hinterland connections, strengthening customer relationships, adopting digital solutions and fostering a robust business environment are key success measures to promote prosperity for ports industry and the entire region,” concluded Giovanni Moscatelli.