Middle East ports sector faces threats despite strong growth, says BCG report

20 August 2018 Consultancy-me.com 4 min. read

Ports in the Middle East currently handle around one fifth of the globe’s seaborne trade, favoured by geographic advantages and smart investments. Yet, rising overcapacity and the potential for sector disruption threaten this ascendancy. A new report from The Boston Consulting Group has examined the strategic landscape for port operators in the region.

In highlighting the recent growth success of the Middle East ports sectors, the BCG report notes that the region now handles approximately 20 percent of global seaborne trade, despite accounting for less than 3 percent of global GDP. This, the strategy and management firm says, can be attributed to both the Middle East as an intersection of several trade routes – including the Far East-Europe passage, possibly the world’s busiest – and well-executed infrastructure investments.

As a snapshot, container throughput in the Middle East’s major container ports has grown at a compound annual rate of 4.1 percent over the period of 2011 to 2016. This growth has exceeded the global average of 3.3 percent, including the 3.7 percent recorded in Asia despite a heavy investment push from China, and places the Middle East only behind North America at growth of 5 percent for the period. The report notes that throughput growth rates of other types of seaborne cargo have also been strong for the Middle East, along with financial returns.

Shipping container growth in Middle East

In terms of investments, BCG commends the quality of infrastructure developed in the region as to both its scale and technological sophistication, pointing to investments in handling capacity for the Far East–Europe trade route as well as smaller routes. All told, the capacity additions in the Middle East between 2011 and 2016 amounted to 16 million 20-foot equivalent units (TEU, a standardised measure for cargo capacity), at a growth rate of approximately 7 percent.

Yet, with the 7 percent rate in capacity growth put up against the 4 percent throughput growth rate, the overall utilisation rate has dropped 9 points from 75 to 66 percent – with the utilisation figure generally considered low according to the report and the overcapacity described as severe in some locations. This overcapacity, the firm says, puts downward pressure on the handling rates, and will ultimately lead to lower returns on capital than should be expected in the sector.

Capacity additions and utilisation rates at Middle East ports

In addition to the falling utilisation rate, which could dramatically continue its downward trajectory if announced plans to double regional capacity by 2030 are realised, the BCG report identifies two further threats to the local sector; lagging productivity and a high exposure to transshipment, the latter of which currently makes up more than half of the throughput in the Middle East, especially in the UAE and Oman, and is subject to competition from smaller destination ports.

The report states: “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 smaller destination ports succeed in attracting large volumes of direct calls, the current model of serving the entire region with a few transshipment hubs will be threatened. Even at constant levels of trade, overall utilization will fall sharply.” BCG estimates that 10 to 20 percent of transshipment volumes could become direct-destination volumes by 2022.

Impact of transshipment reduction for Middle East ports

To address the combined threats, the authors of the report suggest several strategic priorities and levers for port operators in the region in order to maintain momentum, including by focusing investments on developing hinterland connections rather than building extra capacity and by pursuing enhanced productivity and increased digitalisation – with technologies such as connected platforms, cloud-based services, sensors and predictive maintenance, autonomous transportation, and big data solutions.

The report concludes: “Middle Eastern ports have built world-class facilities and earned the respect of port and shipping industry participants globally. To solidify these achievements, they must focus on making the right moves going forward. In an environment of declining utilisation, success requires capturing more business opportunities, not constructing more berths and terminals. Building hinterland connections, strengthening customer relationships, adopting digital solutions, and fostering a robust business environment are among the ways that port stakeholders can maintain momentum.”

Related: Atkins selected for Oman Khazaen Economic City logistics hub project