Ports in the storm

DP World Chairman Sultan Ahmed Bin Sulayem explains why he is leading the charge into Africa.
DP World Chairman Sultan Ahmed bin Sulayem speaks during a news conference in Dubai. In easily the biggest confrontation between a SWF and the West, Dubai-owned DP World was forced to sell US port terminal operations it acquired through its takeover of UK-based P&O in 2006 amid a political firestorm that the deal posed a threat to American national security. (Getty Images)
By Andrew White
Sun 15 Feb 2009 04:00 AM

DP World Chairman Sultan Ahmed Bin Sulayem explains why he is leading the charge into Africa, as the ports operator looks to limit its exposure to the worst of the global economic turmoil and boost growth in emerging markets.

"We as DP World are not only a Dubai company, we are a world company - we operate where the cargo is and where the customers want us," insists HE Sultan Ahmed Bin Sulayem.

"The customers wanted us to be here and the customers wanted this type of service. Wherever we see the cargo, we go."

The world has become too used to reaping Africa’s resources...Africa should also get the benefits.

If anyone doubted those international credentials, the Chairman of ports operator DP World and its parent company Dubai World is speaking on a state of the art jetty at the port of Doraleh in Djibouti, on the horn of Africa's east coast.

Behind him, two enormous cargo ships are beginning to unload thousands of metal crates onto the docks and into the care of hundreds of expectant Djiboutian stevedores. In front, a throng of dignitaries, including Djiboutian president HE Ismail Omar Guelleh, are being entertained by traditional dancers and musicians assembled to celebrate the completion of the first phase of the $330m container terminal upgrade.

"When you talk about Africa, you talk about the strategic location that Djibouti has, connecting the continent to Asia," Bin Sulayem adds. "I think by next year the difference to Djibouti will be huge - this is the life of the city, it's a trading port and on one of the best maritime routes.

The relationship between the government of Djibouti and DP World began in June 2000 when the operator, then Dubai Ports International, secured a 20-year concession to manage the International Autonomous Port of Djibouti. Located 11km from the ‘old' Djibouti port, the Doraleh terminal is now the most advanced container terminal in East Africa, its exceptional quay length and depth able to accommodate the largest container ships in operation.

Not that the infrastructure development is restricted solely to the Doraleh quayside. On the same day, Bin Sulayem and president Guelleh will also inaugurate the 14.5km-long Boulevard Mohammed Bin Rashid Al Maktoum, which stretches along the shoreline and towards the city, where executive travellers will be delighted to find the five-star Djibouti Palace Kempinski, developed by Dubai World subsidiary Nakheel Hotels. There's a reason some wags have dubbed the place ‘Djubaiti'.

"Our business and effort does not only centre on the port, but on many other businesses and areas which are related; infrastructure is very important," says Bin Sulayem. "We are learning from what we have done in Dubai, where we started with a port and then ended up with many other businesses."

The Djibouti model is one that DP World is eager to promote to other African nations that might be considering awarding ports concessions to international operators. At its heart is an economic free zone, which offers companies tax and trade incentives, and which is now "almost full", according to Bin Sulayem. In order to accommodate the overflow, a new free zone will shortly be established at the port.

"Djibouti is a good example for Africa, as it's difficult to tell African countries ‘Dubai did it, let's do it in Africa', because you cannot compare," says Bin Sulayem. "But when you take the example of Djibouti, where so far the investment we have been able to achieve here has been positive, it is far more credible. Djibouti is an example we are taking around Africa."

DP World, one of the largest marine terminal operators on the planet, is already active at various key points in Africa, embarking on large-scale public-private partnerships across the continent.

"The agreements are about a lot more than DP World, in that they involve the establishing of free zones and more," says Nabil Ahmed, an analyst with Deutsche Bank AG in Dubai. "Some of these African nations will have been looking at Dubai as a model, in terms of this very rapid development through developing various sectors at the same time, and so that's what they sign up for in the agreements."

Among its 49 terminals and 12 new developments across 31 countries, DP World has investments in Senegal, Rwanda, Nigeria, South Africa and Mozambique, and has ambitions to increase its presence in a market that has thus far escaped the worst of the current economic crisis, due to Africa's low dependence on credit to finance trade.

"Africa is on our doorstep and there has been a long trade relationship between East Africa and Dubai and the UAE," Mohammad Sharaf, CEO of DP World, tells Arabian Business. "We have noticed that Africa really lacks infrastructure and that improved infrastructure will really help to improve trade and the logistics chain.

"We have noticed that with goods moving in and out of Africa, the freight rates are the highest in the world, because of the lack of infrastructure and of a logistics network," he continues. "We believe that by improving that, it will reduce costs, bring more efficiency and will help the African economy."

Historically, a key driver for container shipping has been the number of movements to finished products for the world's consumer durables. Things are manufactured in one country, put together in another country, and consumed in yet another - now Africa could be the latest beneficiary of globalisation as production is outsourced to the continent.

"The world has become too used to reaping Africa's natural resources," says Sharaf. "Africa has been the supplier, but we believe that Africa should also get the benefits of the finished products. They can afford it, provided they have the infrastructure at the right cost.

"Djibouti by itself is a small market, but it serves Africa, and this is where the governments of Djibouti and surrounding nations come into play - to put the proper infrastructure in place," he continues. "We are in dialogue with governments over how to put proper infrastructure in place, and to upgrade old existing infrastructure built 20 or 30 years back."

In addition to collaborating with various African leaders, DP World is counting on broader international support for its investment initiatives.

"It's in everybody's interests - if the Europeans don't want the migration of Africans into Europe, they need to do something in Africa so that jobs are created," insists Sharaf. "Rather than the Europeans spending billions of dollars on security and keeping people out, they can spend that money investing [in Africa] and creating opportunities so that people can have a better life."

The challenge for DP World could be to temper those expansionist leanings as the crunch bites. After the rapid growth of the last five years, during which it acquired British ports and ferries operator P&O among a number of other purchases, it looks set to put the brakes on capital expenditure this year.

Although Bin Sulayem insists that DP World is "looking at other locations", he admits that global economic circumstances will determine the path the operator takes over the coming months.

Container shipping is facing its stormiest year ever, according to the latest numbers from Drewry Shipping Consultants, which earlier this month downgraded its traffic numbers for 2008, and expects global growth to shrink even further in 2009.

Drewry estimates that the industry as a whole will have added capacity at an average annual rate of less than five percent between 2007 and 2013; a research note published this month by Societe Generale estimated that DP World will have added capacity at a more pronounced annual rate of just above seven percent over the same period.

"With respect to Dubai Ports, it is fair to say that the peak (of the spending, at least) is past," the report said.

"We forecast that capital expenditure will be reduced from $880m in 2007 and $1.8bn in 2008 to $730m in both 2009 and 2010."

The Societe Generale note forecasts that DP World will record growth in throughput of only 4.2 percent this year before resuming to a more normal, but still depressed, 11 percent in 2009.

 

Trade through DjiboutiMost of Djibouti's imports and exports originate in, or are destined for, landlocked Ethiopia. Djibouti has been Ethiopia's primary access to the sea since 1998. Located alongside principal shipping lanes linking Africa, Asia, Europe and the Middle East, the port also has significant potential to attract a large volume of trans-shipment traffic.

According to DP World, economies of scale and scope allow for potential reductions in handling and freight costs, so capacity is easily expandable to meet long-term demand.

Port activity is one of the main revenue generators for Djibouti. Between 2001 and 2005, real economic growth grew on average three percent per year, rising to 4.8 percent in 2006 and 5.4 percent in 2007.

Port and related activity make up a large share of this increase. The country has unexploited mineral wealth, as well as a significant potential for tourism.

And as the operator grows, it must do so with one eye trained carefully on its operating costs - particularly as the Jebel Ali port, which still provides a significant proportion of its income, may see a slowdown in container traffic in 2009 and 2010.

"Ports operators are probably better positioned than many other businesses around the world, and they have not historically suffered from pricing pressures, so they should be able to maintain yields or rates even in the current environment," says Ahmed at Deutsche Bank.

"However, we've seen the world collapsing in a few months, and the next couple of months as well as the rest of 2009, are going to look pretty dreadful in terms of volumes for ports operators."

 

If the Europeans don’t want migration of Africans into Europe, they need to do something in Africa.

According to Bin Sulayem, the operator has yet to see any significant decrease in throughput since the turn of the year. In 2008, however, cargo volumes at the 26 terminals in which it has majority ownership or operational control rose 15 percent, compared with 18 percent growth a year earlier.

"2008 was very good and we were monitoring the numbers in January compared to the previous month," Bin Sulayem insists. "I don't have numbers to hand but we don't anticipate a drastic slowdown."

Not all analysts are convinced that this will be the case for much longer. "One of DP World's major ports is obviously Jebel Ali, and the regional economy is slowing down sharply, so that is a worry for all analysts and investors," says Robin Byde, a shipping and logistics analyst at HSBC in London.

However, he also notes that DP World's global network should stand it in good stead as he does not anticipate a major slowdown in Africa, or parts of Asia and the Middle East. The operator's long-term investment programme has identified areas where there is "good potential for growth in the next 15 years", Byde adds.

DP World has 65 percent of its operations in the Middle East and Asia, which should limit its exposure to the worst of the gathering economic storm. Nevertheless, the company is still looking to rephase and "push back some of the capacity expansion into 2010 and 2011", according to Byde. Delivery schedules of projects at London Gateway and Rotterdam's Maasvlakte 2 are currently being revised.

"We are very cautious and we are looking at each area of our projects that we have announced and are committed to, [to see] how we might reduce costs," says Sharaf, who insists that DP World's current hiring freeze was introduced alongside a "redundancy freeze" to safeguard jobs.

"We are already an efficient organisation; we don't have much fat," he continues. "However, in these times if the business is not growing at 15 to 20 percent, do you need to be expanding your facility at that pace? No. Whatever percentage growth your business is going to expand at, then [build capacity to] match that."

The new developments at Doraleh and elsewhere in Africa will provide ample capacity at each port, even if the statistics do not immediately highlight Africa as a significant player in the DP World portfolio. Last year, the operator handled around 24m boxes, of which Africa accounted for just 400,000. However, analysts agree that ventures such as the one in Djibouti mean DP World has a firm foothold in key emerging markets that are likely to outshine more established regions over the coming years.

"Africa might be an exception - so far it's one of the few places in the world that is not showing massive declines," says Ahmed at Deutsche Bank. "This kind of capacity expansion in Djibouti, for example, may be more justified than capacity expansion in Asia or Europe.

"Strategically, the Doraleh project looks like a good move because you can see some customers shifting from another port and heading to Djibouti to take advantage of the brand new facilities," he adds.

"It also looks like a safe bet in terms of capacity utilisation, because it has been under huge strain for the last few years.

As one of the last undeveloped frontiers, Africa holds huge untapped potential and Bin Sulayem is prepared to be patient as he waits for the profits to roll in. In the new scramble for Africa, it's all about leading the pack.

"This place, whether it's Djibouti or Nigeria or any part of Africa, still has great growth potential," says Bin Sulayem as he readies himself for the short car journey to Djibouti's Ambouli International Airport, from where he will board a private jet to take him back to Dubai.

"There is so much demand, and many of the plans that governments have put into place will require services and infrastructure. We want to be ahead of everybody in Africa."

Slating the ratingsEarlier this month, DP World was listed among six government-owned companies in Dubai whose credit ratings are under review at Moody's for possible downgrades as the economy slows, a decision that draws a stinging response from the ports operator.

"Organisations like ourselves are going by DIFX rules and by London Stock Exchange rules; we're meeting all the transparency requirements and more, and still [it's not enough]. Why? It's because we are in Dubai," contends DP World CEO Mohammad Sharaf.

"If the same company was based in the US, with the balance sheet that we have, would there be concern over our rating? No. We are better than Fortune 500 companies in terms of our performance," he continues.

"Moody's and everybody else can see our balance sheet, have seen our profitability in the first half, have seen our volumes, and they have all the information," says Sharaf. "It's their call, but I look at it and it's not right if they're going to bring it down."

Analysts note that while a downgrade is likely to increase a company's finance costs and impact investors' sentiment negatively, DP World is nevertheless well positioned should Moody's cut its credit rating.

"DP World looks well-financed at the moment, and around 80 percent of the maturities are long-dated on their existing quoted debt," says Robin Byde, an analyst at HSBC in London. "From an equity analyst point of view, their financing looks reasonably sound."

"I don't know what will happen," Sharaf concludes. "I don't know enough about those [ratings agency] guys, but I can tell you that they don't know us either."

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