Starting this month SFME will be asking an expert a question from their specific field. This month, consultant Fred Doll explains how oil alone cannot explain the Middle East’s booming shipping industry.
Can the oil boom explain the transformation of the Middle Eastern shipping industry?
MBA MEI MNI
To analyse what is really happening in the maritime sector across the region we must look at the wider economic picture. In the Middle East we see GDP growth at 5.8% for 2006, and forecast at 5.4% for 2007. There can be no question that high oil prices have brought income into the region, however to accurately explain the growth in the shipping business, it is necessary to appreciate that there is more going on than an oil boom.
Both the private sector, regional and international, and the governments in the GCC are embarking on developed strategies for growth. The first step has been to promote industrial growth and maintain strategic control in core energy industries. Following on from that has been a successful attempt to capture additional value in adjacent sectors such as the strengthening of the steel and aluminium sectors, and in petrochemical refining facilities.
Governments and private firms are seeing that there is a need for infrastructural development in this region, both as an investment opportunity, and as a key pre-requisite to further growth. Port businesses are an excellent illustration of that type of investment in the maritime sector.
There has also been a significant attempt to diversify away from oil and gas dependency. The haphazard diversification witnessed during the oil boom of the late 1970s and early 1990s turned out to be problematic for many of the economies that tried it. Currently we’re witnessing the opposite, a systematic and logical diversification in the sectors that can support it. The investment in the steel and aluminium sectors is directly related to construction, which is in turn related to the infrastructural development. A move into the aluminium business without any support could be foolish, but if there is capacity in the market that is only being met by imports, and the business can stand alone, then the investment is very logical.
The growth the region is witnessing now is having knock-on political effects, even though this may not be intended as an objective. The investment strategies that have been embarked upon have the effect of enabling and driving national and regional economic growth, and with it naturally create opportunities for employment. Obviously government entities and state-affiliated companies have welfare improvement strategies within their remit of possible objectives. But, something Adam Smith first spoke about over two hundred years ago comes into play here. Interestingly, private individuals, or more often, private firms, which may have the single goal of investing for financial gain, can be “led by an invisible hand to promote an end which was no part of its intention.” What this means in the Middle East, is that high quality employment and the broad distribution of opportunity generated by a growing economy will de facto improve society.
The picture painted by the maritime business in the Middle East is an excellent illustration of that process.
We’ve seen government owned operations, state affiliated companies and private investors broadening
the whole spectrum of economic opportunity, and society is witnessing the positive trickle down effects.
The chemical plant capacity planned for construction by 2010 will drastically increase regional capability. In Saudi Arabia, projections forecast an 8 million tonnes per year (mtpy) increase and Qatar is expected to grow by 2.4 mtpy. There will also be additional capacity in Oman and Kuwait raising their output potential by approximately 1 mtpy each. Added to other projects, that means the regional production will have an additional chemical capacity of over 14.2 mtpy.
We also see an additional 3 million barrels per day refining capacity slated for the same time period. Again, rather than simply pumping the oil, or developing gas resources and sending them out of the region, this is clearly indicative of a strategy for companies involved to move into adjacent industries and integrate along the value chain.
A major historical aim of the regional maritime business has been to control sufficient shipping to maintain the smooth flow of oil in case of regional disruption, a goal that has been very well served by the tanker operating companies. The shift we can see now is that there is a more far-reaching economic objective that goes hand in hand with that delivery function. That objective is to maximise value realised per barrel of oil, or cubic metre of gas produced. Ultimately that means keeping more of that ‘value-added’ within the region.
For further illustration of strategic adjacent investment, we need look no further than the regional investment in tankers. Nakilat, the Qatar Gas Transportation Company now have 17 LNG carrier vessels owned outright, and a 30% - 60% equity share in an additional 28 LNG vessels. This situation is mirrored by the National Shipping Company of Saudi Arabia who now own eight Very Large Crude Carriers (VLCCs) and also have 12 chemical carriers on order through their 80% owned affiliate, National Chemical Carriers.
Similarly, the National Iranian Tanker Company (NITC) has 13 VLCCs and four Suezmax vessels on order.
The Emirates Trading Agency has had a long tradition in dry cargo shipping but has recently expanded from this solid base into the liquid tanker sector with two VLCCs and several Handysize chemical tankers.
NITC and Islamic Republic of Iran Shipping Lines have ordered vessels from Iran’s shipbuilding industry, which in turn provide the demand for the steel and aluminium sectors. The materials producers in the Middle East can take advantage of very low energy prices, which keep smelting costs down, and makes their goods competitive, not just to local buyers, but also on a world stage. As these producers have increased production and invested in the expansion of facilities, some are now in fact exceeding regional demand, and are in a position to target the export market. Sohar Aluminium plans to have a 325,000 mtpy smelter operational by 2008, indicative of how industries are capitalising on shipping industry growth.
Of course, no analysis of regional activity would be complete without taking a look at how DP World have turned a strong regional base into a global brand and rapidly become a worldwide leader in its field. The consolidation of the global ports market began a while ago but recently it became apparent that the increase in trade traffic was enticing DP World’s competitors into creating a global network of ports. The action taken by management began with the purchase of CSX, which gave access to the Asian Ports, followed by the widely publicised takeover of P&O Ports. The result to date is a global network of port facilities with a handling capacity of over 55 million TEUs per annum, spread across 51 terminals in 24 countries.
The acquisition process has not resulted in a shift in focus from the regional base, and organic growth in its core Middle East operations continues. The latest figures suggest that 2006 will be approximately 15% up on 2005 in terms of throughput, and a further 5 million TEU expansion at Jebel Ali is forecast for 2007.
Oil revenues may have provided the liquid capital to undertake some of these projects, but it must be seen that there is significantly more going on in the region. Investment is promoting growth and maintaining strategic control in the core energy industries, and capturing additional value in adjacent sectors has become a core aim. Shipping and ports are integral parts of this investment strategy. DP World has set the example of how strong growth and performance in the Middle East can serve as a springboard for world leadership in chosen sectors. Income generating opportunities are being realised by companies from around the world, and to use high oil prices as a one-stop explanation for regional growth would ultimately be misleading.