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Wed 27 Jul 2011 08:43 AM

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DP World digs London Gateway as economy slows

Dubai firm is pinning its investment on Britain’s need for more modern ports

DP World digs London Gateway as economy slows
DP World is considered one of the more profitable assets of debt-laden Dubai World

DP World  is preparing
to spend £1.5bn ($2.5bn) on Britain’s first deepwater port is at least 20 years
at a time when the economy has yet to recover from the last recession.

The world’s fourth-largest port operator is dredging about
106 million cubic feet to accommodate the world’s biggest ships at London
Gateway, about 25 miles east of the capital. It’s designed to win clients by
combining a harbor terminal with an onsite distribution center, luring
wholesalers and retailers away from older ports such as Hutchison Whampoa’s
Port of Felixstowe, about 50 miles northeast.

DP World is pinning the investment on Britain’s need for
more modern facilities that will help companies save on transport costs at a
time when UK economic growth is set to trail global expansion. If completed as
planned, London Gateway would expand the UK’s capacity for ultra-large
container ships and become Europe’s sixth biggest port, based on 2009 rankings.

“The UK is a mature slow-growth container market,” said Mark
McVicar, an analyst at Nomura International Plc in London. Still, “for reasons
of proximity to London, over the long term it will work” and “it could be an
important and incremental profit contributor.”

DP World is pressing ahead with the project even as the global
economic expansion cools. While the company has committed about £400m for work
such as dredging and reclaiming land, the pace of development may depend on how
quickly it wins clients. It said in February the onsite distribution facility
will save clients “significant” costs and cut about 65 million freight miles a

Gross volumes at its ports rose 11 percent in the first half
of the year to 26.2 million 20-foot containers, or TEU, often used as the
industry measure, DP World said in a statement Tuesday. That matched growth in
the fourth quarter and compares with a 14 percent increase for all of 2010
versus 2009.

“We’re still on track,” DP World chief executive officer
Mohammed Sharaf said Tuesday, when asked about London Gateway on a conference
call. “The essential infrastructure work is going on, but we have still not
decided on a date. We can speed it up as and when we see the market comes back,
or slow it down. It will all depend on how the market reacts and what the
situation is in the market.”

Growth in world trade will ease to 8.2 percent this year and
6.7 percent in 2012 from 12.4 percent in 2010, the International Monetary Fund
forecast on June 17. The IMF also cut its forecast for 2011 global economic
growth to 4.3 percent.

At the same time, the UK economy is struggling. Gross-
domestic-product growth slowed to 0.2 percent in the second quarter from 0.5
percent in the three months through March.

“As we go into the second half of the year, there is some
uncertainty around the global economy, making it difficult to forecast how
global trade will develop,” Sharaf said.

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Britain is trailing recoveries in other industrial
economies: Gross domestic product is about 3.9 percent below its peak in the
first quarter of 2008. The US and Germany have already recovered all the ground
lost during the recession.

London Gateway will directly support as many as 1,500 UK
jobs a year during construction and about 12,000 once operational, according to
a report by Oxford Economics commissioned by DP World.

Neil Davidson, a port adviser at Drewry Shipping Consultants
in London, said London Gateway will increase Britain’s capacity for so-called
ultra-large container ships.

Among them is A.P. Moller Maersk’s Emma Maersk, the world’s
biggest, with a carrying capacity of 14,770 containers.

Maersk has ordered 20 Triple-E class container ships this
year that can carry 18,000 containers each to help meet increasing trade demand
between Asia and Europe. The first of the vessels is expected to sail in 2013.

“It’s a very big order book, and they will inevitably be
deployed in the Asia-to-north-Europe trade route,” Davidson said. “So we know
that all the bigger ships are coming to UK ports in increasing numbers in the
coming years.”

DP World inherited London Gateway when it bought Peninsular
& Oriental Steam Navigation Co., at the time the UK’s No.1 port operator,
in 2006. The purchase also gave it stakes in container terminals at
Southampton, the UK’s second-largest port, and Tilbury on the River Thames, the
distribution hub for the London 2012 Olympic Games.

The port operator is 80 percent controlled by state-owned
Dubai World, which roiled global markets in 2009 when it said it was seeking to
reschedule debt payments. Dubai World reached an accord with creditors to
restructure about $25 billion in March.

Hutchison Whampoa’s Felixstowe is the UK’s largest container
port, handling more than 40 percent of British imports and exports a year. The
terminal tested two berths that can handle ultra-large container ships in
February that are due to open this year.

In the UK, most large ports are located in or near coastal
cities, limiting the space for expansion or building neighboring logistical
facilities, Nomura’s McVicar said. That results in containers having to be sent
to distribution centers sometimes more than a hundred miles away.

“If you talk to DP World, their view is, ‘We expect to be
able to attract volume from existing ports because of the quality of service,’”
he said. “The cost to the shipper of moving stuff from Hong Kong to Oxford
Street will be lower. Which is very different from adding more capacity in
somewhere like Felixstowe because you’re not changing the proposition.”

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