Middle East logistics overview Challenges vs. Opportunities

Introduction

ALG has been very active in the Middle East and its commitment in the region led it to establish its own office in Dubai which is now on its 9th year. This presence has strengthened its ties with major clients in the region and has also allowed it to develop its capabilities with a deep understanding of local needs.  Along with its global practice, ALG has been instrumental in deploying state-of-the art projects in the region which incorporates into the ME way of doing business. ALG’s team of consultants is also embedded with local capabilities and understanding of major areas to work with.

ALG has been developing projects in the following business areas in the region: Strategic management, Investments & acquisitions, Business development, Feasibility analysis and Market research, working with the major clients in Maritime, Aviation, Road and railway and Logistics and supply chain. These projects enabled us to develop our own overview of the Logistics in the Middle East and present its challenges and opportunities as we observed them.

It is indeed an interesting moment in the ME and despite recent decrease in oil prices, it has been and it will continue growing at a faster pace than the world´s major economies. Oil prices have dropped more than 50% since 201 and as a result the GDP regional growth evolution has shown a slowdown from 5 %to 7% before 2012 to around 3% thereafter with signs of getting close to 4% in the previous year. Those data show that this growth has been above the G7 evolution for the same period.

Not only the previous years’ data show that the Middle East could react well to the challenging economic situation, but the data are promising for the close future. All major economies of the region show promising data for the GDP’s CAGR from 2017 to 2021. The UAE shows an expected CAGR of 6.8% while KSA 5.5%. Across the whole spectrum Lebanon shows 4.7%, the smallest growth rate in the region, and Qatar and Iran top with 7.6%, although it remains to be seen the Qatar embargo in the country, as well as Iran – USA relationship going forward.

The optimism around those economics can also be seen in their outlook for population growth. Oman is leading the forecasted population growth for the region with an overall growth of 13% from 2017 to 2021. Similar numbers show Kuwait and UAE with 12%, and the KSA somewhat smaller but still with strong growth of 8%. Although population does not ensure wealth creation, it certainly can be a constraint since it could pose limitation on the human capital available for the businesses.  These factors have kept the interest of companies around the world especially those that have expanded their commercial reach in the region. It can be observed that some countries in the region forecast important growth in its imports as can be seen in next Figure.

Import volume growth (USD; 2017-2021)
Import volume growth (USD; 2017-2021)

The continued performance of Middle East countries and their key regional partners as well as their favorable short and midterm prospects have resulted in increased activity at the main ports. These are the main trends observed in their development:

  • Diversification: ME countries are diversifying their economies to be less oil-reliant. Exports of other goods are being stimulated with all major countries focusing in developing stronger industrial and service economies.
  • Higher internal demand: Population growth and improved per capita income result in higher internal demand driving up imports.
  • Containerizing ratio: The region has witnessed growth in containerizing ratio; however, there is still a gap when compared to more mature logistics markets, therefore reason to grow.

Driven by the positive economic expectations and existing gap in logistics standards, port activity in the region is expected to continue growing globally, although competition will be fierce. Jebel Ali plays a very important role in the overall volume of containerized cargo moving an impressive amount of 14.8M TEUS in 2016. Other relevant ports in the region are Khor Fakkan (4.5M), Jeddah (4.0M) and Salalah (3.3M). The total TEU volume in the region has grown from 23M TEUS in 2010 to more than 30 M TEUS in 2016, a CAGR of 4.3%. This import growth is more or less aligned with the GDP growth that was presented previously.

Not only the port traffic has been driving the Middle East economy, the region also holds an outstanding positioning in air cargo with four airports among the 30 busiest in the world, with Dubai International Airport ranking fifth. Notwithstanding this are two major trends that can reshape the air cargo industry in the ME:

  • Increasing freighters’ fleet: The total amount of freighters in the fleets is expected to double by 2036, reaching 180 freighters from the current 80 freighters.
  • Airport expansions:
    • Dubai, Abu Dhabi and Doha are expanding their cargo handling capacity
    • Dubai´s new Al Maktoum International Airport is planned to be the world´s largest cargo hub.

Leveraging on the current positive trend, most airports plan further expansion of their capacity while main airlines and cargo handlers will continue increasing their fleets. Those expansion plans are backed up by the impressive growth that this business has shown in the recent past, with a CAGR of 10.9% in 2010. The cargo traffic has grown from 3.9MTon in 2010 to more than 7.2 MTon in 2016. Again, the UAE represents an important part of this traffic.

Meanwhile, road transportation is more competitive than rail as the latter’s network is yet to be completed. Needless to say, the drop in oil price had an impact in the deployment of the railway network as it requires an important CAPEX to be developed. On the other hand, a depressed oil price makes the road transportation more attractive. In this regard, it can be seen that currently, the road transportation advantages in respect to the rail way are:

  • Low fuel prices vs higher energy costs for the railway network
  • Low labor cost (with great availability) vs skilled personnel required to settle up and run the railway network
  • Amortized fleet vs new investment, currently a big hurdle, or the deployment of the required infrastructure
  • Current connectivity of the road network vs unfinished railway network
  • Door-to-door service vs constraints to deliver. The road is the king of the last mile

In next Figure 2, the reach of the current road network across the region can be seen and the very competitive prices in which a TEU can reach main destination from Jebel Ali.

Arab Mashreq Road Network and Land transportation pricing from Jebel Ali
Arab Mashreq Road Network and Land transportation pricing from Jebel Ali

The following trends can be observed:

  • Road investment: Governmental investments to upgraded overloaded network. Currently the roads play an important role in the regional traffic and governments have to keep them up and running otherwise it could jeopardize the economic growth.
  • Improved truck flow: New streamlined cargo corridors has been put into operation to allow trucks to move without barriers, keeping costs controlled and enabling a mode to close the gap of delayed deployment of railway network.
  • Railway development: As the local economies have adapted to new oil prices, new initiatives to deploy the new railway network are now being observed. The plans across the region are showing that the network will be developed starting 2021

The UAE plays a pivot role in managing inbound flows

The UAE plays a pivot role managing the inbound flows into the region. As a matter of fact, nearly a half of the GCC countries inbound flows are channeling through the UAE.

UAE share over other GCC countries inbound flows and UAE share over inbound flows per country
UAE share over other GCC countries inbound flows and UAE share over inbound flows per country

Saudi Arabia has less dependency on UAE thanks to its West Coast ports and higher direct services to its ports in the East Coast.

Given the strategic role played by the control of the main logistics infrastructure for the overall economy, there are various projects being developed along the region to open up new ports. As a result of those investments and based on projects near to start operations as well as planned expansions, the region’s overall port capacity will be increased by 66% in 2020. Most of those developments will be challenging the Jebel Ali position in the Gulf area. Among the major developments are:

  • Mubarak Al Kabeer Port: Expected to add more than 3.6 M TEUs
  • Khalifa Port: Expected to add 1.9 MTEUs
  • Damman: Expected to add another 1.8 MTEUs

  • New Hamad Port: Expected to add 5 MTEUs
  • New terminal in Sohar: Expected to add 5 MTEUs

All in all, once all those projects are completed in 2020, the region will have an overall capacity to handle 101.2 MTEUS from a current capacity of 62.7 MTEUS. Naturally, all this new development and expansion will bring pressure to the utilization of infrastructure. Current estimations show (Figure 4) that by 2020, the utilization of capacity will fall to 40% from the current level of 57%. It will be interesting to see how the cargo dynamics will change, and how Jebel Ali and the UAE will be affected by those changes. It is important to note that behind the port development there is an entire industry that enables cargo flow. The shipping companies have also a major role to play so that the consolidation of a new maritime cargo scenario will be shaped in the course of the next years.

Capacity utilization estimations (MTEUs; 2016-2020)
Capacity utilization estimations (MTEUs 2016-2020)

The new GCC rail network a game changer for the regional cross-border trade

All GCC countries expect to be connected by the new GCC rail network in 2021. Those investments were the most impacted by the drop in oil prices, but countries are referring back to the projects and this situation will change in the immediate future.

UAE is the only country which already has implemented part of its GCC network segments. It has already launched the first phase of its railway network which belongs to the GCC network. It is expected to reach the Saudi and Omani border soon.

Public budget restrictions have delayed the completion of several of the foreseen sections until 2022/2044. The GCC countries committed to develop a network for freight and passengers of 2,177 km. From this investment, Bahrain accounts for 36km, Kuwait 145km, Qatar and Oman 283 and 306km. The leading railway infrastructure developer will be the UAE with 684km followed by KSA with 663km.

The GCC railway will offer a high capacity alternative to road and sea transportation which can strengthen the UAE’s role as a Middle East hub.

Main Strengths

  • Potential development of bonded trains and standardization offering better transit times and lower total supply chain costs for end users.
  • Massive capacity offered vs road, with potential to increase economies of scale.
  • Reduction of road accidents, pollution and other external costs.

Main Opportunities

  • Expected growth of the regional trade in some cargo and overall.
  • Development/expansion of new industries and industrial areas in the UAE, generating additional exporting capacity.
  • Expected increase of the sea rates and road transport costs.

The new railway is expected to compete for capturing both continental (exports) and oceanic flows (intermodal) shown in the following diagram with the foreseeable volumes to be transported by the GCC railway network supported by the UAE’s current predominant position in inbound flows. Next figure tries to unveil the future traffic that the different nodes of the future GCC network can transport along the various borders.

Air-sea cargo can gain relevance

The development of joint value offering of ports-airports especially with the new airports in DWC & AUH can represent a further push to the air-sea cargo connectivity.

Some of the drivers that could fuel such a development are:

New airports close to port-logistics hubs

New airports and expansions in UAE will be located in the heart of its main port-logistics developments:

  • Abu Dhabi Midfield will have a privileged access to KIZAD and Khalifa Port
  • Dubai World Central will be located in the heart of Dubai South and Jebel Ali

Additional Opportunities

  • Cargo by-passing Hormuz strait through the Omani ports and re-exported from DWC: perishables, military cargo, textile

Air-sea cargo can also benefit from the increased capacity in the Omani ports that enables to by-pass the Hormuz strait to export time-sensitive cargo.

Foreseeable GCC railway main flows based on a UAE current predominant inbound position. Combined air-sea cargo in UAE – Dubai case scheme
Foreseeable GCC railway main flows based on a UAE current predominant inbound position. Combined air-sea cargo in UAE – Dubai case scheme

Challenges facing the infrastructure/service providers and users

In this scenario, both providers (logistics infrastructure and operators) and users (cargo generators) are facing very different challenges.

Logistics infrastructure developers & operators

  • Extremely high competition and it is expected to grow in the coming years as the investments matures, there will be a high risk of cannibalization of the exiting market instead of creating new volumes
  • Temptations: Compete in prices and target transhipment
  • Need to differentiate their value proposition and service offering
  • Reduce leverage on major trade flows, trying to diversify their clients’ portfolio offering adequate value
  • Lack of control over clients’ inland supply chain due to a highly fragmented 3PL sector, with a large number of small players offering point solutions

Users: cargo generator

  • Ambitious expansion & growth plans, aligned with investments already committed
  • Search for diverse client portfolio through a wide range of services offered
  • Too much service offered that is the same: No “game changer”
  • Although technology is emerging as a “democratizing” factor, digital transformation of the business is no longer an option…it is a must
  • VAT introduction in GCC countries (expected in Jan 2018)

These challenges, combined with an uncertain market, should provoke each player to focus on solving the key issues as soon as possible.

The challenges facing the Logistics infrastructure developers & operators

The level of complexity of the existing trade network in the Gulf is beyond any expectation. In Figure 7, some of the major flows of goods are represented in order to enable their analysis. The UAE has been a major logistics provider in the region, but as many more choices arise and the trade opportunities broaden, it is important to understand the various traffics that coexist and the services and infrastructure that each demands.

As for the UAE outbound flows to the GCC, there is a combination of pure road exports and its relation to the maritime inbound into the UAE logistics operator in the many logistics areas and free zones. There is also transshipment function in the ports that is relevant to establish shipping company hubs and drive volume through the infrastructure. Understanding those O/D matrixes of cargo is fundamental to develop an adequate service offering for the infrastructure and set adequate business strategy.

Complexity of the existing trade network in the Gulf
Complexity of the existing trade network in the Gulf

At the same time, location of trade generation (O/D inside the GCC) is extremely scattered, with large scale industrial and logistics areas spread around the GCC. In the effort to diversify and foster the development of new economic sector, the Gulf countries have been developing various IPLs, Free Zones, Dry Ports and ICDs along its territories with important subsidies to attract those companies. After more than 25 years developing such infrastructures, there are already some well stablished ones which play a significant role in the specific country’s economy, and it is an important driver of the relevant position that a port can have.

But this model is being stretched further with a number of new developments underway and its impact in the overall network remains to be seen.

  • Duqm, Qarn Alam, Marmul and Khasab (Oman)
  • New Economic cities in Madinah, Makkah, and Jizan (KSA)
  • New Industrial cities (MODON)

The logistics complexity delivered by those developments is driven by the following aspects:

  • The increased number of locations; it remain to be seen how those new development will compete with the existing one and what will be the impact for both inbound and outbound flows
  • Those investment are being locally driven without a centralized planning department which might lead to redundant and overlapping investments, but at the same time it will maintain the commercial push to attract investments and investors to the region
  • Highly specialized clusters competing with multidisciplinary ILPs
  • A strong investment pipeline that will be driving attention for the region

Bearing in mind the big amount of projects in the pipeline, especially in Saudi and Oman, the complexity of the inland logistics will increase, generating opportunities for the companies willing to take the risks associated to them. It will be very important to carefully understand the entire supply chain that a certain investor is laying out and the benefits of a certain location by delivery to them. ALG has already worked closely with some clients to identify the potentials of certain locations, those might be related with the availability of space, utilities, access to markets, preferential port handling taxes, existence of certain maritime connection, to name a few. As competition grows fiercer in that domain, the taxation and commercial treaties among countries and trading blocks are becoming more important to be brought into the picture.

As for the developers of such areas, it is interesting to note that both rail freight terminals and inland terminals can contribute to anchor cargo, increasing economies of scale and catchment areas.

Creating multimodal platforms (Jebel Ali) and anchoring and expanding hinterland (Khalifa Port)
Creating multimodal platforms (Jebel Ali) and anchoring and expanding hinterland (Khalifa Port)

Rail freight terminals can become multimodal consolidation centers, not only serving the railway but also attracting an array of added value services that would increase the attractiveness of the location.

Inland terminals enable more control over clients’ supply chains, increasing the impact and the services to be provided.

The challenges facing the users: cargo generator

Current environment in the Middle East presents four major business challenges where an enhanced logistics solution could become an opportunity to improve the overall end to end supply chain for cargo generators. ALG claims that those overall logistics approach will be fundamental to select locations and make one’s supply chain as a driver of competitive advantage, in an environment that offers many opportunities to arrange and rearrange its footprint.

Main challenges facing cargo generators
Main challenges facing cargo generators

The logistics function could help develop an efficient inventory management to keep costs down and maintain adequate service level while cargo generators are facing a volatile demand. This will have to encompass the infrastructure to use, the right operational strategy, the right partner selection and also align internal procedures. It will be important also to take into account an operational strategy also to serve the online costumers, in case there is an online platform. For those companies seeking to develop an integrated solution for its entire logistics network, the growing relevance of the online channel might be an opportunity to revisit the current operations.

ALG has been working very closely with first tier companies that have actively transformed their network footprint to work towards increasing its competitive edge.

Those successful histories will be explained to be used as benchmark on how to tackle important business challenges. Those are valuable lessons on how leading companies transformed inventory management into profit generators and see that major companies in the ME can benefit and apply those learned lessons in their current businesses.

fig_09
Real success stories that ME companies can emulate to make their stocks work for profit generation

The following learning points can be extracted from those three below mentioned success stories that can be used by leading companies to maintain their competitive edge:

  • Product segmentation should work beyond the marketing function all the way down to the replenishment polices
  • Define adapted stock strategies for each segment to drive stock levels reduction
  • Use target service levels to focus on more profitable and less volatile products, recognizing in full where is the best place to be in order to serve the most profitable clients
  • Share forecast information with suppliers to reduce raw materials stocks. Selecting adequate partners that will take full benefit of the information to be shared and that can be responsive to this update
  • Define multi-echelon stock policies to reach the desired service levels at the delivery point. Select the right locations to keep stock
  • Fully recognize all costs involved and all possible interactions in the network. Transportation costs and lead time plays an important role not only in OPEX but also in defining working capital requirements
  • Standardize processes and review stock policies systematically
  • Generate meaningful KPI and update dashboard
  • Quality of sales forecast define safety stock levels work to improve it
  • Use analytics to calculate optimal stock level adding statistical and commercial events
  • Stock management is not static, it moves with sales movements
  • Systems should allow the stock policies parameters to be recalculated and has a tangible impact in the volume of stocks to be held

Closing words

It is clear that the Middle East is and will remain an interesting place to invest. The region is able to cope with decreased oil prices, and its economy is much stronger than before. The commitment of the various countries remains strong and the increased capabilities and infrastructure upgrade in other GCC countries may jeopardize UAE’s current dominant position as a logistics hub.

Once the railway network is in place, local distribution dynamics will be dramatically changed thanks to a higher competition between transport modes. The UAE is the first country where the GCC railway network has started its deployment. In this sense it will fight to keep its position as a logistics provider of reference in the region. The new investments need to have an approach of end-to-end supply chain, specialization and value proposition to compete with existing infrastructure. Countries seeking to capture more businesses for its new infrastructures need to have at least a regional focus to make sure there will be real competitive advantage to attack operators and cargo users.

Infrastructure operators and logistics provider will have the challenge of adapting to its current network and service offering to capture the advantages that the infrastructure market is offering. This will have to fall in the business strategy of each company and find its complementarity and cost synergies. There will be no room for “one fits all” solution or try to be in all places as specialization will be the key to capture cost efficiency. All this is to bring the whole region to the next level of professionalization and specialization of the function and raise the overall standards presenting great solution for global supply chain to be implemented here.

In this regard, the cargo generators, users of the logistics infrastructure and services, have the opportunity to revisit their stock and stock policy, creating a lively inventory management to fully benefit from the resulted enhanced infrastructure. Global companies should transform its inventory management function and embed it with client requirements so that they can strive in the existing market and create value generation opportunities to work as entry barriers for new entrants.

ALG as a provider of global logistics consultancy has developed a global and yet local knowledge that enables it to be the service provider of reference for all stakeholders: investors, infrastructure developers, logistics service providers and industries when it comes to driving better results out of investments carried out in the region.


About the authors
Pablo Ruiz del Real is MSc in Civil Engineering, Partner at ALG and Head of Middle East operations
Flaviano Moreira is MBA, Chemical Engineer and Manager at ALG
For more insights, please check www.alg-global.com or contact:
pruiz@alg-global.com
famoreira@alg-global.com