The Dubai City-Port growth model

The origins of a model of reference

The Dubai port was first built in the mid-19^th century in the Dubai Creek area. It served a settlement of 800 members of the Bani Yas tribe led by the Al Maktoum family, whose subsequent generations have kept on developing the port and city, turning it to an international trade hub. The calm waters of the Creek have favoured fast-growing maritime activity, a big capacity for mooring berths, and have made it possible to build the ports of Hamriyah and Rashid, and finally, in the late 70ies, Jebel Ali Port (i.e. one of Dubai’s main assets, a success story of the United Arab Emirates).

Other ports in the region were developed or upgraded with modern infrastructure throughout the 60s and 70s (i.e. Port Khalid in Sharjah, Mina Zayed in Abu Dhabi or Khalifa Bin Salman in Bahrein). However, Dubai’s Jebel Ali was the only harbour to succeed in becoming a large-scale global port. It benefited like no other port in the region from the relatively recent containerisation of cargo, which enabled high operational efficiency and economies of scale. In only a few years, Jebel Ali became the main cargo gateway for Gulf region, later on emerging as a distribution platform for other regions such as Indian Subcontinent and East Africa.

The success of the model

Nowadays, Jebel Ali ranks amongst the 10 largest ports worldwide. In 2018, the port moved approximately 15 million TEUs and has become the busiest logistics hub in the Middle East, only outranked by those in the Far East of China and South Korea. Dubai’s port operator and authority, Dubai Ports World (DP World) has expanded overseas and has become the 4^th largest port services provider, moving more than 70 million TEUs per year in its nearly 50 container terminals across 6 continents.

Jebel Ali and its adjacent free trade zone, JAFZA (launched in the mid-80s), represent more than 16% of employment in Dubai, with more than 135,000 direct jobs and 8,600 companies. They account for nearly 25% of Dubai’s foreign direct investment and more than 30% of the Emirate’s GDP (est. 2017). Around 100 Fortune 500 companies have set up branches within Jebel Ali-JAFZA’s boundaries — as have many other companies in other districts of Dubai, which has emerged as a hub not only for goods trade, but also for professional services, finance, tourism and leisure, real estate, media and culture.

Snapshot of UAE and GCC ports

Current market dynamics

Characteristics of Dubai’s natural markets

Dubai Port is an oceanic hub that participates in the global maritime value chains. It has access to 4 main natural markets, classified into hinterland and foreland:

• Hinterland: UAE and GCC (in transit) – Markets served as gateway cargo
• Foreland: Middle East, South Asia and East Africa – Markets served as transhipment cargo or in re-export from JAFZA

Dubai’s natural markets cover a total population of more than 2.3 billion inhabitants (30% of the world population), meaning more than USD 6,500 billion in GDP. They expect more than 20.5 million full TEUs, generating a traffic in the region of more than 60 million containers (including movement of empties and transhipped containers).

Overview of Dubai ports’ competitive landscape

Dubai Ports currently focuses its operations on the Middle East and UAE volumes, which include the national demand and the cargo generated in JAFZA and other adjacent logistics nodes. South Asia and East Africa are also important markets with a lower share in the volumes handled in Dubai.

Dubai has managed to consolidate as the main port for these regions, as it is the only connection with ocean routes for many of them. However, other ports in the area are also fiercely competing for this growing market.  

Volumes handled and capacity

Jebel Ali is the leading port in container volume within its natural market, handling 15 million TEUs per year, of which 10 million TEUs are transhipment and 5 million TEUs are gateway cargo. This share not only shows the international vocation of the port but also its key role in the UAE’s economy and import/export market. In 2018, Dubai handled nearly 25% of the containers in the region, followed by far by Colombo, the other oceanic hub.

Other transport infrastructure in synergy with ports: Free Zones

Jebel Ali port is complemented by several free zones and industrial areas located in the surroundings (NB: the main Free Zone is JAFZA, which falls under DP World’s direct management). Both entities share common commercial teams and strategies, working in synergy to attract cargo and tenants as part of the feedback process that has contributed to make Jebel Ali port the most successful hub in the Middle East.

JAFZA hosts activities from most economic sectors, mainly focused on the trading and logistics business. Goods are imported from overseas to Jebel Ali port and they are stored, in bonded conditions, in JAFZA tenants’ logistics facilities, where they may receive value-added services or be manufactured, to be exported later to Dubai’s natural markets. JAFZA mainly focuses on cargo re-export activities, with a small presence of manufacturing businesses.

The Dubai Port model of obtaining synergies from adjacent logistics and industrial facilities under Free Zone conditions has been replicated by several of its main competitors. In general, these port-free zones provide very competitive land prices to stimulate demand, anchoring cargo to their logistics areas and therefore improving the competitive positioning of their port.

A turning point for Dubai ports’ growth

Dubai has managed to consolidate its market positioning thanks to the favourable market and competitive environment, as well as local synergies and an effective growth model.

Market

• The strong local and regional demographic and economic growth has favoured the port as the hub for the Middle East.
• The port has become the platform for several large-scale projects in the region, including Dubai’s development.

 Competition

• Ports in the area have historically suffered from poor capacity and efficiency, lower capabilities and technology.
• The first-mover effect has been key to generating economies of scale and gaining an edge on the competition.

 Synergies

• Alignment and retro-feeding between the Port and Dubai’s economic agents’ strategies.
• Free Zones supporting and boosting the port captive cargo and international connectivity.

Growth Model

• The increase in capacity has been driven by strong demand.
• Volume-driven strategy, involving an inherent prioritisation of quantity over value added.

Expected port market trends

However, in the last few years Dubai Port and JAFZA have reached a turning point motivated by the changes in its markets and competitors. Dubai’s positioning as a global trade hub is being challenged by several factors.

The following section analyses some of the key drivers for this slowdown, as well as other events that may additionally impact it.

Geopolitical events

One of the most important challenges that Dubai faces is global geopolitics, especially due to its location in the Middle East. The Gulf has been exposed to fluctuating instability for several years, which has had an impact on Dubai’s addressable markets. The port has sometimes been closed de facto, other times used as an opportunity for market differentiation having also benefited from the situation. Below is a list of some the most relevant geopolitical events with their associated potential impact on Dubai’s positioning in the mid-term:

Iran crisis

• Trade from/to Iran is restricted from the UAE, so it opens up import, export or hub opportunities for countries where sanctions are not applied in full (i.e. Russia, Qatar, Turkey).
• The Hormuz Strait crisis since beginning of 2019 has jeopardised Dubai’s positioning as a hub and gateway.
• On 17 May, the London insurance market’s Joint War Committee extended the list of waters deemed high risk to include Oman, the UAE and the Gulf after separate ship attacks off Fujairah. Insurance costs for ships operating through the region increased by at least 10%.

Yemen conflict

• A large natural market for Dubai remains mostly closed.
• The Gulf of Aden requires additional security measures that entail premium insurance costs. If the situation worsens, alternative routes to the global maritime route (through the Red Sea) will likely gain momentum. This is the case of the new belt and road initiative promoted by China. Dubai’s potential does not seem as promising as that of other ports such as Gwadar, or the Central Asia railways.
• Tensions with Iran, who is very sensitive to the conflict, may jeopardise Dubai’s logistics chains.

Trade war between the US and China

• Global sea trade is suffering the drop in imports from China, and port hubs are already perceiving a drop in traffic
• China is focusing its efforts on increasing their commercial ties with alternative partners.

Global trade and value chains

Historically, Dubai has benefited from being part of the global maritime route. Its location near the entrance of the Gulf and the relative proximity to the Red Sea has favoured its development as a hub capable of serving countries in the natural markets or even beyond these markets (e.g. Europe). However, two main events may jeopardise the current global value chains.

China’s One-Belt One-Road strategy: The new silk road

The concept was proposed in 2013 within the framework of China’s action plan issued in March 2015. It is an economic and strategic agenda to make the two ends of Eurasia, Africa and Oceania more closely connected along two routes: one overland and one maritime.

The initiative envisages the construction of 6 economic corridors and several key maritime points on land and on water.

Dubai is not included in any of the Chinese new silk routes, despite the fact it currently handles a large part of Chinese cargo that is later redistributed to countries included in the One-belt One-road strategy.

Opening the Artic route

The ice melting in the Artic is opening up a new landscape for maritime transport: three possible routes are being explored as an alternative to the current Asia-Europe sea trade (i.e. the Northern Sea Route, the Northwest Passage and the Artic Bridge).

The closest route to the Arctic Circle centre is the Northern Sea Route. This route is available for oil and gas vessels all year around, thanks to the new ice-breaking oil and gas tankers. Bulk carriers operate in summer and transport materials from the northern mines (zinc from Alaska, iron ore from Canada).

Regarding container ships, The Northern Sea Route has only been completed by Venta Maersk and the results were: the trip was 10 days shorter than the southern route through Suez Canal but required the support of an icebreaker. Artic shipping routes are not expected to be cost-effective until the region’s ice has significantly melted.

The opening of a new route for container vessels through the Artic is expected for 2050.

New projects in ports and other infrastructure synergies

Competitiveness is one of the main challenges faced by Dubai Ports. The ability to capture part of the growing natural markets (in which Dubai has been so successful) has pushed governments in the region to set port investment as their top priority. In the last years, massive investments have been made in the creation and the expansion of terminals. This is the case of new ports such as Khalifa Port, King Abdullah Port, the new Dammam terminal and the expansion of the Omani ports.

Nowadays, there is an evident overcapacity in the port sector in the region. However, there are projects to increase capacity (expanding current ports or by building new ones) in the mid and long term.

New Corridors

Apart from the recent expansion of competitors’ capacity, Dubai’s current positioning may be affected by the opening of new corridors in the region. Some of them are connected to Dubai (such as the new GCC railway), while others represent an alternative option to current trade patterns (such as the Saudi land bridge).

GCC railway

• The switching from feeders and truck transportation to GCC is expected to reduce the overall transportation costs of Dubai and Khalifa port
• The project is highly dependent on the willingness of the KSA to prioritise this connection to the detriment of the competitiveness of its Gulf ports
• A positive impact is the reduction of number of trucks on Dubai roads (reducing external costs such as emissions and road fatalities) and freeing up berths in Dubai ports, which are currently being used for T/S to feeders
• Ensures connection to and from Fujairah, circumventing any closure of the strait of Hormuz

The KSA’s Landbridge project

• Strengthening of the Red Sea ports’ positioning to supply Riyadh, avoiding dependence on Gulf cargo, and therefore, the potential T/S and re-export from Jebel Ali and JAFZA.

KSA – Oman road and cross-border

• Opening of an alternative transit route from Sokar to the KSA capable of competing directly with transit and re-export by road from Jebel Ali and JAFZA

KSA – Iraq road and cross-border

• Opening of a new corridor connecting the Red Sea with the KSA and Iraq, circumventing the Gulf and reaching more populated areas such as Bagdad (thus reducing Dubai’s position for Iraqi cargo)
• Also, the expected trade relations between the KSA and Iraq may potentially discontinue the current supply chains linking countries such as the UAE and Turkey with the KSA

Syria-Iraq-Iran

• Alternative to connecting Iran and Iraq with European cargo supplied from Syrian ports (avoiding the Gulf as main trade corridor)
• This corridor is especially important for O&G export from Iran, Qatar, Iraq and Syria

Advanced technology and digitalisation trends

Four main technology trends are expected to become competitive factors in the positioning of Ports.

The Port Community Systems provide a single window platform that not only facilitates all the transactions within the sea port community system, but also provides an efficient and easy flow of information accessible to all the stakeholders, thereby improving the operations and increasing a port’s competitiveness.

The National Single Windows allow trade and transport stakeholders to store standardised information and documents with a single-entry point to fulfil all import, export, and transit-related regulatory requirements.

The use of Internet of Things (IoT) and Big Data in port operations enables the monitoring of physical logistics flows by collecting data from sensors capable of measuring port and logistic chain processes.

The integration of blockchain in Sea Trade facilitates the exchange of information. By storing the cargo information on the ledger, all the parties involved in the process are granted permission to access the block where the information is stored in real-time and with lower transaction costs.

The implementation and integration of all the technology systems listed above lead to an automation of processes and equipment in ports. Dubai is one of the pioneering ports in the world in terms of technology. However, it is worth mentioning the relevance of continuous investment in order to have an edge over the competition.

Public sector policies trends

While Dubai Ports has had a policy of prioritising its own capabilities and financing to develop and operate terminals, many ports worldwide have preferred to enter into partnerships with third parties to share not only risks and responsibilities but also profits. This is the case of nearly all ports competing with Dubai, where the Port Authority has either conceded several or all terminals to other companies, or partnered with them as joint ventures.

The seven main reasons for considering a joint venture in the development of Dubai’s terminals are: limited financial capability, limited operational capability, become part of the global strategy of a shipping line, encourage competition, benefit from a G2G agreement or strategy, ensure continuity of a logistics chain, and national security.

Another main trend to consider is that environmental awareness is gaining relevance in all economic sectors, including maritime transportation. The change to more renewable fuels, the imposition of IMO regulations or the creation of maritime zero emissions zones are some of the mechanisms to mitigate
the environmental impact.

Positioning of Dubai’s ports within the new paradigm

To sum up, Dubai’s ports face new challenges…

• Geopolitical instabilities that can affect Dubai’s positioning, notably:
  • The Iran crisis, which could result in the closing of the Hormuz Strait leaving Dubai with no entry to overseas markets, as well as restrictions to one of the largest markets for Dubai
  • Qatar crisis, which threatens to consolidate Hamad port as Iran’s main hub
• Potential reshaping of global trade routes, especially through China’s One-Belt One-Road strategy
• Strong competition in Dubai’s natural markets, mainly with:
  • Khalifa Port, competing directly with Dubai in the UAE and Middle East (current main markets for Dubai), based on the provision of additional capacity and aggressive commercial strategies
  • Colombo and Gwadar for the South Asian and East African market
  • Overall improvement of national and local gateway ports, which would reduce dependence on hubs such as Dubai due to the possibility to operate larger vessels
• Opening of new alternative corridors such as the KSA’s Landbridge project, the new Syria-Iran corridor or the KSA-Oman boarder cross
• Risk of loss of momentum if investment in technology is not a priority at all levels
• Competitors leveraging their growth on partnering with Dubai Ports’ historical clients, providing high incentives for shipping lines, industrial tenants or developers, as well as setting G2G agreements that may reduce Dubai’s access to certain markets (mainly China)
• Risk of non-compliance with future international environmental and sustainability regulations affecting ports and shipping lines

…but still have considerable assets to capture future opportunities

• • Dubai’s natural markets are expected to grow substantially in the coming years, especially South Asia and East Africa, with an expected three-fold increase of imported containers in the region
  • There is margin for increasing the value added of goods that are re-exported from Dubai (assembly or manufacturing)

• Potential to attract partners and contribute to the revamping of traffic in Dubai (either
  a specialised terminal operator, shipping line or G2G)
• Potential for increasing trade relations with DP World overseas ports and free zones, in which Dubai has a much more central role
• Potential to further develop the City-Port model, where companies start to relocate their centres of decision-making to the city rather than having only branches or distribution hubs
• Room for increased integration between logistics players in the city, including Jebel Ali, all Free Zones (not only JAFZA) and the airports of the city
• Etihad Railway has opened the door to restructuring and reducing costs of land logistics (internal and external) and also to extend the reach of Dubai’s ports to Saudi Arabia, Bahrain and Oman
• Innovation investment in DP World with potential to be exported overseas as well as to change dramatically current value chains where Jebel Ali stands

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About the authors
Genís García-Alzórriz holds a MSc. in Civil in Engineering and is a Manager at ALG.
Yassine Derkaoui holds a MSc. in Management and is a Manager at ALG.
For more insights, please check www.alg-global.com or contact:
ggarciaalzorriz@alg-global.com
yderkaoui@alg-global.com