Saudi Arabia’s ports expanding to compete internationally

Saudi Arabia’s ports are some of the biggest in the region, and the Kingdom’s combined throughput of 194m tonnes per year (excluding crude oil) is the largest volume in the Middle East. However, with the international trend in shipping moving towards consolidation at ever larger ports (and with ever larger container ships), the government has announced plans to invest $30bn in upgrading facilities to enable the Kingdom’s ports to compete on the global stage.

As one of the world’s largest exporters of primary products, the Kingdom has an extensive network of ports on its Red Sea and Gulf coasts. However, with the exception of Jeddah Islamic Port (JIP) on the Red Sea coast and Dammam on the Gulf, most of these ports primarily serve either industrial or bulk cargo purposes. This bias towards primary products is reflected in the Kingdom’s total throughput capacity, which in 2014 reached 532m tonnes per year. By contrast, in 2013 the World Bank recorded Saudi ports’ throughput in twenty-foot equivalent units (TEUs) – the medium via which the majority of the world’s consumer goods is transported – to be only 6.7m TEUs.

A New Port

With the world’s major shipping lines currently consolidating into a few large alliances, and limiting their ports of call to only the largest and most technologically advanced facilities, the Saudi authorities have in recent years looked to invest in boosting capacity at the Kingdom’s main hub, JIP. In particular, the $510m Red Sea Gateway Terminal, which opened in 2009, added an additional 1.8m TEUs of capacity to the port, bringing total capacity (including the preexisting north and south terminals) to 5m TEUs.

Given the future requirements of the Saudi economy, the government believes there is room for another major container port on the Red Sea, alongside JIP. The King Abdullah Economic City (KAEC), which has been under development since 2005, is located some 100 km north of Jeddah, and is hoped to eventually play host to 2m residents. It will be linked to Jeddah (and Makkah and Medina) by the Haramain HighSpeed Rail Project, currently under construction. If plans come to fruition, it will also house one of the region’s largest container ports, King Abdullah Port.

Private Finance

King Abdullah Port, which is the first port in Saudi Arabia to be entirely privately owned and financed, has been under development for several years. DP World, the UAE state-owned operator of Jebel Ali Port in Dubai, had expressed initial interest in the port, signing a memorandum of understanding with KAEC’s developer, Emaar Economic City (EEC), in 2008 to develop and operate the facility. Ultimately, however, EEC went ahead with a local partner, the Saudi Binladin Group, forming a joint venture in 2009 – the Ports Development Company – to develop King Abdullah Port. A separate agreement was then made with National Container Terminal (NCT) to operate the first terminal at King Abdullah Port. NCT, a Saudi company associated with International Port Managers and National Port Services, part of Nesma Holding Group, took control of the official terminal operator building in the port from the Ports Development Company in October 2014. Operations at the port, however, had already begun at the beginning of the year, when EEC announced that phase 1a, a 1. 3mTEU container facility, was ready to receive ships.

The first phase of development at King Abdullah Port reportedly involved investment of SR2.5bn ($666.3m), entirely raised from the private sector. According to EEC, additional stages in the port’s development will bring total investment to SR9bn ($2.4bn) by 2018, and will see capacity rise to 4m TEUs by 2016 and 7m TEUs by 2018. Current capacity of the port is 3m TEUs and it has four 18-metre-deep operational berths. EEC claimed that, eventually, King Abdullah Port will reach an annual throughput of 20m TEUs, which would make the port comparable in size to Dubai’s Jebel Ali (whose terminal 3 expansion will bring capacity to 19m TEUs) – currently the region’s largest shipping hub.

Red Sea Hub

Indeed, there are currently many boosters for King Abdullah Port who argue that the Red Sea represents a more natural hub for regional shipping than the Gulf – albeit one which has been historically under-utilised. Speaking in an interview on the sidelines of the World Economic Forum in Davos in 2014, Fahd Al Rasheed, CEO of EEC, noted, “25% of global trade goes through the Red Sea, but we’ve never leveraged it in the region.” Similarly, speaking at the Saudi Maritime Congress in December 2014, Hassan Abouraya, risk management executive at Zamil Offshore Services, a Saudi-based shipping services company, observed that, while more than 25,000 merchant vessels plied the Red Sea route, “Only two old repair yards with limited docking capabilities are available in Jeddah and Suez – there is room for at least one world-class ship repair yard to be built.”

Strategic Position

The strategic position of King Abdullah Port on the Red Sea trade route has been the key spur to investment – particularly given the initial absence of guarantees from major global shipping lines that they would serve it. Planners estimated that the port’s position could shave over a week off East-West trans-shipment along the Asia-Europe trunk line, and the Economic Cities Authority – the government body that regulates KAEC, where King Abdullah Port is hosted – helped facilitate the port’s potential by creating a bonded zone allowing for Customs-free movement of goods. EEC’s efforts appear to already have paid off, with King Abdullah Port welcoming the largest ever container ship to dock in a Saudi port in September 2014, when the Mediterranean Shipping Company’s (MCS) 16,500-TEU-capacity MSC London docked at the terminal.

MSC forms part of the recently agreed “2M” vessel-sharing alliance, which also includes Maersk. Alongside the “Ocean 3” alliance between French CMA CGM, China Shipping Container Lines and United Arab Shipping Company, the two groups account for the lion’s share of global East-West shipping. According to industry reports, the emergence of King Abdullah Port 100 km to the north of JIP could prompt heated competition between the two Red Sea ports, with JIP in danger of being left with business from the smaller alliances CKYHE and G6. Others argue that the relocation of these lines’ ports of call could be a temporary bargaining tactic to drive down handling costs.

Either way, the competition from King Abdullah Port seems to have prompted JIP to action, with Sahir Tahlawi, director-general of JIP, announcing in February 2015 that concessions for its north and south container terminals will be retendered in 2017.

Terms of trade aside, the main difference between the two ports is that JIP was constructed using government money, and remains wholly owned by the state. The decision to tender operation and management contracts to the private sector was made by the Saudi Ports Authority in 1997. King Abdullah Port, by contrast, was financed from the start by private capital, and its owners must cover the cost of capital.