Gulf Monitor

Can Saudi container ports demand keep up with capacity?

Over the last decade the volume of container throughput handled at Saudi ports has nearly doubled, due in large part to privatisation, regulatory changes and high-tech equipment. With ever more attention directed towards capturing Red Sea trade flows, Riyadh’s port development objectives are part and parcel of its broader goal of diversification. However, a closer look at the port story shows inconsistent growth and an uncertain future, leading to concerns of overcapacity.

 

Turning location into a comparative advantage

Despite having a large population, new port projects and the geographic advantage of being the only country that straddles the Gulf and the Red Sea, Saudi Arabia is yet to fulfil its potential as a maritime trade and logistics hub.

Regionally, the country comes in at a distant second place to the UAE – the undeniable maritime leader in the Middle East. Emirati ports account for around half of all container volume handled by Gulf countries, while its port operators are present globally.

The difference between the two is particularly evident in the Red Sea, which represents one-tenth of global trade. While there are six ports under Emirati operational control along the waterway, Saudi Arabia only catches a small amount of the business that passes through it.

 

 

However, for Riyadh, this is bound to change with the implementation of programmes related to the Vision 2030 economic development plan. These include flagship initiatives, such as the construction of the NEOM smart city and the National Industrial Development and Logistics Programme, which seeks $35bn in mainly private investment for logistics and a further $300bn for industrialisation.

Depending on the success of such programmes, Saudi ports could significantly benefit from a rise in cargo volumes linked to non-oil diversification.

Additionally, national and regional transport projects under consideration – such as the Saudi Landbridge and the GCC Railway – could see Saudi ports wrestle trans-shipment trade away from Emirati ports by offering a more direct route to westward-bound vessels. All in all, Riyadh hopes to double its throughput volume by 2030.

 

The geopolitics of the Red Sea

In light of these goals, securing the Red Sea is an important objective for both Riyadh and Abu Dhabi.

For Saudi Arabia, Red Sea stability is crucial for the smooth development of tourism, new economic cities and maritime Customs.

Additionally, there are hopes that as Saudi Arabia increases industrial production, the country could benefit from rising demand in the fast-growing economies of East Africa. Meanwhile, countries like Sudan represent a potentially large source of agricultural products and raw materials that Red Sea ports could import for further processing in the kingdom.

These commercial concerns help to explain why Saudi Arabia and its Emirati ally have heavily influenced East African politics, from the 2018 Ethiopia-Eritrea peace accord to the 2019 creation of the Council of Arab and African Coastal States of the Red Sea and Gulf of Aden.

The council’s future effectiveness remains uncertain given the political instability in the region, but the intention behind its creation is no less clear: to fight smuggling, piracy and human trafficking, and above all ensure that chokepoints are not blocked by threats, such as Iran-affiliated proxies.

While Gulf countries remain vulnerable to the latter’s closing of the Hormuz Strait, they have not spared efforts in securing Red Sea shores from Iranian influence.

 

 

Are Saudi ports outperforming local and global demand?

Between 2009 and 2019, Saudi ports doubled their combined annual throughput to 11m twenty-foot equivalent units (TEUs), with 40% of this growth coming from the privately-owned King Abdullah Port (KAP).

With plans to make it Saudi Arabia’s largest port with a capacity of 20m TEUs, KAP is looking to position itself as the premier Saudi alternative for Asian trans-shipment trade, while also thriving on the promise of cutting-edge local supply chains linked to NEOM and King Abdullah Economic City.

 

 

Elsewhere, older ports are also turning towards privatisation and expansion. Recent deals in Jeddah and Dammam have shown the country’s success in restructuring port development agreements and attracting foreign investment to bolster capacity, modernise equipment and improve efficiency.

By 2025 Dammam and Jeddah should be linked by rail through the Landbridge project, allowing shipping lines to access ports with significant hinterland connectivity, be it for consumers, logistics services or industrial output.

Both cities also have vast emerging logistics zones, which should help strengthen value chains and local production.

Although most Gulf container throughput is linked to trans-shipment activity, the contrary is the case in Saudi Arabia, with the country’s large population ensuring that export/import trade will remain its bread and butter. Being the closest to populous areas, Jeddah and Dammam offer good investment prospects for port developers provided that Saudi Arabia experiences strong economic growth underpinned by vibrant local demand.

However, this prospect – in addition to KAP’s astronomical rise – is currently at risk due to falling oil revenues and the economic impact of the coronavirus pandemic.

Hit by the US-China trade war, KAP saw a 12% drop in TEUs handled last year. This magnified the high volatility of trans-shipment activity, and bears even greater concerns considering the probable delay of NEOM and other economic cities on which KAP’s inland connectivity depends.

Any growth in throughput over the coming years should also be taken with a grain of salt. Much of the expansion seen this decade is more attributable to modernising infrastructure than general market growth.

This means that although positive, the growth story for Saudi ports remains far removed from government ambition. The minimum 20m TEUs of additional capacity expected this decade will certainly not find an adequate utilisation rate and will lead to overcapacity, despite Saudi Arabia’s obvious advantages compared to other Gulf countries.

 

Daniel Moshashai is the regional analyst at Castlereagh Associates. He specialises in Iran, the GCC, economic diversification in national agendas and geopolitics in the Middle East.


Sources: 

[1] Lloyd’s List Maritime Intelligence https://lloydslist.maritimeintelligence.informa.com/one-hundred-container-ports-2019#ranking

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