What can we expect from 2015? Logistics Middle East magazine spoke to a selection of regional logistics experts for their predictions.
On any regional impact of EU and US russian sanctions
Mohammad Alkhas, GCC CEO, Aramex: Trade activity widely varies between GCC states and other MENA countries in their economic relations with Moscow. Russia’s economic ties with the UAE are largely orientated around developing the banking and retail sector. If these sanctions create a new energy crisis, this could potentially put pressure on global oil prices and on Russia to find new oil suppliers. This could increase demand for logistics and transportation solutions in the region – however at this stage we do not foresee these sanctions significantly impacting the GCC logistics market.
John Swift, director, NATS Middle East: The biggest risk is if Russia places tit-for-tat sanctions on US/ EU airlines flying through its airspace, potentially forcing more carriers to fly routes further to the south, into airspace that is already impacted by airlines avoiding conflict zones in Syria, northern Iraq and parts of Ukraine.
Andre Toet, CEO, Sohar Port and Freezone: Companies hit by sanctions will look for alternative markets and the Middle East could benefit, especially in relation to oil and gas, but the impact of one market on another is always difficult to predict.
Katharina Albert, CEO, Kat Logics: The economic impact of sanctions against Iran potentially being lifted in 2015 would have a far greater impact on the region. Sanctions against Russia are only moderately affecting the Middle East as goods from Europe or Asia are usually shipped directly. In terms of cash flow, we will see ongoing property investments from Russia in the Middle East as long as the Rubel keeps losing value.
Mustapha Kuwam, CEO-Gulf States, Globe Express Services: I believe the EU and US sanctions on Russia will have a limited impact on some sectors in the Middle Eastern market next year.
Frank-Uwe Ungerer, country manager-UAE, DHL Express: I do not think that the EU and US sanctions will have any effect on this region.
Shailen Shukla, head of logistics, Jumbo Logistics: Russia is an important import and export partner for the Middle East, accounting for trade of essential products in the oil and gas, and FMCG sectors. While the US and EU sanctions on exports to Russia, and the subsequent Russian sanctions on products from these regions, have resulted in price fluctuations and supply chain disruptions in the Middle East, the overall impact at a micro level has been manageable so far. Any tightening of sanctions in 2015 could lead to a severe and more immediate effect on the Middle East, testing the robustness of supply chain networks in adjusting and adapting to new trade patterns in order to offset the gaps created by Russia’s isolation.
Muthanna Muckatira, business director Middle East, Ehrhardt + Partner Solutions: The sanctions will affect the Middle East markets with lower demand for oil and gas, which in turn will impact the large infrastructure projects in the pipeline. However, the decision by OPEC countries not to cut down production will have to be reviewed or prices can expect to remain depressed in the next 15 to 18 months.
Predictions for 2015 trends
Katharina Albert: We will see continued steady growth, with more companies focussing on improving productivity, and upgrading their facilities and IT environments. The need was always there but the financial situation has stabilised and many are willing to invest in their business operations to not fall behind their competitors.
Andre Toet: All eyes are on the continued growth of the physical logistics infrastructure that is spreading across the region, which includes the Gulf railway that will link all six GCC nations by rail for the first time. Within the shipping industry, it will be interesting to see how the LNG market responds to the IMO deadline for ships to cut sulphur oxide levels in fuel supplies to 0.1 percent, with many shipping companies already looking at ways to bypass this costly process in favour of moving directly to LNG. Air transport is being invested in heavily here in Oman; on top of a new airport in Muscat, Sohar Airport also opened towards the end of last year, and will offer 50,000 tonnes of air freight cargo capacity and complement strong regional growth. On top of these developments we will see an increase in logistics activities in the SOHAR Gateway as a result of the commercial closure of the Port of Muscat and subsequent transfer of cargo to SOHAR.
Mustapha Kuwam: Saudi Arabia, the UAE and Oman will remain the biggest market contributors (a combined 85 per cent share) to the value of the GCC logistics sector, especially thanks to Dubai’s successful bid to host World Expo 2020. The emirate has allocated a total of AED 31.7 billion to build and develop its infrastructure and improve its logistics facilities in the run up to the Expo, with between AED 7 and 8 billion dedicated to building new infrastructure and upgrading existing ones. The UAE’s phenomenal growth complements the expansion of the entire Middle East where international cargo demand is expected to witness 4.9 percent increase by 2016. According to an industry report by Transport Intelligence, the Middle East’s regional freight forwarding sector will expand 7.8 per cent annually until 2017. All these positive indicators signal that the entire region led by the UAE is poised for more significant growth in the future.
Frank-Uwe Ungerer: Looking back at the express logistics industry and the massive growth that we experienced in 2014, we think that the market will continue to grow strongly, especially with the recent investments that DHL has launched across the region.
Muthanna Muckatira: The Middle East economy is expected to show growth year-on-year for the next decade. Construction budgets increased across the GCC countries over the past year with Saudi accounting for almost half the total spend followed by the UAE, Qatar, Kuwait, Oman and Bahrain. The Expo 2020 in Dubai and World Cup in Qatar will offer plenty of opportunities. As the UAE logistics market is at the crossroads it is likely to benefit most from strong growth of trade volumes between Asia, Africa and Europe, along with steady development of projects and manufacturing activities in the country and other GCC countries. The GCC-wide rail network will be a game changer in the regional transportation network and will impact the current players in the logistics market, especially with land transportation. E-commerce is expected to be challenging and will play a significant role in the years ahead especially for the fast growing retail sector with cross border transactions and demanding timely deliveries.
Shailen Shukla: The Middle East logistics industry is set to see continued growth well into 2015, with the UAE being at the epicentre of trade activities in the region. According to Frost & Sullivan, the UAE logistics market valuations are expected to touch a staggering $27billion in 2015, driven by an increase in import and export trade volumes and upward trends in local manufacturing. Analysis shows that economic growth across FMCG and automobile sectors will also escalate demand for logistics services in the UAE. With the UAE’s accelerated race towards smart solutions and major technology goals in the run up to Expo 2020, we expect major sectors, such as electronics, to substantially increase logistics operations over the next few years.
Mohammad Alkhas: Dubai is widely regarded as having some of the best logistics facilities in the world. As the world’s third largest re-export hub, its Jebel Ali Port is among the top ten container ports globally and Dubai International Airport witnessed a 15 percent increase in passenger traffic in 2013, according to estimates, once again reaffirming the Emirate’s commitment to facilitating global connectivity. However, there are many challenges that stand in the way of enhanced connectivity, particularly because of barriers to E-commerce growth. Credit card penetration is low, with COD (cash on delivery) dominating 70 percent of online shipments, restricting the full potential of online shopping. Region-wide regulatory reform is vital to facilitate the flowering of trade and commerce. GCC countries have not drafted laws specific to E-commerce and current UAE government regulations, for example, are outdated, with laws implemented only for hand-carried packages. Delivering a package from New York to Dubai costs half of what it does from Dubai to Saudi, which highlights the significant logistical inefficiencies within the Middle East. Companies can also only send consolidated freight by road. Consequently, for 2015 we believe innovative technology solutions in E-commerce will be critical to the swifter, more efficient movement of goods and services in the region, in addition to joint trade reform from GCC countries to mitigate these issues.
On any impact of falling oil prices
Mustapha Kuwam: The GCC, which has substantial dependency on commodity exports, is facing enormous challenges brought on by oil price weakness. Bahrain and Oman are feeling the highest pressure. Saudi Arabia, Qatar, the UAE and Kuwait are better shielded from the effects of low oil price price, due to their large and mature domestic banking systems, access to international markets, and large sovereign wealth funds generating ample investment income. The oil price decline attributed to weaker demand, increased supply and a strong US dollar could affect the GCC’s real GDP, subsequently impacting the logistics industry. A stronger economy is fundamental to the industry’s development.
John Swift: It will reduce costs which may make air transport more appealing compared to sea/ land options. My hope is that it doesn’t allow airlines to take their eye off the environmental ball and that cheaper fuel doesn’t stop them challenging air navigation service providers for more fuel efficient and therefore environmentally friendly routings of aircraft.
Katharina Albert: The falling oil price is due to the over-production by US and Saudi Arabia to put pressure on countries like Iran, Russia and Venezuela, who are heavily relying on higher price levels. As for Dubai and Abu Dhabi they have diversified their industries and sources of income years back. We will benefit from falling consumer prices, more visitors who can afford holidays in the UAE and a cost relief for the logistics industry.
Andre Toet: Globally speaking, the growth of international trade and motorisation over the last 30 years has seen the use of oil in transportation grow by over 15 percent of total consumption. Transportation commands the largest share of oil use and as a natural consequence, the impact of falling prices on logistics is inevitable. How it will affect the industry is a bit of a zero-sum situation; lower energy costs typically lead to lower consumer costs and, potentially, increased cargo volumes, but there are implications for profit margins, operating costs, and job security if you don’t achieve those volumes.
Muthanna Muckatira: There could a marginal slowdown expected on certain large infrastructure projects in the region for a while but the ongoing mega projects will continue and get completed since they have been budgeted earlier. The expansion plans for tourism, hospitality, retail sectors is expected to gather pace with few mega malls and theme parks planned across the region.
Shailen Shukla: The declining oil prices are definitely a big positive for the logistics industry at a global level, especially as fuel accounts for high input costs. Since fuel price is controlled in the Middle East, the logistics and transportation firms or road operators and all intra-GCC movements will only see a slight upside that could help to balance out other costs that are typical in the industry, including accrued debt, equipment or vehicle wear and tear, rents, labour and costs, among others.
Mohammad Alkhas: Oil price declines could dampen the GCC’s economic growth, according to recent estimates. A prolonged period of lower government revenue, given GCC governments’ high infrastructure spending plans, may push up sovereign and government-related entity capital market issuance and place more pressure on the private sector to fund investments. Lower government revenues may also result in increased government efforts to tackle energy subsidy reform, which could hurt a number of industries. Consequently, for the logistics sector, it is increasingly critical to invest heavily in e-commerce, to find more efficient and less costly transportation solutions to ensure faster, more efficient movement of goods and services across the region.
Which emerging markets will have the biggest impact?
Frank-Uwe Ungerer: Intra-Middle East region shipping will continue leading growth within the region as well as Africa, which we see massive opportunities within, especially out of the UAE.
Mohammad Alkhas: The Asia Pacific and Africa regions can offer significant opportunities for the growth and development of the GCC logistics industry in 2015. Exports to Asia alone from the region increased by 11 percent in 2013 from 2012, according to the WTO. Similarly, the volume of Africa-Middle East trade has been growing in the last few years. By hosting Expo 2020, Dubai’s role in the global trade landscape will only increase and enable its foreign trade to touch over $1 trillion.
Mustapha Kuwam: Asia-Pacific and Latin America will have the biggest impact next year. Their manufacturing and logistics industries have been attracting key supply chain executives who are capitalising on these emerging markets. Many aspects of the supply chain, including product design, pricing, and logistics are now poised for growth. However, penetrating the new regions and moving away from established markets such as China presents new challenges. It is, therefore, essential for industry players to determine new natural and economic risks posed by the emerging markets in order to ensure that relevant policies are in place to lower these risks.
Katharina Albert: Africa and South America continue to be of interest due to their vast natural resources and young population. Ambitious countries like Sri Lanka, Malaysia and the CIS (Commonwealth of Independent States) are undergoing a huge transformation to catch-up fast on infrastructure & development and attracting many investors. So it is interesting to expand and seek partners, suppliers and new clients in these countries.
Andre Toet: Latin America has taken on a greater significance for SOHAR, with the agreement between our joint venture partner Port of Rotterdam and Porto Central in Brazil. One of Porto Central’s primary functions will be to serve the mining industry, ferrying iron ore and other commodities through the Middle East. This greenfield site promises to create opportunities for streamlining the process of getting iron ore from Latin America to Oman, through the longstanding relationship that exists between SOHAR and anchor tenant, Vale. Much has also been written about the rise of Africa, which is home to seven of the world’s top-ten fastest growing economies according to the IMF.
Muthanna Muckatira: India will certainly offer plenty of opportunities with the opening up of its economy, especially for investors from GCC countries. The lower prices of oil & gas will benefit India with huge savings on imports which could be translated into investment in infrastructure and development. China will face a slowdown in exports and this could impact its fast paced growth in recent years. The African economies have huge potential and investments are required. Indonesia and Turkey are countries to look out for bigger opportunities.
Shailen Shukla,Jumbo Logistics: According to PwC, the transportation and logistics industry are increasingly targeting new growth markets in Central Eastern Europe (CEE), Latin America and Africa, with a focus on entering in to M&As, joint ventures and strategic alliances with local firms in these regions.
John Swift, NATS: As Afghanistan starts out on what it terms its ‘transitional decade’ increased economic activity will require good trade and logistic links to the outside world for this landlocked state – the GCC region is well placed to provide the services needed to support Afghanistan’s development.
On potential mergers and acquisitions in the regional logistics industry
Muthanna Muckatira: Currently there are not many such M&A activities in the region and do not expect a radical shift happening in the near term. SME’s might see some consolidation but not with the larger players.
Frank-Uwe Ungerer: I think the intra- Middle East region shipping will remain leading the growth within the region as well as Africa which we see massive opportunities within, especially out of the UAE.
Andre Toet: With the addition of unprecedented transport networks practically across the board – sea, rail, air, and road – regional logistics industries will undergo a major transformation in the next few years. This shift is likely to sustain change; possibly triggering mergers and acquisitions or close cooperation between Gulf nations and/or between regional logistics industries.
Mustapha Kuwam: Mergers and acquisitions are seldom in the GCC market since most multinational companies are already well established, with their own unique identity. The companies usually have similar business systems and procedures based on international standards and best practices. Even in critical situations, most companies do not usually embark on mergers. We believe that this trend will continue up until next year.
Katharina Albert: Usually the best time for mergers and acquisitions was during the crisis when the market had to drastically consolidate. Those companies now left in the playing field will rather seek partnerships and joint ventures to grow their business, with the rate of mergers and acquisitions probably slowing in 2015.
Shailen Shukla: The Middle East logistics industry is largely fragmented, including a large number of small and mid-level entities that account for distribution in the region. For global players who wish to broaden their portfolio and enter the Middle East markets, mass consolidation of these existing networks would save them heavy costs of establishing new operations. With the rise in supply chain opportunities spurred by the region’s growth, not just as an important international trading hub, but as a strong consumer base, we can expect to see more M&As in the logistics industry here.
Mohammad Alkhas: The Middle East holds potential for mergers and acquisitions in the logistics industry, given the number of projects underway to help facilitate enhanced trade and connectivity. For example, the GCC electricity grid interconnection provides benefits to all member states by increasing efficiencies in power and electricity. The Dolphin pipeline, which transports natural gas from Qatar to the UAE and on to Oman, is another example of how cross-border initiatives are creating value for GCC countries. The GCC-wide railway network to connect the six GCC members will also positively impact trade and freedom of movement of goods and services. We believe these projects could translate into more M&A opportunities in the near future. Aramex is investigating potentially large acquisition opportunities with companies that have suitable, scalable synergies with our existing infrastructure.