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August 2015 Issue

Rising Star of Middle East Depends on Strong International Framework
Michel Deleuran
The global maritime industry is undoubtedly the backbone of globalization and international trade, contributing to human welfare by fostering worldwide growth and development. This phenomenon was the basis for discussions at the Danish Maritime Forum, which was held in Copenhagen last year. The significance of the global maritime industry in the context of world markets is underscored by the fact that 85 percent of globally traded merchandise is transported on ships. Without vessels moving through the world’s oceans and waterways, international commerce would come to a standstill.

Throughout history, maritime trade was governed by four underlying levers: demography, resources, disruptive events, and the state of the world economy.

World population is expected to reach 8 billion in 2030, with a large concentration in Asia, the region that will also lead oil and steel consumption by the same year. Disruptive events—whether in the form of political unrest or new technologies—also impact trade patterns. Last but not least, global trade will always be dependent on the condition of the world economy.

However, the dynamics of these levers, particularly the patterns of trade, are now changing.

Looking at the maps of global trade between 1995 and 2015, one would immediately notice the shifting patterns of trade. A discernible change is the rising stardom of the Middle East/Gulf, which has become a hub, or more accurately, hubs, for transshipment between Asia, Europe and Africa.

This major shift in global maritime trade stems from a bid by Gulf countries to diversify their economies, which are strongly reliant on the oil and gas industry. Gulf governments have been ambitiously investing billions of dollars to build new megaports, upgrade existing ones, and establish technologically advanced logistics hubs. The $7.4 billion Hamad Port in Qatar, the massive Jebel Ali Port in Dubai, which already exceeded the Port of Rotterdam as the busiest port in the world, and Oman’s Sohar Port and Freezone, where current investments exceed $15 billion, are noteworthy examples of the ambition of these construction and upgrade projects.

This unprecedented spending spree on maritime infrastructure—coupled with similar spending on railways and airports—has catapulted these countries to the forefront of the shipping world map and promises to usher the region, and the world, into a new era of enhanced connectivity.

It goes without saying that the geographic location of the Gulf between the Strait of Hormuz, the Suez Canal, and the Bab El-Mandeb Strait—all of which are chokepoints for energy and merchandise trade—gives its countries a strategic advantage in the realm of seaborne trade.

However, it is not all moonlight and roses for the region. The old and new ports in the Gulf Cooperation Council may face severe internal competition from one another. Established ports will try to fend off competition, and, all things equal, may engage in tariff reduction, which may erode return from project investments.

Additionally, with only a few operators managing multiple ports in the region, there is room for increasing consolidation between companies within the logistics value chain, which would result in an oligopoly structure.

Another looming threat is the political instability in the Middle East, which could jeopardize access to regional ports.

Last but not least, there is a common and pressing problem for the industry worldwide, not just the Middle East, and that is human resources. Shipping is seen by many as an unappealing form of employment, not to mention that vessels are becoming more technologically sophisticated day by day, which means seafarers need to have a higher level of education and training than they used to in the past.

All things considered, despite these inhibitive factors, the Middle East growth story will continue. But there is a need for orchestrated and unified execution of plans for establishment of maritime and logistics hubs across the region.

There is also a need to enable economic growth through government support of local companies across the value chain, which would support sustainable economic progress in the region. The maritime shipping industry is highly competitive, and with only a few giants dominating the market, local companies need the edge provided by government backing.

The overarching question is: How can the Gulf region utilize the full potential of the global maritime industry?

Former Danish Minister of Business and Growth Henrik Sass Larsen has an interesting four-pronged answer applicable to the Middle East that relies on an international framework. First, he says, we must safeguard open markets for international shipping. At a time when global trade patterns are changing, this is fundamental for preserving easy distribution of food, goods and energy for the world’s population. Second, we must put smart global regulations in place. We should set targets and conditions for the shipping industry and at the same time give business room and flexibility to come up with innovative and efficient solutions. Third, funds—both public and private—must be available to finance necessary development of infrastructure that will allow the maritime transport chain to function efficiently from factories to consumers. Finally, we must ensure the availability of skilled people with the right competencies to support the industry. “The foundation for our success is our maritime workforce,” Larsen said.

Michel Deleuran is the executive vice president for maritime at Milaha, a Middle East provider of transportation, logistics, marine offshore services, and supply chain solutions. He heads the Maritime and Logistics and Gas and Petrochem businesses. Deleuran is an alumnus of Harvard Business School, with more than 30 years of experience in transportation, strategic vessel planning, and global asset deployment and yield.


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