April 2015 Issue 14
ENHANCING THE BUSINESS OF LOGISTICS
The track to the future
Emerging markets The investment scene
Future ready Farm Fresh
AFLOAT Halul Offshore Services Company looks at the big picture
INTRODUCING SKYSTABLES YOUR NEW EQUINE TRANSPORT SERVICE
Etihad Cargo, winner of 2014 Air Cargo Industry Customer Care Award, is proud to announce the launch of SkyStables, the brand new bespoke service for your equine shipments. Right from booking to arrival, SkyStables will guarantee a safe, comfortable and convenient journey for your valuable horses, giving you the peace of mind you require. With dedicated Equine Managers who supervise the handling teams both in the air and on the ground, you can now take advantage of our global freighter network, and ship from Abu Dhabi to destinations in Europe, Asia, Africa, Australia, and the Americas. Visit etihadcargo.com for more information.
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Like all businesses the offshore support vessels (OSV) industry is facing a tough time right now and, yes, fuel has a starring role. However, the Middle East has enjoyed significant growth in the OSV market in the last few years as a result of the expanding offshore exploration and production (E&P) activity. There are around 75 owners in this region with easy accessibility to the market. However, the region is now gradually feeling the pinch of the oil price decline. Industry insiders are optimistic, though, as long term growth prospects are good. Currently, with demand stagnant across most regions in the world, attention is shifting towards the anticipated surplus of the Platform Supply Vessel (PSV) and Anchor Handling Tug Supply (AHTS) vessels in 2015, due to quite a few ships being built on speculation. An interesting read on page 22. The MENA region has learnt many lessons since the economic recession from a few years ago. Most nations in this region, have gone the route of developing and investing in areas that will enhance their economies for the long run - yes you guessed it, in logistics and infrastructure. A surefire winner when it comes to returns. A report on page 36 on this. Coming back to our main topic again - fuel. What do falling oil prices really mean for the oil and gas industry? AT Kearney reckons that it mean a rise in mergers and acquisitions in the industry. We have a brief excerpt from the full report on page 49. Hope you enjoyed the articles. Do write in with your feedback on my address below.
Munawar Shariff Managing Editor email@example.com
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April 2015 Issue 14
ENHANCING THE BUSINESS OF LOGISTICS
22 06 News 12 Kuwait – Looking beyond the oil
Kuwait is planning ahead by facilitating growth in the non-hydrocarbon sector
22 Staying buoyant Falling oil prices aren’t helping the regional OSV market, however the big picture is quite positive
30 Track to the future One of the largest planned construction investment in the country is Oman’s national railway
34 Evolving opportunities in emerging markets
Emerging markets - are they losing their appeal? In today’s business environment, globalisation is proving to be more of a risk than an advantage
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38 The Middle East and North Africa at work
As Middle East and North African (MENA) countries pursue political transformation and economic diversification
44 Keeping it fresh
Shehzad Ahmad, CEO, Farm Fresh, is revved up about future growth
50 What falling oil prices really mean
AT Kearney examines how the fall in oil prices is expected to trigger a new wave of mergers and acquisitions in the oil and gas sector in 2015
58 Scaling heights Sohar Port and Free zone explores bigger business opportunities
60 Leading by empowerment A leadership talk with Abhishek Ajay Shah, MD, RSA Logistics and a member of the board at chemical logistics joint venture RSA-TALKE
Integrated supply chain solutions that move your business forward. When it comes to integrated logistics solutions across the supply chain, you can trust Al-Futtaim Logistics to get your business moving ahead. Automotive: Vehicles, Spare Parts, Machinery | Retail: Fashion, Hanging Garments, Electronics, High Tech, Furniture Engineering | Industrial | Project Cargo: Heavy Lift and Break Bulk | Humanitarian
P.O. Box 61450, Dubai, United Arab Emirates. Tel: +971 4 881 8288, Fax: +971 4 881 9157 e-mail: firstname.lastname@example.org www.aflogistics.com
Synergy – the way forward
Sheikh Khalid Abdul Aziz Al Qasimi (seated left), Chairman of Liberty Investment Co (LIC), and Al Ameen (right), Chairman and founder of FLS Group, signing the joint venture agreement. Also seen (standing from l to r) are Vishal Dhamija, General Manager, SNTTA Cargo; Mohamed Bushelaibi, Group General Manager, Legal & Shareholders Affairs, LIC; Peter Scholten, CEO, FLS Group, and Ravikiran Vishal, CFO, FLS Group.
DP World announces strong financial results Global marine terminal operator DP World has announced strong financial results from its global portfolio of marine terminals for the 12 months ended December 31. The revenue was revealed at US$ 3,411 million. Like-for-like revenue increased by 11.3 per cent driven by a 10.5 per cent increase in containerised revenue. Like-for-like noncontainer revenue increased 6 APRIL 2015
by 14.2 per cent. Adjusted EBITDA margin reached a new high of 46.6 per cent due to strong throughput growth at higher margin locations, and there was strong growth in profitability across all regions. Continued investment in high quality long-term assets is expected to drive long-term profitable growth. Jebel Ali added 2 million TEU capacity at Terminal 3; progress was made
at new projects in Mumbai (India), Yarimca (Turkey) and Rotterdam (Netherlands), which are expected to launch in 2015. By the end of 2015, they expect to have approximately 85 million TEU of gross global capacity, an increase of approximately 15 million TEU since 2012, and over 100 million TEU of gross capacity by 2020, subject to market demand.
Liberty Logistics Fast Logistic Solutions Group (FLS) recently entered into a joint venture agreement to synergise their individual strengths and offer superior services to local and gobal clients. The new joint venture will begin operations in May 2015 from its headquarters in Liberty building in Dubai and its warehouse facilities in Jebel Ali Free Zone and Dubai Cargo Village. The partnership agreement was signed by Sheikh Khalid Abdul Aziz Al Qasimi, Chairman of Liberty Investment Company, the holding company of Liberty Logistics, and Al Ameen, Chairman and founder of FLS Group. “Liberty Logistics is delighted to enter into a major partnership with Fast Logistic Solutions Group. This will enable us to significantly expand our footprint on the international logistics map,”said Sheikh Khalid Abdul Aziz Al Qasimi, Chairman of Liberty Investment Co.“The combined expertise of UAE’s two leading logistics players will give clients vastly superior and highly reliable services, spanning the whole of the UAE and different parts of the globe.” “FLS Group, with 40 offices in Africa, UAE, India and the Far East, is on a high growth track and this partnership with Liberty Logistics gives us a new springboard for further expansion,” commented Peter Scholten, CEO of FLS Group.“We are keen to build on our existing relationship with the Liberty Group and benefit from its strong UAE network. We believe together FLS Group and Liberty Logistics are in an unrivalled position to deliver high quality customized services to large corporate clients.” The signing ceremony was attended by Vishal Dhamija, General Manager, SNTTA Cargo; Mohamed Bushelaibi, Group General Manager, Legal & Shareholders Affairs, Liberty Investment Co.; Peter Scholten, CEO, FLS Group and Ravikiran Vishal, CFO, FLS Group.
Sohar rail and cargo plans gather pace Plans for a world-class rail terminal and rail links that will connect global supply chains with Sohar Port and Freezone via the GCC Rail project, have received widespread praise from among thousands of government officials, rail operators, and contractors at this year’s Middle East Rail Exhibition, Sohar Executive Commercial Manager Edwin Lammers has announced. The efficiency and integration of supply chains and the benefits of transporting cargo through Sohar were also the subject of approvals and praise from participants engaging with the Omani port at The Cargo Show MENA 2015, according to Lammers. The Oman leg of the GCC Railway will connect all of the Gulf state’s logistics hubs, but will be predominantly used to get goods in and out of consumer markets in UAE and Saudi Arabia, through Sohar. The Middle East Rail Expo is designed to bring Middle East governments together to design, plan, and build their future rail networks. It is the only regional rail
conference and exhibition in partnership with the UAE government, and is held under the patronage of His Highness Sheikh Mansour Bin Zayed Al Nahyan, Deputy Prime Minister, and Minister
of Presidential Affairs. The Cargo Show MENA also brings together cargo and transport logistics supply chains to improve efficiency in the movement of cargo across the Middle East.
Milaha launches first ever direct container service between Qatar and India Milaha Maritime & Logistics, a subsidiary of the Qatar based Milaha Group, has announced the launch of the first direct container service between Qatar and India. The non-stop service will connect Qatar’s Doha port with India’s largest port Nhava Sheva, also known as Jawaharlal Nehru Port, located in Mumbai, Maharashtra. The move will further facilitate the thriving trade activities between the two countries that have witnessed a phenomenal growth in the recent years. Unlike existing services in the market, the new weekly service by Milaha will enable direct shipments between Nhava Sheva and Doha without the need for transshipment in Jebel Ali or elsewhere, thus increasing reliability and reducing
Khalifa Ali Al Hitmi
transit time and costs. With an end of the week sailing, Indian exporters will benefit from a late cut-off providing more time to bring cargo into the port. With a reduced transit time, shipments of perishable products for the Qatari market will better retain freshness and quality. Moreover, the new service may open up for new perishable
commodity segments which – due to previous transit time – were previously not an option. Khalifa Ali Al-Hetmi, President and CEO of Milaha, said, “We express our thanks to the Jawaharlal Nehru Port for their support in reinforcing bilateral relations between Qatar and India that has gathered significant pace over the years. The launch of a fast and direct container service by Milaha will support the increasing trade volume, where imports into Qatar from India reached a total value of US$ 989 million in 2013-2014.” The new service, which is named NDX, will not only bolster Milaha Maritime & Logistics’ feeder commitment to the Indian market, but also increase Milaha’s presence in non-vessel operating common
carrier (NVOCC) activities. In addition, the new non-stop service will strengthen the company’s existing feeder network with the UAE with more fixed connections. “The commencement of operation at Nhava Sheva’s Shallow Water Berth (SWB) has opened new business opportunities for handling smaller vessels, operating particularly from the Gulf region. We have allotted a fixed window slot to Milaha Maritime & Logistics to operate the Nhava Sheva Doha Express (NDX) service. We extend our full cooperation to the company to make use of the mechanised facility at SWB and benefit the trade between both countries,” concluded Neeraj Bansal, IRS, Chairman-inCharge, Jawaharlal Nehru Port.
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Korean Financial Institutions provide financing for Etihad Airways’ Etihad Airways has completed a Korean Finance Lease for its second new Airbus A380 aircraft. The funding was provided by way of a private placement with a group of major Korean institutional investors and was arranged by London-based aviation finance specialists Magi Partners, in conjunction with their Korean associates, Youjee Partners. The deal follows non-deal roadshow meetings between Etihad Airways and Korean investors in early 2014, and a competitive global request for proposals last summer. The transaction, which is structured as a 15-year, fixed coupon full-payout finance lease, is the first ever Korean financing to be arranged covering the entire cost of a brand
new A380 aircraft. The aircraft is the second of a fleet of 10 A380s on order from Etihad Airways to enter service and, like all the airline’s A380s, features The Residence by Etihad™. Since inception Etihad Airways has raised more than US$10.5 billion from over 70 financial institutions and lessors to fund its fleet of aircraft and engines. Fast and Furious On a separate note, Etihad Airways and Universal Pictures unveiled the luxury Fast & Furious777 airliner at Los Angeles International Airport (LAX) to kick off the global junket and world premiere of the much-awaited movie, Furious 7. The film
arrives in theaters on April 3. Representing a welcome first for the franchise, the Fast & Furious 777 will fly the direct route between Abu Dhabi and Los Angeles, which Etihad Airways opened in June 2014. The airline is also sponsor of the Furious 7 world premiere, which takes place in Los Angeles on April 1.
Flynas selects sita for passenger check-in services flynas, a leading hybrid carrier from Saudi Arabia, has chosen air transport IT specialist, SITA, to provide a range of passenger check-in services. The five-year, multi-million dollar agreement includes an end-to-end check-in solution incorporating SITA’s Departure Control Services (DCS),
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SITA’s private IP VPN telecommunications infrastructure, Type B Messaging Service and Service Management. Paul Byrne, CEO of flynas, said,“flynas has successfully managed rapid growth of over 30 per cent in 2014, and we aim to set a new standard of efficiency for hybrid and budget
travel in the region.”SITA DCS will provide all current and future flynas destinations with fast and efficient automated passenger check-in, boarding pass distribution and bag tag printing, covering both check-in counters and self-service, and the required connectivity and infrastructure solutions.
Outstanding innovations bringing happiness to passengers HE Sultan Ahmed bin Sulayem, Chairman of DP World and Chairman of Ports, Customs and Free Zone Corporation, launched the ‘Smart Customs Inspection System’, which is the first of its kind system, invented by one of Dubai Customs employees to better facilitate the customs inspector’s functions, in a swift and innovative manner. The new invention has the capacity to conduct the whole inspection process in less than three minutes. The integrated multi functions system is capable of recognising its operator, identifying risk level, recommending the safety level for manual inspection referral, timing the inspection process, generating an inspection end statement (positive/ negative), establishing a record of the manually inspected bags, analysing peak times for manual inspection and creating a passengers’ data base. Ahmed Abdullah bin Lahej, Director of Passenger Operations Department, pointed out that the new inspection system was created by Ahmed Shahdad, Inspection Manager at DXB Terminal 2, who sought to create an inspection tool that would increase customs throughput and expedite passengers’ formalities at the airport. After a lot of research, Shahdad didn’t find any company or airport in the world that has a similar advanced system.
Sultan bin Sulayem briefed on the Smart Customs Inspection System at Dubai airports, in presence of Ahmed Mahboob Musabih
The Smart Customs Inspection System
Air Arabia rewards passengers with region’s first low-cost carrier loyalty program Air Arabia has launched ‘Airewards’, the first ever Low Cost Carrier rewards programme in the MENA region. Points are based on money spent rather than distance flown, and can be earned on any product or service purchased from the airline. This online loyalty programme
also offers unparalleled flexibility when redeeming points, with the availability of a variety of payment and reward options, without any blackout dates or limitations on availability. Joining Airewards is free and open for everyone. Members can earn and redeem their points while traveling
with Air Arabia via its hubs in the UAE and Morocco. Members will also be the first to learn about promotions and new routes, schedules and launches. For passengers who fly frequently for business, and then occasionally with their whole family, Airewards offers a dedicated ‘Family
Account’ for up to eight relatives to enable faster earning and quicker redemption. Airewards acts like a currency, with 100 points equal to US$1. They can be redeemed via the Air Arabia website on flights, baggage and ancillaries, using only points or a combination of points and cash.
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DHL Express retains ‘Top Company to Work’ for title DHL Express has been officially recognised as number one in the ‘Top Companies to Work for in the UAE’ in 2015 by Great Place to Work Institute UAE, part of a global research, training and consultancy firm that recognises the best workplaces in over 50 countries worldwide. The official list, published in the March
16, 2015 issue of Bloomberg Businessweek Middle East magazine is a ranking of the nation’s 15 best employers based on the confidential feedback of employees and an audit of management practices. Frank-Uwe Ungerer, Country Manager for DHL Express UAE, commented, “I am incredibly proud of our dedicated
employees who are the reason we have retained our number one position for top company to work for in the UAE. Our people with their passion and can do attitude are at the heart of our organisation and the backbone of our business, who make sure we deliver excellent service quality for our customers.”
Regional aviation organisations must incorporate top-down safety culture The pivotal role of safety in driving forward the thriving regional aviation industry surfaced as a key conclusion at the 3rd World Aviation Safety Summit. Held under the Patronage of His Highness Sheikh Ahmed bin Saeed Al Maktoum, President of Dubai Civil Aviation Authority, Chairman of Dubai Airports, Chairman and Chief Executive
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Officer of The Emirates Group, the Summit was hosted by the Dubai Civil Aviation Authority and organised by the Streamline Marketing Group. Speaker after speaker at the summit emphasised the importance of the continuous improvement in aviation safety in ensuring that the Middle East aviation industry continues to grow at an accelerated pace and
contribute significantly to the region’s economic prosperity. “Aviation safety is not limited to territorial boundaries – it’s a global discussion,”said H.E. Mohammed Abdulla Ahli, Director General at Dubai Civil Aviation Authority (DCAA). “By 2030, the industry will transport approximately 6.6 billion passengers. With such expansion, safety remains the
top priority for air travel in not just the Middle East but around the world.” Leading aviation safety specialists from around the world gathered at the 3rd annual World Aviation Safety Summit in Dubai to debate the key strategies and challenges required to improve aircraft safety in the global industry. Experts also shared regional case studies on how the challenges of integrating and implementing new and existing safety procedures can be overcome.
Trimble expands operations in Dubai Trimble announced that it is expanding its operations in the GCC with the opening of a new office located in Dubai Internet City. The Trimble office in Dubai will be one of the company’s first offices dedicated to construction-related technologies, and is set to be Trimble’s largest office in the region. With US$ 2.4 billion (AED 8,8 billion) in revenue for 2014, Trimble is a US-based company and leading innovator of productivity solutions for building and heavy civil construction projects. Demonstrating the increasing demand for solutions in the construction field, annual spending on major programmes in the Middle East is expected to reach a record in 2016, where spending is expected to be nearly double that of 2013, according to the EC Harris report ‘Middle East Major Construction Programmes’. In 2016, construction programmes in the region are expected to comprise 46 per cent of total programme spending - outpacing transport, energy, property and water projects. Trimble’s new Dubai office will enhance the company’s collaboration with regional stakeholders, enabling the company to expand service, support and training for customers in the region.
Trimble’s new office in Dubai will be one of the company’s first offices dedicated to construction-related technologies, and is set to be Trimble’s largest office in the GCC region, to support a wide range of projects.
300 leading French companies attend Jafza Business Seminar in France
Ibrahim Aljanahi, Dy. CEO of Jafza and HE Maadhad Hareb Meghair Jaber Alkhyeli, the Ambassador of UAE in France, with Jafza team and UAE Embassy staff
The recently held Jafza roadshow and business seminars in France recorded a spectacular success,
wherein, during the four-day roadshow, the Jafza team interacted with a large number of French
companies. Jafza Seminars held in Paris and Lyon have together attracted 300 leading French
companies from diverse sectors, spanning from food, healthcare, machinery to automotive parts and logistics, who expressed their keen interest in exploring opportunities in the wider Middle East region, which Jafza as the trade and logistics hub serves. Ibrahim Mohamed Aljanahi, Deputy CEO, speaking on the remarkable success of the Jafza roadshow in France said, “The strong growth posted by French companies in Jafza provided an added impetus to their desire to capitalise on the emerging prospects. We hope to see at least 10 per cent growth in the number of French companies in Jafza this year.” The seminar included a panel discussion on setting up business in Dubai and in Jafza, which was very deftly moderated by Bertrand Dumon of Dumon & Partners.
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Looking beyond the
It may have the world’s largest oil reserves per capita, but Kuwait is planning ahead by facilitating growth in the non-hydrocarbon sector.
uwait’s large proven oil reserves (102 billion barrels) and relatively small population (3.9 million) means it has the world’s largest oil reserves per capita. At current production, Kuwait’s reserves would last 89 years. These reserves are mainly in Burgan, the world’s second largest oil field. In addition, Kuwait has large gas reserves that would last 114 years at current extraction rates. The hydrocarbon sector accounted for 87 per cent of exports, 80 per cent of government revenue and 63 per cent of Kuwait’s GDP in 2013. Hydrocarbons continue to grow - oil production has risen from around two million barrels/day in the early 2000s to over three million today. Over the same time horizon, gas production has risen from below 0.2 million barrels of oil
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equivalent per day (boe/d) to almost 0.3 million. Hydrocarbon receipts have been invested in the non-hydrocarbon sector, boosting economic growth and drawing in expatriate workers. Overall, GDP per capita on a purchasing power parity (PPP) basis rose from US$ 51,000 (AED 187,323) in 2000 to an estimated US$ 68,000 (AED 249,764) in 2014. Kuwait has built up the largest buffers in the GCC, thus protecting it against lower oil prices. Large current account and fiscal surpluses have enabled the building of these buffers. The fiscal breakeven oil price - the price at which budgetary revenues would equal expenditures - is currently US$ 54 billion (AED 198 billion) according to the IMF, the lowest in the GCC. This means that Kuwait is one of the best placed oil exporters to withstand low oil prices. The expectation is for oil prices to gradually recover as marginal oil producers, particularly in the US, cut production as they become commercially not viable. On this basis, Kuwaitâ€™s fiscal balance is likely to remain in surplus in 2015 and beyond. Furthermore, Kuwait has strong external and fiscal buffers with low public debt and a sizeable sovereign wealth fund to withstand even lower oil prices. Going forward, Kuwait aims to boost the non-hydrocarbon sector to diversify its economy. The growth of
A new five-year Development Plan for 2015-19, recently approved by parliament, focuses on key reforms to support financial institutions and private sector development. 14 APRIL 2015
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non-hydrocarbons is expected to be driven by government diversification plans. Kuwaitâ€™s Vision 2035 aims to transform the economy into a commercial and financial hub driven by private sector activity. This should result in a new model of growth, based on a more diversified economy. A new five-year Development Plan for 2015-19, recently approved by parliament, focuses on key reforms to support financial institutions and private sector development. It also envisages a series of infrastructure projects (housing, rail, metro, a new port, airport and a media city). This diversification drive, together
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with lower oil prices, is expected to help reduce the share of the hydrocarbon sector from an estimated 59.2 per cent of GDP in 2014 to 44.5 per cent by 2017.
Recent developments (2014) Real GDP growth is estimated to have softened to 1.3 per cent in 2014. Monthly indicators suggest that hydrocarbon production was broadly flat. Crude oil production declined slightly, which was offset by rising gas production. Kuwait has invested heavily in exploration and production of natural gas to meet domestic
electricity and industrial needs. Growth in the non-hydrocarbon sector (estimated at 3.5 per cent in 2014) was mainly driven by private consumption, boosted by higher public wages and subsidies. This has supported growth in the services sector, which experienced an estimated five per cent growth in 2014. Rising petrochemical production also added a boost to nonhydrocarbon growth. Consumer price index (CPI) inflation increased to 2.9 per cent in 2014 as population growth (2.8 per cent) pushed up rents and generated demand for
consumption goods. Housing is the largest component of the CPI basket (29 per cent) and rents rose steadily in 2014, reaching 4.4 per cent on average, compared with 3.8 per cent in 2013. The steadily growing population combined with a lack of investment in new housing led to upward pressure on rents. This sustained moderate domestic inflation of 2.6 per cent in 2014. Foreign inflation accelerated to 3.3 per cent in 2014, as strong consumer demand drove up prices for imported items such as furniture (4.8 per cent inflation in 2014). However, this was offset by lower food price inflation (2.9 per cent in 2014) in line
with weak global commodity prices, thus keeping foreign inflation moderate.
The current account surplus narrowed in 2014 on lower oil prices and rising imports The current account surplus narrowed to an estimated 35.5 per cent of GDP in 2014 (40.5 per cent in 2013), reflecting lower hydrocarbon export receipts and rising imports. Oil prices fell to an average of US$ 99.7 billion (AED 3,637 billion) in 2014 versus US$ 108.7 billion (AED 397 billion) in 2013, leading to lower oil export revenue. Imports expanded on rising
domestic demand underpinned by strong government spending on subsidies and wages. The deficit in the capital and financial account reflects the reinvestment of the current account surplus in foreign assets, including through the sovereign wealth fund. The capital and financial account deficit is likely to have fallen in 2014 in line with the lower current account surplus. International reserves reached US$ 29.3 billion (AED 106 billion) or 8.1 months of prospective import cover at end-2014. The Kuwait dinar (KWD), which is pegged to an undisclosed basket of currencies, weakened moderately against the US$.
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The fiscal surplus fell to an estimated 23.8 per cent of GDP in 2014 (32.2 per cent in 2013) due to lower oil revenue and higher subsidies and public wages. Revenue fell to an estimated 71.6 per cent of GDP in 2014 from 73.6 per cent in 2013 as a result of lower oil prices and flat hydrocarbon production. Meanwhile, the government continued to step up current spending on subsidies and wages, with overall expenditures rising to an estimated 47.8 per cent of GDP in 2014 from 41.4 per cent in 2013. Some measures to rein in current spending have been introduced. Energy subsidies (estimated at nine per cent of GDP in 2013) are being phased out. The diesel price was tripled in 2014, reaching US$ 0.59 (AED 2.17) per litre at the beginning of 2015. The
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government also decided to reduce medical allowances for Kuwaitis travelling abroad for healthcare. Public debt remained low at an estimated 6.2 per cent of GDP at end-2014. The growth of the banking sector slowed in 2014. Deposit growth fell to 3.2 per cent, reflecting lower fiscal surpluses. Nonetheless, banks remained highly liquid (the loan to deposit ratio was 92.6 per cent at end-2014) as the government continued to provide a large and stable funding base. Loan growth was stronger than deposit growth as robust private consumption led to higher demand for consumer lending. Asset growth was higher than both deposit and lending growth as banks directed their excess liquidity towards investments. Banks continued to clean their balance sheets to reduce legacy
non-performing loans (NPLs, estimated at 3.5 per cent at end-2014). This led to moderate profitability, with return on equity averaging an estimated 10.0 per cent in 2014. Overall, growth in credit facilities was 6.2 per cent in 2014. Most of this was driven by consumer lending, which grew 10.5 per cent in 2014 and accounted for 39.9 per cent of the loan book by year end. Previous high risk lending to the real estate sector has been growing more slowly. The contraction in lending to investment companies (non-bank institutions that provide a broad spectrum of financial services, including securities trading, brokerage and asset management) is a result of deleveraging and also due to banks writing off legacy NPLs to these companies. Investment companies have been forced
The government has announced plans for a 20 per cent cut in current spending in 2015, which will mainly be achieved by removing subsidies.
to deleverage since the 2009 crash, when they suffered losses due to overexposure to the real estate sector and the stock market. According to the IMF, risks related to investment companies are now contained as their exposures are ring-fenced and regulatory oversight has been strengthened.
Macroeconomic Outlook (2015-17) Real GDP is projected to slow in 2015 as the government cuts back on subsidies, before recovering in 2016 and 2017 as major development projects get underway. There are plans to invest US$100 billion (AED 367 billion) in 2015-19 on boosting production as well as upgrading petrochemical plants, refineries and transportation. The head of the national oil company recently stated
that Kuwait aims to add five per cent to production capacity by 2016. This would mainly come from enhanced oil recovery techniques on the Burgan oil field, the second largest oil field in the world with capacity of 1.7 million b/d. With regard to nonhydrocarbons, the government has taken the historic decision to cut subsidies, leading to higher prices and reducing demand, which is likely to slow non-hydrocarbon growth to 2.1 per cent in 2015. However, growth is expected to recover in 2016-17 as US$ 155 billion (AED 569 billion) of non-hydrocarbon investment spending envisaged during 201519 starts kicking in. Overall inflation is expected to rise to 4.2 per cent in 2015 on subsidy cuts before moderating in 2016-17. Domestic inflation is projected to
rise to 5.5 per cent in 2015 on higher fuel and water prices, but the impact should fade to five per cent in 2016 and 4.6 per cent in 2017. Additionally, under-investment has led to a lack of capacity in the economy, which is putting upward pressure on domestic prices. In particular, a lack of housing supply is pushing rents higher, with likely pass through to other domestic prices. On the demand side, population growth is projected to remain steady at 2.8 per cent, which will add to domestic inflationary pressure. Higher domestic inflation should be offset by slowing foreign inflation in 2015 as global commodity prices fall on weak global demand. The decline in global commodity prices is expected to be reversed in 2016-17, leading to higher foreign inflation. The current account surplus is projected to narrow in 2015 on lower oil prices, before recovering in 2016-17 as oil prices rise. Brent crude oil prices are expected to average US$ 56.2 billion (AED 21 billion) in 2015, with the price rising to US$ 64.1 billion (AED 235 billion) in 2016 and US$ 69 billion (AED 253 billion) in 2017. Hydrocarbon exports were 86 per cent of total exports in 2014. Therefore, exports are expected to dip in 2015 before recovering slightly in 2016/17. Continued steady growth is expected in the non-hydrocarbon sector, which will sustain import demand in 201517. Therefore, the current account surplus is expected to fall to 12.6 per cent of GDP in 2015, before recovering to 15.8 per cent in 2016 and 16.6 per cent in 2017. A moderate decline in international reserves is expected as the lower current account surplus is offset by reduced investment outflows under the capital and financial account. International reserves should remain very comfortable, despite
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the large investment spending programme, which amounts to around US$ 255 billion (AED 936 billion) in 2015/19, and should drive up demand for imports. Nonetheless, the current account should remain in surplus and outflows of investment on the capital and financial account are expected to fall. Therefore, international reserves should only decline marginally in terms of prospective import cover. Furthermore, Kuwait has extensive foreign assets, including those held in the sovereign wealth fund. There might be a marginal further depreciation of the KWD against the US$ as higher expected US policy rates lead to an appreciation of US$ against other major currencies. A small fiscal surplus of 1.6 per cent of GDP is expected in 2015 as the government cuts back expenditure; the surplus should grow to an average 4.9 per cent of GDP in 2016-17 as hydrocarbon revenues recover. Hydrocarbon revenue accounted for 77 per cent of total budget revenues in 2014. Therefore, government revenue is expected to reach a trough in 2015 as oil prices bottom out before rising in 2016-17. The government has announced plans for a 20 per cent cut in current spending in 2015, which will mainly be achieved by removing subsidies (the main subsidies are on diesel, electricity and water, healthcare and petrol). This will moderate expenditures throughout 2015-17, despite a growing wage bill and an increasing amount of public investment. There should be a slower deposit growth in 2015 as lower fiscal surpluses reduce flows to the banking sector, but this should reverse in 2016-17. Slower deposit growth and weaker demand for credit owing to the decelerating economy are likely to lead to slower asset and loan growth in 2015. In 2016-17, rising current account and fiscal surpluses are expected to lead to higher deposit growth. Loan growth might be slightly higher than deposit growth on resilient demand for consumption loans. As a result, the loan-to-deposit ratio should gradually increase. Profitability will rise going forward as Kuwait’s strong macroeconomic fundamentals support asset quality, loan books are cleaned of NPLs and as the government’s investment programme provides new financing opportunities. - Joannes Mongardini, Rory Fyfe, Ehsan Khoman, Hamda Al–Thani and Ziad Daoud, QNB Kuwait
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Vivek Seth, CEO, Halul Offshore Services Company, talks to GSC about the OSV market in the region. Falling oil prices aren’t helping however the big picture is quite positive. The region in general has enjoyed better revenues due to expanding exploration and production activity
22 APRIL 2015
he Middle East has enjoyed significant growth in the offshore support vessels (OSV) market in the last few years as a result of the expanding offshore exploration and production (E&P) activity. There are around 75 owners in this region with easy accessibility to the market. However, the region is now gradually feeling the pinch of the oil price decline.“Going forward, we can expect a downward pressure
on the day rates. Long term growth prospects are good, but gradually we expect older tonnage to leave the market,” speculates Vivek Seth, CEO, Halul Offshore Services Company which is based in Doha, Qatar. Currently, with demand stagnant across most regions in the world, attention is shifting towards the anticipated surplus of the Platform Supply Vessel (PSV) and Anchor Handling Tug Supply (AHTS) vessels in 2015, due to quite a few ships being built on speculation.
“It is thus important to manage your risks and establish a safe and reliable operation. This is the most important factor in maintaining a competitive advantage, regionally and internationally,” advises Seth. “As with every industry, one of the biggest challenges we face is to be able to transform and adapt to the market’s changing tides. We have expanded a great deal over the last few years. However, to continue this positive movement, we must look for interesting growth opportunities
across our diverse sectors. It is always a challenge to sustain profitability, but these issues can be addressed by remaining flexible and taking a different approach to sectors that show an opportunity for innovation,” he adds. Halul supports their clients in upstream segments, drilling operations as well as in IRM (industrial repair and manufacturing) and subsea work. Their fleet strength is currenty 40 vessels, with a majority of their PSV and AHTS fleet being
Dynamic Positioning (DP) enabled. “We have new vessels that will be inducted in 2015/2016, all of which are DP2. Safety and reliability are the main focus of the day. As of now, the trend is towards DP2 vessels, with a special emphasis on ensuring safe operations,” says Seth. It is important to note that the average age of fleet vessels in use is under 10 years. But that does not mean that older vessels are scrapped. A lot of them are usually designated to other segments where age is not
APRIL 2015 23
a crucial issue, such as in logistics support or ocean tow. For Halul, who have their headquarters in Qatar, the country continues to be their biggest revenue market.“Our industry is very technical in nature, which is why, in order to maintain our particular standards of service, we must attract and retain people who are the best in the field,” asserts Seth. The maritime industry is not always as appealing to job seekers as other industries may be, but companies like Halul are always on the lookout for passionate individuals who are willing to learn. As of now, Halul has more than 1,000 employees from over 15 different countries.“Our human capital is essential to our operations and development. We aim to be a sought after employer, not only in the industry, but in business in general,”says Seth. In an effort to show their commitment to their home country, Halul is also dedicating time and resources to developing promising Qataris by educating and training the local workforce. “We are implementing this through our outreach programmes in high schools and colleges, and providing Milahasponsored degrees in the maritime industry to Qatari students,” concludes Seth
24 APRIL 2015
Falling oil prices impact OSV market After several successive years of strong growth, owners and managers in the offshore supply vessel (OSV) segment are looking at 2015 with some trepidation.
he recent oil price slide has focused thoughts on exploration and production costs, with some voicing concerns about the influence this will have on primary OSV market drivers. Demand for platform supply vessels (PSVs) and anchor-handling tug supply (AHTS) vessels mainly derives from drilling activity, field development work, and production facility support. The oil price drop towards a low of $70/ barrel has sparked fears over the health of these demand drivers in the next 12 months. But it would be wrong to view the global OSV market as a homogeneous block and link a slide in the oil price with any certainty with lower demand for vessels in any given market.
Different regions and vessel classes will offer different opportunities. The age of a vessel, its technical specifications, and even flag state will play a role in its demand and utilisation this year. Previous oil price slides have had minimal influence on the upward drive in OSV term demand. Forecasts for rig demand and new field development projects continue to show growth in the coming 12 months. The latest analysis from the IHS Global Supply Vessel Forecast continues to show growth in overall term demand for OSVs in 2015, but this growth is focused on certain vessel classes in specific regions and is often seasonal by nature. In the PSV segment, the number of vessels exceeding 4,000dwt on term
contracts in 2015 is expected to be 5% higher than in 2014. The second and third quarters offer the best conditions for larger PSVs, as the North Sea summer will help increase the number of term contracts. In addition, demand for large PSVs to work in US Gulf of Mexico waters is expected to increase, while activity in Latin America will hold firm. In the AHTS market, vessels of 15,000â€“22,999bhp could see a boost in demand from the increased use of floating production units in certain regions, with activity during both the hook-up and installation stages, and the continuing production stage. However, these market segments will be harmed by recent cancellations of drilling
APRIL 2015 25
support contracts in Russian waters, as tensions continue between the Kremlin and the West. Growth in demand is not limited to the more powerful vessels, as contracts for AHTS of 6,000-9,999bhp are also expected to show positive movement in 2015. Capable of both routine supply duties and undertaking anchor handling activities, these vessels are often seen as the workhorses of the fleet in regions of shallow water and a benign environment. Day rates for vessels of this size are lower than for the largest vessels and this will boost demand in an increasingly cost-conscious business climate. The positive message of increased term demand needs to be balanced against the backdrop of continued fleet expansion. The current newbuilding orderbook exceeds 570 vessels, more than 400 of which are scheduled for delivery before the end of this year.
26 APRIL 2015
Many of these delivery dates will slide, and some vessels on order but not yet being built will be cancelled, but a fleet increase close to the 220 vessels delivered across 2014 should be expected. Most of this fleet growth is focused on large PSVs, adding more competition to the market segment showing the most positive demand growth. The overall effect on the market will be to restrain improvements in usage and day rates. Vessel age has begun to play a major role in term contract requirements, with many offshore oil and gas operators stipulating vessels must be less than 15 years old. This trend is increasing worldwide, including in markets such as Mexico and the Middle East, where previously vessel age was of little concern. Term utilisation for OSVs built before 1991 is today about 30% in both the AHTS and PSV markets and
declined in 2014, a trend seen since the start of 2008. This slide in vessel utilization highlights the need to remove older tonnage. Examples of scrapping and sales out of the offshore market were reported with greater frequency in late 2014, so a more concerted move to address the issue of older vessels may feature in 2015. The diversity of the OSV market prevents the making of a simple forecast for 2015. There will be winners and losers in each region, vessel type, and vessel class. Yet threats and concerns are the same across the industry: oversupply, older tonnage, and weakening day rates. These are the same concerns faced at the start of 2014. However, a sliding oil price, with the subsequent potential for a cut in offshore budgets, is shining a harsher light on these worries. -David Hunter http://magazines.ihs.com/Maritime/
والعمل حتت سطح البحر .تبلغ سعة السفن القدمية من احلسبان وتخريدها ،إذ عادة في الوقت احلالي ،لدى حالول أكثر من أساطيلها حاليا 40سفينة ،أغلبها سفن ما يتم حتويل الكثير منها إلى قطاعات أخرى ألف موظف من أكثر من 15دولة مختلفة، إمداد للمنصات البحرية وملرساة مناولة قطر حيث عمر السفينة ليس عنصرا حاسما ،كما وعنهم يقول سيث« :رأس املال البشري لدينا التموين ،وكلها تدعم نظام حتديد املواقع هو احلال في الدعم اللوجستي أو السحب في أمر ضروري وحيوي لعملياتنا وللتطوير .نحن الديناميكي .عن ذلك يخبرنا سيث: عرض البحر. نهدف ألن نكون شركة يسعى املاهرون للعمل «لدينا سفن جديدة ستدخل اخلدمة في بالنسبة إلى شركة حالول ،الذي توجد لديها ،وليس فقط في هذه الصناعة ،ولكن ،2016/2015وكلها تدعم نظام حتديد مقارها في قطر ،ال تزال قطر أكبر سوق في مجال األعمال التجارية بشكل عام». املواقع الديناميكي .السالمة واملوثوقية لعائداتها ،كما يخبرنا سيث بقوله« :صناعتنا في محاولة إلظهار التزامهم نحو بلدها تأتي على قمة اهتماماتنا في الوقت احلالي. تعتمد على التقنية بدرجة كبيرة بطبيعة األم ،حالول تكرس الوقت واملوارد لتطوير اعتبارا من اآلن ،االجتاه احلالي هو نحو بناء احلال ،وهذا ما يفسر ملاذا يجب علينا جذب املواطنني القطريني الواعدين من خالل برامج سفن تدعم نظام حتديد املواقع الديناميكي وإبقاء أفضل العاملني في هذا املجال ،من أجل تثقيف وتدريب للقوى العاملة احمللية، مع التركيز بشكل خاص على ضمان أمن احلفاظ على معاييرنا لتقدمي اخلدمة ».قد أو كما يقول سيث« :نحن نطبق ذلك العمليات». تكون الصناعة البحرية غير جذابة للباحثني من خالل برامج التوعية لدينا في املدارس من األهمية مبكان مالحظة أن املتوسط عن العمل من الصناعات األخرى ،ولكن الثانوية والكليات ،وتوفير درجات علمية العام لعمر أسطول السفن قيد االستخدام هو شركات مثل حالول تبحث دائما عن األفراد برعاية مالحة في الصناعة البحرية للطالب أقل من 10سنوات .لكن هذا ال يعني اسقاط املتحمسني املستعدين للتعلم. القطريني». 28 APRIL 2015
البقاء على السطح
فيفيك سيث ،الرئيس التنفيذي لشركة حالول للخدمات البحرية ،حتدث إلينا عن سوق سفن املنصات البحرية في املنطقة .ال شك أن انخفاض أسعار النفط عامل غير مساعد ،إال أن الصورة العامة إيجابية للغاية ،إذ أنه بشكل عام ،تتمتع املنطقة بعائدات أفضل نظرا لتوسيع نشاط االستكشاف واإلنتاج.
حققت منطقة الشرق األوسط منوا كبيرا في سوق سفن املنصات البحرية والدعم البحري في السنوات القليلة املاضية نتيجة لتوسع نشاطات االستكشاف واإلنتاج البحري. هناك نحو 75مالكا في هذه املنطقة يسهل عليهم الوصول إلى السوق ،ومع ذلك ،فإن املنطقة اآلن تشعر تدريجيا بآثار تراجع أسعار APRIL 2015 29
النفط ،ويعلق على ذلك فيفيك سيث ،الرئيس التنفيذي لشركة حالول للخدمات البحرية التي يوجد مقرها في الدوحة ،قطر قائال« :بالتطلع للمستقبل ،ميكننا أن نتوقع ضغطا هبوطيا على األسعار احلالية ،رغم ذلك تبدو آفاق النمو على املدى الطويل جيدة ،ولكن تدريجيا نتوقع للسفن القدمية أن تخرج من السوق».
في الوقت احلالي ،ومع ركود الطلب في معظم املناطق في العالم ،يتحول االهتمام نحو الفائض املتوقع لسفن إمداد املنصات البحرية ومرساة مناولة قطر التموين في عام ،2015 نظرا لكون عدد غير قليل من هذه السفن جرى بناؤها على أساس توقعات مستقبلية. يستطرد فيفك سيث قائال« :بالتالي، فمن املهم أن تدير املخاطر اخلاصة بك وتنشئ عمليات آمنة وموثوق بها .هذا هو العامل األكثر أهمية في احلفاظ على ميزة تنافسية إقليميا ودوليا .كما هو احلال في كل صناعة، أحد أكبر التحديات التي نواجهها هي أن تكون قادرا على التحول والتكيف مع املد واجلزر والتغيرات في السوق .نفذنا عمليات توسع كثيرة خالل السنوات القليلة املاضية، ومع ذلك ،وملواصلة هذا التحرك اإليجابي، يجب أن نبحث عن فرص منو جديرة باالهتمام .احلفاظ على الربحية حتدي كبير ال شك ،ولكن ميكننا معاجلة هذه القضايا بأن نبقى مرنني وأن نتخذ نهجا مختلفا نحو القطاعات الواعدة التي توفر فرصا لالبتكار». حالول تدعم عمالئها في قطاعات عمليات احلفر واإلصالح الصناعي والتصنيع
ملواصلة هذا التحرك اإليجابي، يجب أن نبحث عن فرص منو مثيرة لالهتمام .الحفاظ على الربحية تحدي كبير ال شك، ولكن ميكن معاجلة هذه القضايا بأن نبقى مرنني وأن نتخذ نهجا مختلفا نحو القطاعات الواعدة التي توفر فرصا لالبتكار.
futu to the
30 APRIL 2015
One of the largest planned construction investment in the country is Oman’s national railway, estimated at US$ 15 billion (AED 55 billion). The government, funding the project with support from other GCC states, hopes that it will be a catalyst for economic diversification and underpin the long-term growth of sectors like manufacturing and logistics.
man’s national railway project will link the major ports and growing industrial centres of the country, notably Sohar, Duqm and Salalah. The development of railways across the GCC member states is expected to help drive 35 per cent growth of the region’s construction sector, according to international press reports.
Opportunities The Oman railway’s development will provide great opportunities for private and global contractors. Initial plans will see the 2,244 km network link six cities in Oman and Buraimi on the UAE border (130 km from Dubai), and may later be extended to Yemen as well. The first stage of the network should be fully operational by 2018. Construction on the 1,061-km first stage of the network started in late 2014. Contracts for several of the project packages have been awarded by the Oman Railway Company (ORC), a state-owned entity under the Ministry of Transport and Communications (MoTC), which will oversee the entire initiative, including procurement. Italian state railway engineering company Italferr has already been selected to conduct preliminary design on the project, and the Tender Board has shortlisted bids for a project management consultant. In September 2013, Ahmed bin Mohammed Al Futaisi, minister of transport and communications, told the local press that the ministry was “asking the private sector to think about investment
APRIL 2015 31
strategy and take advantage of the available opportunities” on the rail project.
stretch from Al Misfah in Muscat to Sohar Port, with a 20 km link to Muscat Central Station, and an 8 km spur to a railway yard at Sohar. There is also a 486 km line from Muscat to Duqm Port, and 84 km between Sinaw and Ibra in Oman’s east. International connections are also included, with a 136 km track from Sohar to Al Ain in the UAE, with a 27 km spur to the border town of Buraimi, and a 58 km line from Sohar to Khatmat Al Malaha, another border crossing.
According to Luka Beccastrini, Middle East regional head of Italferr, construction of the network will involve 1.7 billion cu metres of cut-and-fill and 20.25 million cu metres of earthworks. There will be 35 km of tunnels, 45 km of viaducts, 39 km of rail bridges, 48 km of wadi bridges and 245 flyovers and underpasses. There will also be 46 stations of various Initial plans will sizes, extensive support see the 2,244 km facilities like marshalling and intermodal yards, network link six maintenance workshops, and supporting roads cities in Oman and security fences. Once and Buraimi on operational, the railway will use diesel trains the UAE border to move passengers at (130 km from up to 200 km/hour and freight at 80-120 km/hour, Dubai), and may according to the MoTC. later be extended The first phase of the railway includes a 242 km to Yemen as well. 32 APRIL 2015
Wider access The Omani railway will connect to a broader GCC network, meant to link the countries of the Gulf and beyond. In the longer term, the aim is to connect the GCC Railway to networks in the Middle East and Turkey – and then as far as Europe and Central Asia. The project could be a real game-changer for Oman, and help generate long-term demand for the construction industry, both in maintaining the network and in developing
the industrial, logistics and transportation infrastructure that the railway is expected to catalyse. The sultanate’s ports have the benefit of lying outside the Straits of Hormuz to the east and the Bab El Mandib to the west. However, Oman has not been able to make full use of its unimpeded access to the Arabian Sea and Indian Ocean, partly because of a lack of a railway to move goods to and from the Arabian Peninsula. The GCC railway could alter the dynamics of regional trade significantly, and allow Oman to capitalise on its strategic location. As global real estate firm Cluttons said in a 2013 report on Oman, the railway could prove a“vital addition to the potential of the ports at Salalah, Duqm and Sohar to develop further as regional freight hubs”. This would have knock-on effects for logistics real estate in the country, particularly around those crucial ports. Originally published by Oxford Business Group (OBG) in The Report: Oman 2014, published in January 2014, Construction Chapter. For economic news about Oman and other countries covered by OBG, please visit http://www.oxfordbusinessgroup.com/ economic-news-updates.
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T emerging markets Evolving opportunities in
Emerging markets â€“ are they losing their appeal? In todayâ€™s business environment, globalisation is proving to be more of a risk than an advantage. However, despite near-term setbacks, there are still many attractive long-term opportunities in emerging markets. This report from the Capital Group elaborates
34 APRIL 2015
he long-term structural growth story in emerging markets remains intact. These areas of the world will likely continue to face cyclical headwinds, but things appear more favourable on a secular basis. Headline risk is becoming less significant in emerging markets. Globalisation and the broadening of investment opportunities have minimised the impact that regional and countryspecific events have on the share prices of individual companies. The story of developing economies is not just a growth story. Emerging market companies have shown an inc reasing willingness to enhance shareholder returns by paying dividends, which can help smooth volatility during rough periods. A difficult macroeconomic
EMERGING MARKET REPORT
Container Terminal in China
environment and fragile investor sentiment have made valuations compelling for many well-managed, high-quality companies.
The story is far from over The poor returns of emerging markets over the last couple of years, especially relative to their developed market peers, have called into question whether now is the right time to be investing in the asset class. In some ways, the question may be misplaced, or simply inadequate. Globalisation has made it nearly impossible for any investor to avoid emerging market risk. Many US, European and Japanese businesses now derive a significant portion of their revenue from emerging markets, and it is often the fastest growing segment of their revenue.
At the end of 2014, companies in developed One important consideration regarding nations generated nearly 30 per cent of their future consumption trends in emerging revenue from emerging markets - a similar markets is not just what people will buy, but percentage to the revenue generated from how they will buy it. Increasingly, they are developed Europe and Asia combined. using smartphones to purchase household Overall, despite near-term setbacks, products and services, as well as to access there are still many attractive long-term healthcare and banking information. With opportunities in emerging markets. their phones, these consumers have changed Valuations, especially on a relative basis, are the face of retailing, effectively leapfrogging more attractive than they have been in a the traditional brick-and-mortar model that long time - but stock selection, and hence has long reigned in the US and Europe. The active management, are critical. move has been facilitated by e-commerce First, the growth story: developing marketplaces, like Alibaba and JD, and has economies continue to be the engine of allowed new opportunities for companies global growth and all over the world to reach wealth creation for customers without having to An intense focus on millions of people. build costly infrastructure. individual companies Not only are emerging Online shopping also markets expected to appears to boost overall that can meet the continue growing consumption, not merely at a faster pace than replace offline purchases. demands of middlemature economies, the In China, for example, a class populations composition of that dollar spent online replaces growth is changing in roughly 60 cents of sales whose numbers and meaningful ways. in offline stores and affluence should Rising living generates around 40 cents of standards alter incremental consumption. increase in coming consumption patterns, This increased buying years will be a key driving demand for may be the key to helping higher value goods facilitate the nation’s shift source of growth and services. For from an investment-oriented example, in urban China a rapid rise in per economy to one led by consumption. capita income over the last two decades has Also impacting the emerging market meant that consumers now spend less of consumption story is the rapid ageing of their incomes on fulfilling basic needs and populations. Historically, the emerging market more on discretionary services and activities story has been one of a young, vibrant and such as travel and leisure. It is for this increasing working-age population. This reason that the slowdown in China’s growth remains true for countries like Indonesia rate is giving many investors pause. and India. But accelerated urbanisation and But China’s policy must be viewed in a declining birth rates mean that countries longer-term context. Portfolio managers and like China, South Korea and Thailand have economists maintain that by cooling down populations that are older and ageing quickly. an overheated property market, reining in These older consumers have tremendous unbridled lending, and curbing unprofitable buying power, but their consumption habits infrastructure projects, China is laying the will likely differ from those of a younger foundation for more sustainable – if slightly demographic. If the experience of the developed lower – longer-term growth. Portfolio world is any guide, spending on healthcare, Manager Christopher Thomsen points out: including pharmaceuticals, should rise “Despite the recent economic slowdown significantly, which benefits companies in both in emerging markets, I continue to have emerging and developed markets.“The initial strong conviction that the evolution of the beneficiaries of this ageing trend were the middle class and structural growth of Asian large-cap global pharmaceutical companies,” consumption will remain one of the most says portfolio manager Noriko Chen, who is important investment themes of this decade.” involved in Capital Group’s research focusing
APRIL 2015 35
EMERGING MARKET REPORT
Headline Risks Are Less Relevant in Explaining Emerging Market Returns Over the past two decades, company- specific factors, as opposed to macroeconomic factors, have played an increasing role in determining the success of emerging market businesses. Breakdown of Nominal Returns for Emerging Market Stocks
Source: Empirical Research Partners. Attribution analysis uses capitalisation-weighted monthly USD returns. Data smoothed on a trailing two-year basis.
on ageing in Asia.“But we are now moving into the second stage, where people have even more disposable income and are willing to pay for services like private healthcare and diagnostics. Service providers, particularly hospital operators listed in Asia, have very positive tailwinds. They also tend to be very well run and have a decent growth runway for the next several years because they are just starting to build capacity. For me, I would be much more willing to buy a Chinese healthcare–related or services company rather than a luxury brand.”
An inadequate social safety net in many developing economies is one reason that ageing may cause consumer spending patterns to differ from those in developed markets. In China, Indonesia, Korea and India, consumers generally bear significantly more of the burden for ensuring their well-being as they age.“Given the lack of social welfare and social security, and pension benefits in many emerging markets, insurance companies are clear beneficiaries,” says Noriko.“But as always, it is about
Dividends Have Reduced the Impact of Share Price Declines in Emerging Markets Results Relative to the MSCI Emerging Markets Index (%)
Dividend payers with above-median dividend yields
Sources: FactSet, Capital Group. As of December 31, 2014. Dividend payers with above-median yields and non-payers are subcomponents of the MSCI Emerging Markets Index.
36 APRIL 2015
finding the right time and valuation to invest in these types of companies.”
It’s about companies, not countries Portfolio managers sometimes use the headline risk associated with emerging markets to invest in high-quality businesses with the potential to withstand stretches of slowing growth, political upheaval or currency declines.“During a research trip to Brazil in October, I was struck by the number of meetings with company managements that I walked away from with a positive outlook,”says portfolio manager Carl Kawaja.“As a longer-term investor, it’s vitally important to look through macro headwinds to find individual company successes.” Like Carl and other portfolio managers at Capital, investors across the spectrum are distinguishing between macroeconomic factors that often trigger headlines, and the specific factors that drive company success. And as more and more companies derive a part of their business from outside of their country of domicile, headline risk is becoming less significant. Over the past two decades, companyspecific factors have gone from contributing a third of the returns for emerging market
Unloading vehicles on the ferry in the port of Crimea, Russia
companies to nearly two-thirds of the returns – a percentage that is increasingly akin to the part that company-specific factors play in the returns of companies domiciled in the developed markets. For this reason, retaining a focus on companies amid macroeconomic challenges remains essential, says portfolio manager Mark Denning.“As a research-driven active investor, my focus is on companies, not the market. Even during a time of mixed near-term prospects for developing countries, great companies can distinguish themselves,”he says.
Embracing a dividend culture One way that companies in emerging markets have been distinguishing themselves is by embracing a dividend culture. This has allowed investors to view emerging markets not just as a growth asset class, but one that can also be an important source of dividend income.“There is a growing appreciation among managements of emerging market companies that dividends do not send a bad signal to markets, and in many cases they send a very positive message,” explains portfolio manager Chapman Taylor. It is striking that more than 90 per cent of companies represented in the MSCI Emerging Markets Index pay dividends, providing a fertile
hunting ground for yield-seeking investors. As of December 31, 2014, the average dividend yield of the MSCI Emerging Markets Index was 2.95 per cent, greater than that of Standard & Poor’s 500 Composite Index and the MSCI World Index; more than one-third of emerging market stocks had a dividend yield greater than three per cent. These dividends have been an important contributor to total returns for emerging market companies. For the 15 years ended December 31, 2014, the MSCI Emerging Markets Index returned 240 per cent, 49 percentage points of which came from dividends. As emerging market companies continue to mature in their capital structure, we expect dividends to play a more prominent role in total return. More important, perhaps, is the role that dividends have played recently in dampening volatility and reducing the impact of market weakness. Since 2003, consistent dividend payers that yielded more than the market have provided superior relative returns to the MSCI Emerging Markets Index. Better results were especially notable during periods of market declines, including the global financial crisis. They were also evident during the second half of 2014, when consistent dividend payers with above-median yields outpaced non-payers by 590 basis points.
A research-driven approach can uncover opportunities Despite the challenges faced by some developing economies, portfolio managers continue to be optimistic, believing that compelling opportunities exist for researchdriven, bottom-up investors. An intense focus on individual companies that can meet the demands of middle-class populations whose numbers and affluence should increase in coming years will be a key source of growth. So too will the distinction between companies that understand the value of enhancing shareholder value and those that don’t.
Key takeaways Despite the divergence in and challenges faced by some developing economies, portfolio managers continue to believe that the overall outlook looks promising for long-term investors willing to look beyond near-term volatility. An active, bottom-up approach is advantageous in a market where, increasingly, company-specific factors are driving investor returns. A strengthening dividend culture should contribute to emerging market returns and help dampen volatility over the long term. -Capital Group
APRIL 2015 37
The Middle East and North Africa at work As Middle East and North African (MENA) countries pursue political transformation and economic diversification, transportation and logistics investment is the cornerstone to future growth, says Joseph Oâ€™Reilly of www.inboundlogistics.com
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MENA LOGISTICS FEATURE
Arabia, Oman, Bahrain, and the United y nature of its location, the Arab Emirates (UAE) – countries that Arab world has always been rebounded from the global recession in the middle. From early thanks to a surge of investments in the man’s migration, to the transportation and logistics sector, and the transfer of culture and cargo continuing efforts to diversify domestic along the Silk Road, to the development industries. Spanning the divide between of the Suez Canal zone and the world’s Asia and Europe, Turkey has become the foremost trade lane, the Middle East and region’s rising star, thanks to government North Africa (MENA) has been a place of efforts to privatise industry and diversify nomadic interludes amid emerging Eastthe economy beyond traditional West dramas. agriculture and textile strengths. Today, the MENA region remains in an uneasy limbo between the extremes of oil-driven affluence and socio-political Current affairs turmoil. Its fortunes, consequently, are Middle Eastern activities – and their impact mired in ambiguity. on oil and gas markets and A recent International global political stability – The lingering Monetary Fund economic have long been a US concern, effects of war outlook describes the Middle but without much reciprocity East as a “two-speed” region, in Afghanistan in terms of US foreign direct reflecting the gap that exists investment (FDI). Apart and Iraq, and between progressive and from the steady build-up of totalitarian political regimes. military infrastructure and the ongoing The Arab Spring uprisings supplies during the Iraq and that beset Libya and Egypt Afghanistan wars, outlay in threat of Iran, in 2010 erupted into a Syrian the region is middling at best. place MENA in US FDI in the Middle East civil war that still smoulders. Elsewhere, the lingering topped out at US$35 billion a precarious effects of war in Afghanistan (AED 128.56 billion) in 2011 position. and Iraq, and the ongoing – the equivalent of Chile’s threat of Iran, place MENA in take – according to the US a precarious position. Bureau of Economic Analysis. The MENA This volatility contrasts the relative region accounts for less than five per cent prosperity of Arabian Peninsula of US total trade, and one per cent of US economies such as Qatar, Kuwait, Saudi FDI outflows.
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MENA LOGISTICS FEATURE
Instead, the US government has used trade and investment incentives as bargaining chips to encourage political transformation throughout the region. For example, Jordan, Bahrain, and Oman have all entered into free trade agreements (FTA) with the United States. FTAs with Kuwait, Qatar, and UAE have also been proposed. Apart from the dark undercurrent that fuels much of the trade and investment within the region, the Middle East offers relatively little value as either a
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manufacturing or consumption market. With the exception of the European Union – its top trading partner – and a select core of exported goods – notably oil – the region is economically isolated from the broader global economy. Countries such as UAE (see sidebar), Kuwait, and Saudi Arabia have endeavoured to change this reputation by focusing on high-end commercial and real estate developments to stimulate domestic consumption in an emerging retail sector.
They have become oases within an otherwise arid economic landscape.
The cost of economic freedom If you take the Heritage Foundation’s ranking of the freest economies (see sidebar) at its word, a sizable swath of MENA is ‘not available’ for comment – which speaks volumes. By contrast, Bahrain, Qatar, UAE, and Jordan – countries the Heritage Foundation labels as ‘mostly free’ – all rank in the top quarter of the nearly
MENA LOGISTICS FEATURE
200 countries included in the think tank’s annual index. The Heritage Foundation’s study scorecards ‘economic freedom’ in a number of different areas – in essence, it measures the relative freedom individuals have in determining their economic direction. The disparity between MENA economies demonstrates not only the challenges that exist in establishing macroeconomic stability amid socio-political upheaval, but also the opportunities and motivation for
Middle Eastern activities – and their impact on oil and gas markets and global political stability - have long been a US concern, but without much reciprocity in terms of US foreign direct investment (FDI)
underperformers to seek parity with their peers. “In promoting economic freedom, it is crucial that nations establish and protect property rights, and combat cronyism and corruption,” writes James Jay Carafano, a senior research fellow for national security at The Heritage Foundation.“As with overthrowing old regimes, these are tasks that will largely have to be the responsibility of the people themselves. They have to win their own future.”
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The lack of a ‘future’ is at the core of current incivilities. With few exceptions, MENA countries are burdened by high unemployment, a scourge that continues to thwart social, political, and economic progress.
Air freight key to growth While the rest of the world is mired in sluggish economic recovery, the Middle East has scored a bonanza in the airfreight sector. Capitalising on Asian and European misfortunes - and focusing specifically on cargo - state-owned airlines such as Emirates, Qatar Airways, and Etihad are seeing profits soar. In April 2013, Middle East carriers reported freight business expanding at an 8.6 per cent clip year-overyear, compared to a 1.4 per cent increase worldwide, according to the International
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Air Transport Association. In 2014, growth was pegged at 11.8 per cent, the highest growth region in 2014.
Global shipping super powers The Middle East is pushing to supplant European air cargo dominance while re-casting global distribution trajectories. The region’s air cargo hubs are similarly expanding. The Middle East features four airports among the world’s top 50 by tonnage (see sidebar), and Abu Dhabi’s airport posted 25 per cent volume growth in 2013 year-overyear. The region is also no stranger to ocean shipping; it is home to six of the world’s top 50 cargo container ports (see sidebar). The Middle East currently offers a tale of two different types of countries in transition: those that have been plagued by social
upheaval and are in the process of major political reform; and stable, oil-producing governments looking to leverage that wealth to diversify economic prospects. “Each country will define its own unique path, but all paths should converge on accelerated private-sector growth and international trade through structural reforms that deepen trade integration, lower the cost of doing business, foster hiring by private firms, develop high-quality human capital, and expand access to finance,” according to the IMF report.
UAE leads by example When the global recession hit Dubai, the effect was immediate. Rampant spending on extravagant real estate properties screeched to a halt. A city born from oil opulence
MENA LOGISTICS FEATURE
MENA - Stats Economic freedom and unemployment
The Heritage Foundation’s Economic Freedom Index ranks countries by the relative freedom citizens have in controlling their own labour and property. Lower rankings indicate more freedom. For some countries in the Middle East and North Africa, insufficient data exists to create rankings.
Source: 2013 Index of Economic Freedom, The Heritage Foundation
MENA Cargo Airports in the World’s Top 50
Four airports in the Middle East/North Africa region rank among the top 50 in the world by tonnage. The airports and their rankings are:
Source: 2013 Top 50 Global Airports, Airports Council International
MENA Container Ports in the World’s Top 50
Among the region’s container ports, Dubai Ports leads as ninth in the world by tonnage. Five others in the top 50 rank as follows:
was suddenly cut off from its lifeblood: credit. Then an interesting thing happened. Developers shifted focus from luxury to logistics, banking on a more reliable foundation for future economic growth. Dubai World Central’s planned logistics corridor is the centerpiece for this emerging vision. Al Maktoum International Airport – the first phase of which opened in 2010 – aspires to be the largest all-cargo airport in the world, capable of accommodating more than 13 million tonnes of freight. The gateway, which spans 77 miles, also features the established Jebel Ali Port – the ninthlargest container port in the world - and the Jebel Ali Free Zone. The new development complements the existing Dubai International Airport, which already ranks as the world’s fifth-largest cargo hub in tonnage.
Source: 2011 World Port Rankings, American Association of Port Authorities
The Emirates’ air cargo capabilities offer a complementary piece to the Middle East’s long-standing jewel: the Suez Canal. Asian manufacturing shifts westward, and the on-again-off-again emergence of India as a sourcing location, will add bandwidth to the world’s foremost trading lane. There’s
also the promise of economic development in Central Asia from the Pakistan north to the Russian border, as well as the untapped potential of Africa. While recent labour strife in Egypt has raised speculation about the threats of closure, the Suez Canal remains the cornerstone of Eurasian trade.
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44 APRIL 2015
Shehzad Ahmad, Chief Executive Ofﬁcer, Farm Fresh, is revved up about the growth he knows his company will witness in the near future. All aspects of Farm Fresh’s operations are readying for an upgrade. Being prepared is the way forward
e’ve all heard the phrase, ‘fresh from the farm’. While that may not apply literally to the company’s portfolio, they do boast of representing a wide range of the world’s best known food brands, including Seara, Shan, McCain, Aashirvaad, Emborg, Sara Lee and K&N’s, and the recently added, SK and India Gate. Says Shehzad Ahmad, CEO, Farm Fresh, “Farm Fresh has experienced exponential growth in recent years. In the last two years in particular, we have been investing strategically in key areas of our business to successfully establish ourselves as the only total distribution solutions company of its kind in the UAE. As a result, we have more than tripled our workforce, quadrupled the size of our fleet, and made significant investments in our logistics and marketing capabilities.”
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As their business continues to grow, they are looking to further develop industry relationships by working with brands across a diverse range of sectors. Their long-term goal is to evolve and diversify the business to become a leading FMCG company, servicing businesses across a range of new sectors and industries. To fulfil this aim, Farm Fresh operates state-of-the-art warehouse facilities across the UAE that can hold volumes up to 4,000 dry, 1,000 chilled and 20,000 frozen pallets. “Our main warehouse in Dubai Investment Park occupies an area of 500,000 sq feet dedicated to frozen, chilled and ambient goods, and an additional 500,000 sq feet to sports equipment and apparel. Our other warehouse facility in Al Quoz occupies 100,000 sq feet,” says Ahmad. The combined capacity of their warehouses exceeds 300 inbound containers and 200 outbound containers per month. As the company continues to expand, they intend to continue increasing their storage capacity in line with business needs and customer demands.
Fleet This commitment to growth also includes their fleet of vehicles, which currently stands at 140.“Over the last two years, as demand for our services has been increasing, we have quadrupled the size of our fleet and will continue to grow it as we move forward. Over the next three years, we are looking to more than double the number of trucks in operation across the business. This forecast is in line with our growth expectations, as we continue to expand our brand portfolio and build on the range of services that we are currently offering to existing customers,” he explains. The Farm Fresh fleet consists of a number of different types of vehicles, which all are essential for the various aspects within the business. These include: Five freezer trucks that can hold volumes of up to 10 tonnes 25 dual temperature trucks 65 freezer trucks 25 ambient trucks Five freezer and 15 chiller vans, which can transport one tonne of product in each delivery
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“Our entire dual temperature fleet of vehicles is installed with temperature controlled facilities. These facilities allow us to effectively transport products with varying temperature requirements in one truck, significantly increasing efficiency, and allowing us to service all of our customers’ individual needs at the lowest possible cost,” says Ahmad.
The combined capacity of their warehouses exceeds 300 inbound containers and 200 outbound containers per month. As the company continues to expand, they intend to continue increasing their storage capacity in line with business needs and customer demands
Farm Fresh currently distributes products to customers across the UAE and Oman, with the majority of their operations based in the UAE. At present, they serve 15,000 points of sale directly in the UAE, which are made up of outlets across all seven emirates. Moving forward, they intend to continue to increase their direct distribution within these markets, serving an increasingly wide range of customers. “Short term, we are looking to replicate the successful operational model we currently have in the UAE, and implement it in Oman. This will include working with our existing brands and extending the outreach within Oman, as well as building a similar facilities structure in terms of vehicle fleet and warehouse operations. Over the coming years, we will also look at further expanding our regional presence, with a particular focus on Saudi Arabia,” he says.
Technology As a company, Farm Fresh is well aware of the need to be up-to-date with the times. The core technological system they currently have in place for warehouse management is EXCEED, which regulates all movements
Middle Eastern activities – and their impact on oil and gas markets and global political stability - have long been a US concern, but without much reciprocity in terms of US foreign direct investment (FDI)
of their products.“Later on this year, we will be upgrading to warehouse control systems that build on the technological platform currently in place. This will allow us to streamline technology across our warehouse and logistics functions. Intra-logistics plays a large part in this, and will allow us to run the warehouse operations with virtually no manual support,” explains Ahmad. With this new warehouse control system, the company aims to strengthen its position as a leading service provider in the industry, as their output will increase to five times the current rate. Accuracy across deliveries will also be strengthened, as the margin for human error is reduced. Overall, this will allows them to improve the management of inventory and stock, and provide an even more efficient service to customers. In addition to this, the implementation of a major ERP business transformation programme across Gulf Marketing Group – the parent company of Farm Fresh – will streamline their business processes, ensuring that they operate in the most efficient and effective way possible. This significant longterm project will transform their business functions, significantly increase productivity,
and give them the right tools to take the business to the next level. These initiatives – as well as continued investments in sales force automation and fleet management systems – ensure that Farm Fresh remains firmly on the cutting edge of the industry. Adopting new ways of working, embracing the latest technologies, and building on support services are therefore all core elements of their future growth strategy. Having the right technology in place is also essential to ensuring efficient fleet management operations.“The technology we have in place enables us to track our vehicles through GPS systems and monitor fuel consumption. This is an essential part of ensuring all orders are distributed to our customers within their required timeframe. As part of our wider technology upgrade, we will also be implementing a new advanced transport management system. This is a full planning system that takes over control of order planning, as it monitors individual customers’ needs and matches them with required services in one integrated platform,” he says. Farm Fresh’s warehouse has a mix of three key supplementing machines, all
of which are essential to the running of warehouse facilities. These include forklift trucks, reach trucks and PPT’s. PPT’s in particular provide automated assistance when moving pallets around the warehouse. Together, they have a total of 25 supplementing machines. In terms of hand held equipment, they have around 50 devices, used for a range of essential tasks such as scanning and registering the products on their system, storing the products and shipping out orders. As the business has grown and the focus of the company has shifted from bulk operations to distribution, they have had to increase the number of machinery and equipment they use in order to reflect this. Over the next three years, they expect the number of machinery and equipment to increase more than five times of what they currently have in place.
Human resource All of these machines are operated by a workforce that is currently 700 strong, with 400 employees working directly in logistics. “Within the warehouses, we have three main teams – the inbound and outbound
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teams and the overall management team that oversees the day-today operations. These teams also include drivers, forklift operators, pickers, clerks, managers, loaders and delivery associates,” says Ahmad. “At Farm Fresh, sourcing, recruiting and retaining the best people in the industry is a core priority – and a key factor behind our success. For example, our logistics GM has over 20 years of experience in the industry. All of our managers across the various operations have at least 10 years of experience in their individual areas of expertise. This combined expertise allows us to continuously deliver a premium service to our customers,” he adds. Having a professional and motivated workforce is imperative to the success of their business. That is why they create growth opportunities for people within the company – several of their supervisors joined as graduates and have been promoted internally. As part of the company ethos, they always look to support those just starting out on their career, whilst also championing loyal employees within the business that have been part of Farm Fresh from the start. “We ensure that our workforce is fully trained in all areas of business operations, with
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a particular focus on health and safety, hygiene standards and customer service training. In addition to this, we also ensure that those employees who are responsible for the warehouse and logistics technology management receive regular training to guarantee they are educated in all areas required to carry out their roles to the highest possible standard,” says Ahmad. Farm Fresh invests significant time and resources into training to maintain the highest standards across the business, as well as support the personal development of their employees.
A tailor-made solution In terms of their brands, Farm Fresh claims to be the only company in the UAE to offer a full solution service to the brands they work with, with the logistics element playing a major part in this. The services they currently provide include: Inbound customs clearance Warehousing Labelling Packaging Distribution Online inventory Value added services Promotional packaging
“Depending on our customers’ individual needs and requirements, we can adapt and tailor the above-mentioned services as required to ensure we deliver the best possible service,” explains Ahmad. “We operate in a dynamic and fast moving industry. Whilst this offers great opportunities for business growth, it also comes with some distinct challenges,” says Ahmad. Weather and high temperatures are major considerations for a business such as this. In order to transport daily deliveries in the Middle East climate, the company operates a highly efficient temperaturecontrolled fleet that allows them to store food products at temperatures as low -22 degrees, even if it is +45C outside. “Remaining at the cutting edge of the industry is another challenge – as well as a major opportunity. With the UAE economy growing at a rapid rate, supported by continued growth in sales of the food industry, it is all the more important that we continue to invest in new technologies, employee training programmes and stateof-the-art warehouse facilities. All this will ensure that as our business grows, we continue to offer our customers the industry leading service that Farm Fresh is known for,” he concludes.
OIL AND GAS
What falling oil prices really mean The fall in oil prices is expected to trigger a new wave of mergers and acquisitions in the oil and gas sector in 2015. But who will be the big players and how many will struggle to survive? This excerpt from AT Kearney’s report – Mergers and Acquisitions in Oil and Gas explores
emember in 1998, when oil prices hovered around US$20 (AED 73.46) a barrel, and oil companies were flourishing? The severe price drop between then and the 1999 low of US$10 (AED 36.73) a barrel ushered in a wave of mergers to gain economies of scale, creating the super majors of today: Exxon and Mobil in 1998; BP, Amoco, and ARCO in 1998 and 1999; Total, Petrofina, and Elf in 1999 and 2000; and then Chevron and Texaco in 2000. Fast forward to the three years from 2011 to June 2014, when oil prices found a new level at around US$ 110 (AED 404) per barrel with less volatility – some would say abnormally low – with the odd hiccup caused by geopolitics (see figure 1).
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OIL AND GAS
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Oil price movements
Note: mm BTU is million metric British thermal units. Sources: Bloomberg, December 2014; A.T. Kearney analysis
Many things have changed since 1998. Demand has shifted east, companies are finding and developing more challenging and higher cost fields, and most recently, the US-led shale revolution, and its stealthy, growing impact on supply has the country now producing more than nine million barrels a day. Although oil prices rose by US$90 (AED 330) per barrel, margins in the industry have not. So a >50 per cent price drop now is likely to have a bigger impact than the drops in 1999 or 2008. Costs have been high, and with the price of oil now under US$50 (AED 183.65) a barrel in January 2015 - and some betting it could fall below $40 (AED 146.92) – pressure will be intense for industry leaders to have a clear mergers and acquisitions (M&A) strategy. Several questions are key for the year ahead: How long will prices need to remain low before companies need to adjust to new realities? Will there be a new wave of mergers to capture scale or selective acquisitions to strengthen portfolios? When is the best time to move? How soon will the window close? Will early movers capture strategic advantage as the competitive landscape changes, or will more prudent fast-followers do better? Who has the strength to acquire, and who will be acquired? Are divestments a good option to provide needed cash flow over the coming quarters? Which criteria should guide the position and assets to sell?
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Within this context, a study was performed to determine how the market might evolve and what impact market turbulence will have on different groups of companies. The findings suggest a business environment that is likely to present some angst, as well as significant opportunities, for those willing and able to adopt contrarian strategies. M&A deals – whether acquiring, partnering, or divesting – will play a big role in shaping businesses to grow value and navigate the new, more turbulent landscape. The winners will be those firms that anticipate potential outcomes, choose how and when to act, and understand how these decisions will impact their positions and competitive dynamics.
Plunging oil prices are creating both uncertainty and opportunities. By early January, oil prices had dropped by more than 50 per cent from their stable range of US$ 100 (AED 367) to US$ 110 (AED 404) per barrel for the three years up to June 2014
M&A in oil and gas showed a strong recovery in 2014 after a sluggish 2013, with North America remaining the most active region and upstream again being the most active sector. So what will drive M&A activity in 2015, and which companies will prosper? Oil and gas supply has been building for some time, driven primarily by US shale, while geopolitical challenges and escalating costs for more complex projects have made life difficult for producers. These factors have all contributed to an industry that is about to embark on a very challenging year. The recent plunge in oil prices, prompted by OPEC’s production decision, looks structural. This has triggered what is likely to be a new wave of M&A activity across the entire value chain. Those with strong cash flow and healthy balance sheets will have significant opportunities, while others will require new strategies just to survive. The significant structural changes and sudden drop in oil prices in 1998 led to consolidation of the major international oil companies (IOCs). This time, industry executives are sceptical that such mega deals will be so prevalent when most have sufficient scale advantage. But never say never. In 2015, it is expected that many companies in the industry will be active in M&A as part of the response to margin squeezes and lower oil prices. Independents. Balance-sheet strength and varying levels of exposure to assets with higher breakeven oil prices will determine the winners and losers as the margin squeeze takes hold. It is also expected that more adventurous financial investors will take this opportunity to enter the market. International oil companies. Optimising portfolios will continue to be the focus. Divestment of downstream and non-core assets could accelerate to enable funding of targeted upstream activity and meeting cash flow needs throughout 2015. Mega deals for scale synergy are not out of the question, but will be limited, if at all. IOCs will favour selective acquisitions to build in their chosen areas. National oil companies. M&A activity will be aligned with the national agenda of their host government, which is often strongly influenced by near-term domestic needs
OIL AND GAS
and politics, as much as by economics and business strategies. Many have the financial strength to play a significant M&A role, and some are expected to be more active in 2015. Oil service companies. These companies will continue to be hit hard as operator margins are squeezed and the pain is shared with service providers. There is significant potential for consolidation from mega deals through to the fragmented sub-segments. Financial investors with capital to invest will continue to be very active, plus new entrants with deeper pockets - such as large engineering companies - could make strategic moves. Financial investors. There is plenty of capital looking to be invested in the industry, but the current margin squeeze, low oil prices, and sluggish demand could suppress some investorsâ€™ appetites. It will take confidence to capture the best opportunities. Investors will certainly acquire in the oil-field services sector, downstream divestments by IOCs, and for those still brave enough, some upstream assets beyond the traditional mature production. For those with cash to invest, 2015 will offer great opportunities for countercyclical moves to buy attractive assets. Well-targeted acquisition strategies will provide stronger, higher value growth than the frontier and other previously planned expensive exploration. With debt pressures mounting and many independentsâ€™ share prices falling, some of these assets will be a good value. The window of opportunity may be smaller than expected, once oil price expectations settle enough to bring buyers and sellers together. So now is the time to be clear on the best options to address the new industry outlook and dynamics. A lot will happen in the year ahead. For some, the shakeout will be painful, but for those in the driverâ€™s seat, it is a rare
opportunity to reshape the competitive landscape to their advantage. The sands are shifting, and all companies will need to be clear on their strategies to thrive - or even to survive - in 2015.
M&A in 2014
When prices settle and valuation expectations between buyers and sellers converge, companies that already have short lists of what they want to buy will start moving to capture these key assets
The 2014 M&A market showed strong recovery from a sluggish 2013, with year-todate (January to November) deal volume of about 1,800 and deal value of around US$440 billion (AED 1,616 billion) already surpassing last year. The first half of 2014 showed signs of a rebound with total deal value rising 24 per cent above the same six months in 2013. Many large deals (more than US$10 billion [AED 36.7 billion]) upstream, midstream, and downstream were announced during the year.
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North America remained the most active region â€“ with more than 65 per cent of deal value in 2014, compared to 44 per cent in 2013. This could be the result of companiesâ€™ efforts to restructure and streamline their portfolios, and a stronger focus on US shale. The Asian market also showed a rebound, with transaction value increasing by more than 65 per cent from 2013. Upstream remains the most active sector, with the value of deals rising 13 per cent (see figure 2). Downstream deal value increased â€“ by a striking 100 per cent - as companies started addressing some longstanding portfolio issues. Midstream transaction volume dropped by around 30 per cent, but deal value doubled, driven by a few large deals. The upstream sector has increased
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its dominance in deal volume, now representing more than 64 per cent of oil and gas deals in 2014. Despite the uptick in activities, deal volume was still about 25 per cent below the 2012 peak. Asian and Caspian national oil companies (NOCs) and sovereign wealth funds have been the biggest buyers in recent years. The quieter buying activity since 2013 comes partly from these national companies being more focused on progressing and developing the big inventories of assets and positions they have already acquired, as well as from lower returns since costs have escalated, even before oil prices fell.
M&A outlook for 2015 Oil price uncertainty could slow M&A in the near term, but then a new wave of deals
will surface. Discussions between industry executives confirm that recent oil price volatility will put the brakes on deals. When prices settle and valuation expectations between buyers and sellers converge, companies that already have short lists of what they want to buy will start moving to capture these key assets. Because deals tend to be under discussion and in the works for months, there will be a short lag before activity picks up again. Most companies are rapidly exploring how to address intense cost pressure, and M&A strategy is a crucial part of the solution for many. Plunging oil prices are creating both uncertainty and opportunities. By early January, oil prices had dropped by more than 50 per cent from their stable range of US$ 100 (AED 367) to US$ 110 (AED 404)
OIL AND GAS
Oil & Gas transactions by target sub-industry (2009-Nov 2014)
Sources: Dealogic and Thompson; A.T. Kearney analysis
per barrel for the three years up to June 2014, with Brent prices falling below US$ 50 (AED 183.65) - levels last seen in 2009. M&A transactions are propelled by industry dynamics. Plummeting oil prices caused by growing supply - most notably from shale producers in the United States and slowing demand in Asia and Europe have changed these dynamics dramatically over the past few years. Lower oil prices are creating intense cost and cash-flow pressure. Participants across the industry know that a clear M&A strategy is a key part of the response needed to weather the storm and for the strongest to take advantage. This creates opportunities. The price drop is unlikely to last forever, and opinions of how long this will last are sharply divided.
One CEO said,“Buyers need to be brave and go countercyclical as the next 18 months will be fairly unique.” But buyers have become more cautious, even before the recent price drop. Companies are already trying to shed higher-cost assets in their portfolios. US exploration and production (E&P) companies, previously net buyers, have become net sellers of international positions as they focus on domestic shale. China’s NOCs have been busy digesting and getting more value from their surge of resource acquisitions over the past few years. Chinese companies bought four per cent (US$ 5.2 billion – AED 18.4 billion) of global assets in 2014, down from 17 per cent (US$ 24 billion – AED 88.2 billion) in 2013. Similarly, the value of assets acquired by companies from Asia was down 50 per cent (US$ 4.2 billion – AED 14.7 billion) in 2014 from what they spent in 2013. Financial investors such as private equity and master limited partnerships have been particularly active in the United States, offering - against very low interest rates on deposits - a steady income at relatively low risk from producing assets. Some of these investors may get more cautious now that the value of these assets has fallen sharply and oil price volatility and risk perceptions have risen. The service sector and highly leveraged independents are likely to feel the impact of lower prices first. For the services sector, discretionary spending is already being
cut. For two years or more, operators have lamented high costs eating into their margins - even with oil prices over US$ 100 (AED 367) per barrel. The market is undergoing tremendous change, driven in part by the rise of US shale production. The focus on reducing costs will increase. Low demand and technology innovation will accelerate the progressive lowering of breakeven points, especially in US shale basins. Financing, particularly for those with lower cash flow and higher debt, will become more difficult. Today’s executives have to deal with more uncertainties and complexity. The new business environment is likely to present some great opportunities for those willing and able to adopt contrarian strategies. M&A deals - whether acquiring, partnering, or divesting - will be a vital way to grow value and navigate the new, more turbulent landscape. Companies that best anticipate and prepare themselves to take advantage of the fast-moving and volatile situation - as the oil price finds a new balance point for supply in a more demand-constrained world - will be in a much stronger position than their peers. Those with a strong cash flow, healthy balance sheets, and the foresight to take first-mover advantage can make significant strategic gains in what will be a very dynamic competitive landscape. -Authors are AT Kearney’s Richard Forrest, Vance Scott, Thomas Luedi and Alvin See
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Towards a sustainable
future RTA becomes first public entity to sign MoU with Etihad ESCO to boost sustainability and a green economy
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n an effort to raise the profile of Dubai in supporting the green economy and a sustainable development drive, the Roads and Transport Authority (RTA) has signed a MoU with Etihad Energy Services Company (Etihad ESCO), to help each other optimise the use of energy and support a clean environment. The MoU was signed by Abdul Mohsen Ibrahim Younes, CEO of Strategy and Corporate Governance Sector, Chairman of Energy and Green Economy Committee at the RTA; and Stephane le Gentil, CEO of Etihad ESCO. The MoU aims to identify the potentials and strategies associated with the
optimal use of energy through capitalising on the resources and tools of the Etihad ESCO. As the RTA endeavours to slash power consumption by 20 per cent in their premises and facilities in implementation of the recommendations of The Dubai Supreme Council of Energy (DSCE), Etihad ESCO will provide support by verifying the financial and technical feasibility of powersaving projects, and optimise the power use in operations, facilities and systems of the RTA. In order for Etihad ESCO to set economically feasible standards for energy consumption, the RTA will provide them with the required inputs.
Etihad ESCO will provide support by verifying the financial and technical feasibility of power-saving projects, and optimise the power use in operations, facilities and systems of the RTA The MoU also stipulates that Etihad ESCO will review proposals made by the RTA for saving power consumption, and select activities needed, along with the priorities of their implementation in concurrence with the strategic direction of the RTA. The procedure by which Etihad ESCO will provide its services to RTA projects is also made clear through defining the purport of each project phase. “The MoU echoes RTA’s relentless endeavours to promote sustainable development through energy conservation, especially as it has an impressive record in sustainability, green economy, and power-
saving. Last year, the RTA undertook 32 power-consumption initiatives and adopted eight initiatives for supporting the green economy. The RTA is also commissioning plans, studies and researches to thrash out innovative and sustainable solutions, rendering it a key player in this field. It is also engaged in a raft of programmes aimed at curbing carbon emissions from its public transport fleet, chalking future plans to enhance the efficiency of power consumption, and accordingly protect the community against any environmental and health hazards. The Dubai Metro and Dubai Tram projects probably demonstrate RTA’s
commitment to turn the green economy concept into a reality that enhances the credentials of Dubai in this vital field,” said Abdul Mohsen Ibrahim Younes, CEO of Strategy and Corporate Governance Sector, Chairman of Energy and Green Economy Committee at the RTA. This MoU is of great benefit to RTA projects, the business sector and all spectrums of the community as optimising the use of energy facilitates a clean environment. In doing so, the RTA has effectively become the first government entity to sign such a MoU with the company.
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s t h g i e h g Scalin Al Siraj Logistics and Warehousing, a tenant with Sohar Port and Freezone, is being considered for MEED Quality Awards for Projects (a regional award) as Sohar Port and Freezone explores bigger business opportunities in Asia.
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t has been an eventful month for Sohar Port and Freezone. Al Siraj Logistics and Warehousing is being considered for a regional MEED Quality Award for Projects. The company, housed at Sohar Port and Freezone, has already won a national award for the business park that it is creating at Sohar. Said Chief Financial Officer Babu Thomas, â€œAs the port and freezone operate on a landlord basis, we saw an opportunity to serve supply chains by building stateof-the-art warehousing, and we are all delighted to have won the Small Project of the Year Award. However, we did not expect to be in contention for a regional award so soon, especially when you look at the pace with which the GCC logistics sector is shaping up. The sector is projected to grow
from US$ 8 billion (AED 29 billion) to US$ 12 billion (AED 44 billion) over the coming years, and while we are focused on turning this trend into business opportunities, we also have one eye on the outcome of the awards now,â€? he added. In association with Mashreq Bank, MEED Quality Awards for Projects aim to raise the standard of business projects through benchmarking best practices specified in project briefs and excellence provided in project delivery. Al Siraj is well deserving of the award, having been a key driver for economic and social progress in Oman, with its broad portfolio of activities spanning oil and gas, construction, manufacturing, education, tourism, F&B, and technology industries. Its high quality brand of ready-to-occupy facilities are the first of a kind development on the
LOGISTICS AND WAREHOUSING
Al Siraj has been a key driver for economic and social progress in Oman, with its broad portfolio of activities.
freezone, and the first 14,000 sq metre phase of the business park opened to businesses towards the end of last year.
Enhancing economic ties Continuing the trend of good news and lucrative opportunities, a Sohar delegation explored economic opportunities between Oman and China as they attended Asia’s largest breakbulk and project cargo conference and exhibition, Breakbulk China 2015, earlier this month. Thousands of breakbulk and project cargo logisticians attended the four-day event at the Shanghai World Expo Exhibition and Convention Centre, and Sohar Executive Commercial Manager Edwin Lammers said contrasting economic conditions in the Far and Middle East are not all bad. The delegation from Sohar Port and
Freezone capitalised on the economic slowdown in China by focusing on the opportunities that are being created in booming regional markets.“China has cut its economic forecasts and set a much-reduced growth target of seven per cent for 2015. This will be the first time it has registered single digit growth for the best part of three decades. Its property sector is shrinking too, and while foreign trade fell by 11 per cent in January, the opportunities are there,”he said. Middle East’s construction sector is a huge generator of breakbulk and project cargo, which grew by 51 per cent at Sohar last year. Saudi Arabia and UAE have for a long time commanded the top two positions in terms of spending, and Oman also awarded US$ 3.53 billion (AED 13 billion) in infrastructure tenders last year.
“As demand for breakbulk imports continues to grow, our aim is to attract cargo volumes to Sohar. Unlike other ports in the GCC, we have the demand, the space, competitive energy rates, and a skilled workforce that can cater to Chinese and other investors that involved in Asia’s various global supply chains,”he added. The figures prove his claim, as in 2014, Sohar handled close to 1.4 million freight tonnes of breakbulk cargo, compared to 886,000 tonnes the previous year. “Being outside the Strait of Hormuz gives us a real advantage over other port and freezone sites when it comes to handling breakbulk project cargo. Our multimodal infrastructure and ground handling capabilities are also equipped to be able to transport goods throughout the region seamlessly,” explained Lammers.
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Leading by empowerment Abhishek Ajay Shah, Managing Director, RSA Logistics and a member of the board at chemical logistics joint venture RSA-TALKE, says that heâ€™s a leader who is very much a part of his team in this concise chat with GSC
Which school and university did you go to? I went to school at the English College, Dubai and to the University of Warwick, England. What was your first job? I was a volunteer at Dubai Summer Surprises. What do they not teach you in business school? The harsh reality of every man for himself, when push comes to shove. Who is your role model? Why? Richard Branson, because he does what he loves and creates companies that he believes in and is very accepting of a failed venture. What is your leadership style? Participative, Itâ€™s important to empower my team. What do you think is most important for being an effective manager? The ability to guide, listen and empower. How well do you handle stress? What is your fool proof method of de-stressing? Playing golf. What do you find encouraging? When your team steps up and surprises you in a positive manner. How do you spend your free time? Family, sports, travel. What is at the top of your agenda right now? Creating a harmonious and work hard play hard professional environment.
60 APRIL 2015
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Published on Apr 13, 2015
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