Middle East Power Brokers

Logistics service providers in the Middle East suffered a slowdown after the global economy plummeted last year, but their pain was not nearly as intense or as long-lasting as what their colleagues elsewhere endured.

“The economic downturn affected us, but not as much as it did the U.S. and Europe,” said Kamal Sadawi, senior vice president of the Middle East region for Agility Project Logistics, which has 12,000 employees and owns more than 6,000 trucks in the region. “That’s because oil production is still at the same level, and very few oil and gas projects were canceled; they were mostly delayed.”

Despite all the talk about the demise of oil and gas, $150 billion in oil and gas projects are still planned for the next five years, along with some $100 billion in projects for utilities and water projects, including desalinization.

“We held our ground, and we met or exceeded our targets,” Sadawi said.

Oil and gas projects aren’t solely responsible for propping up the region. Driven by a fast-growing consumer base, the regional logistics industry is poised for 10 percent annual growth, to $27 billion in 2012, Brian McHale, CEO of Saudi Arabia-based Wared Logistics, said at the SITL International Week of Transport and Logistics in Dubai this month.

“There is a population explosion, with large families that have 10 to 20 people who require a lot of electric power,” Sadawi said. In addition, there is strong demand for consumer goods, mostly imported from the U.S., Europe and Asia. “An oil price of between $70 and $80 a barrel is good for both the producers and the consumers,” he said.

In a recent report, Fadi Majdalani, partner of Booz & Co., said, “Despite the challenges posed by the current economic crisis, the region’s logistics market is stable and the outlook promising.” In the six-nation Gulf Cooperation Council bloc comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, the logistics market was an estimated $18 billion in 2008, representing around 2.3 percent of GDP, far lower than spending in the developed economies.

Booz estimates the market in the region will grow approximately 10 percent a year until 2012. Transportation spending will likely grow 7 percent a year, slightly surpassing overall GDP growth, but spending on logistics services will expand 10 percent or more per year.

Majdalani said even basic road transport services yield operating margins of 6 to 10 percent, significantly higher than in mature markets such as the European Union, where margins are typically 2 to 4 percent. Forwarding, which requires more sophisticated capabilities, typically yields a margin of 8 to 12 percent in the Middle East and North Africa.

Although the current economic crisis is expected to have “a moderate impact” on profit margins across most segments, the long-term profitability outlook looks positive, according to the report. A major factor is the evolution of global logistics hubs in key locations, such as Dubai, along the Europe-Asia trade route, which are growing at above-average rates.

“In a time when cutting costs is a crucial part of business, we are able to use Dubai as a hub to dock large shipments which can then be deconsolidated and shipped on in smaller targeted quantities, which is a great way of reducing logistics costs,” Michael Zuchold, communications manager at Geodis Wilson, a freight management company based in the Netherlands, said at the SITL conference on logistics in Dubai.

One company riding out the storm quite well — even as it faces a new storm in the form of an indictment on charges it defrauded the U.S. government — is Kuwait-based Agility Logistics, which provides services for a broad range of sectors, including defense and government services, infrastructure and project logistics. Although Agility’s overall revenue for the third quarter decreased 11 percent over the third quarter of last year, its net profit increased 15 percent year-over-year, and its earnings per share grew 19 percent. Its operating profit also increased 5 percent, and cash from operations grew 28.7 percent.

“Dividing Agility into three independently managed business groups has seen more focus and clearer financial accountabilities within each group,” said Tarek Sultan, Agility’s chairman and managing director. “However, at the same time, Agility’s business groups are able to work together to offer customers unique capabilities that make a real difference.”

In a further sign of optimism, foreign investors are showing increased interest in buying into logistics companies in the region. Australia-based Toll Group recently purchased privately owned Logistic Distribution Systems, an international forwarder based in Dubai. LDS provides integrated international sea and air forwarding services to customers through an extensive operational platform in Dubai and the Jebel Ali Free Zone, with strong volumes in European and Asian trade lanes. The cost of the acquisition was not made public.

“The Middle East and, in particular, the U.A.E. is a key strategic market for Toll,” CEO Paul Little said. Combining LDS with Toll’s existing business units “helps to secure a global transshipment hub for freight movements between Europe and Asia,” Little said.

LDS has annual revenue of about $50 million, of which 60 percent comes from air and sea forwarding and the rest from customs clearance and other logistics services.

In a further sign the logistics sector is attracting serious attention from global investors, Abu Dhabi-based Invest AD Private Equity Partners recently invested $75 million to acquire a significant minority stake in Ekol Lojistik, a leading integrated logistics company based in Turkey. The transaction was the first by the Abu Dhabi government-owned financial services company for Invest AD, its new private equity fund. The funds will be used to assist EKOL’s plans to expand and upgrade its infrastructure, said Samir Assaad, Invest AD’s head of private equity.

“Ekol is very well managed and expanding quickly as trade grows in Europe and the Middle East,” he said.

Plans also continue for completion of the ambitious Dubai Logistics Corridor, which will link sea, land and air, and create a huge multimodal logistics platform for the region and beyond. In July, Economic Zones World, a global developer and operator of economic zones, technology, logistics and industrial parks, signed an agreement with Dubai Aviation City that will ultimately double the industrial and logistics infrastructure of Dubai, already the largest in the region.

Recession or no recession, the project will integrate operations in the huge new Al Maktoum International Airport, with Jebel Ali Port and their respective free zones on a single, more cost-effective electronic platform.

Contact Alan M. Field at afield@joc.com.