SPECIAL REPORT: INVESTMENT AND TECHNOLOGICAL ADVANCES CEMENT UAE’S POSITION AS GLOBAL COMMODITY HUB
The United Arab Emirates’ (UAE) container ports are expanding rapidly, emerging at the top of global indices in terms of volume growth and efficiency. Dubai, specifically, endeavours on becoming the financial and trading centre of the Middle East region. It intends to compete as a trading hub with New York, London, Hong Kong, and Singapore. And there are signs that the emirate might not be far off from achieving this goal. Despite a gloomy outlook for world trade in 2023, the UAE’s growing role as an emerging market and a global transhipment hub is set to accelerate, supporting economic growth, and attracting investment.
In recent years, the United Arab Emirates (UAE), and more specifically the city state of Dubai, have risen through the ranks as a global maritime centre, taking their place among the top port cities worldwide. As global trade becomes more integrated, transnational companies continue to grow, and sea, land, and air connections proliferate, the emirate looks set to continue progressing, helped on its way by significant amounts of new investment. The UAE is one of the best-connected markets for international trade and its well-developed infrastructure and strategic location attract major logistics and shipping firms. The government has also encouraged trade and investment by scaling back bureaucratic requirements and offering numerous free trade zones strategically close to major trade routes, which further expedite customs procedures and lower administrative costs for exporters and importers. These factors make the UAE a highly attractive location for companies reliant on efficient international trade for business operations.
Further progress is at risk, however, by the challenges currently facing the global maritime industry, at a time of declining growth in cargoes, and a muted trading environment. Additionally, mounting global macroeconomic uncertainties as a result of the Russia-Ukraine war sent commodity prices to record highs last year and exacerbated inflation pressures. In late January 2023, the International Monetary Fund (IMF) projected global growth to fall from an estimated 3.4 percent in 2022 to 2.9 percent in 2023, then rise to 3.1 percent in 2024 – and warned of a cost-of-living crisis due to the impact of the Ukraine war, broadening inflation pressures and a slowdown in China. A slowing economy in China, the world’s second-largest economy, will affect global trade and activity, hence impacting the emirate and other commodity hubs. The World Trade Organisation (WTO) has revised its forecast for global trade growth in 2023 to 3 percent from 4.7 percent. The contraction in demand will have an impact on the volumes of goods to be transported, which could lead to pressure on prices, even though costs will remain high. The transport sector is particularly vulnerable to the volatility of energy costs.
PANGEA-RISK assesses that Dubai finds itself uniquely placed to face these challenges, with confidence high that it will continue to be the region’s pre-eminent transportation and logistics hub. The UAE’s reform drive bodes well for overall investment activity in the country. Indeed, the easing of the COVID-19 health crisis and rising economic competition between the UAE and Saudi Arabia will continue to provide an impetus for the authorities to implement business-friendly reforms to attract foreign investment. The UAE’s favourable business environment, especially Dubai, along with political stability and neutral position in the ongoing Russia-Ukraine War could help it to attract Russian investors looking for new locations to invest. Along with the investments in technological infrastructure, the UAE’s logistics sector has been able to mitigate the effects of the pandemic, and the country’s advanced infrastructure should help to boost its position. These factors are likely to increase investment in Dubai in the near term and support economic growth.
From humble beginnings to a global business hub
The UAE is on its way to creating a world-class financial ecosystem. In 2021, the Dubai International Financial Centre (DIFC) reported a 25 percent increase in the total number of registered firms and is now home to 17 of the world’s top 20 banks, five of the top 10 insurance companies, and five of the top 10 asset managers. Dubai’s financial technology sector, in particular, is making it easier for new market entrants to become quickly established with the rapid and widespread adoption of blockchain technology, robotics process automation, and innovative payment technology. Dubai provides an ever-increasingly favourable environment for financial firms of all shapes and sizes, with leading financial centres, as well as a favourable legal and regulatory regime.
More specifically, the authorities are also taking steps to make Dubai a trading hub for both professional and retail traders, setting up exchanges such as the Dubai Financial Market and the Dubai Gold and Commodities Exchange (DGCX) to support that ambition. To attract more capital and increase volumes, these markets have decided to integrate with the global financial community and changed their trading days to Monday through Friday, instead of Sunday through Thursday (the standard work week for the region). Additionally, foreign exchange (FX) trading saw a significant increase in users and increase in trading volumes. Compared to other markets in the Middle East, the UAE was the first to create the necessary infrastructure for forex trading, with sufficient technological and latency infrastructure, a trusted banking system, respectable regulators, and adequate liquidity providers. All of these successes have reinforced that Dubai has the potential to attract a huge amount of trading activity.
Dubai’s maritime sector has long been a key component of the economy. Historically, Dubai has always witnessed a successful collaboration between trade and maritime operations. Pearl fishing, based on a fleet harboured along Dubai Creek, was once the emirate’s principal source of income, along with trading across the Gulf and out into the northern Indian Ocean. Though oil and gas subsequently supplanted this, much of the revenue from hydrocarbons was invested back in the maritime sector.
According to a report by Boston Consulting Group (BCG), in 2018 the Middle East handled 20 percent of the world’s seaborne trade while accounting for just 3 percent of global GDP. Much of this growth has been achieved through developing new terminals and associated infrastructure, rather than just expanding existing facilities. According to the World Bank, almost double the investment went into new port and terminal construction in the region during the 20 years to 2020 (USD 3.8 billion) than in the expansion of existing port facilities (USD 2 billion).
In 2022, the region’s ports occupied four of the top five spots in the second edition of the Global Container Port Performance Index (CPPI), developed by the World Bank and S&P Global Market Intelligence. The UAE has several ports, such as Jebel Ali, Mina Rashid, Zayed Port, Fujairah Port, and Khalifa Port. At least two of these ports are included in the world’s top 50 container ports by the World Shipping Council. The UAE ports account for nearly 61 percent of cargo destined for the GCC countries of Oman, Bahrain, Qatar, Kuwait, and Saudi Arabia (and the UAE). However, Dubai’s Jebel Ali is the only port in the region that is among the top 20 ports in the world for throughput traffic. Jebel Ali is operated by Dubai Ports World (DP World) and is the largest port in container handling in the Middle East region, playing a role as a transit hub strategically located between Europe and Asia. For instance. Jebel Ali handled 14.0 million twenty-foot equivalent units (TEU) in 2022, up 1.7 percent year-on-year, making it the eleventh busiest port in the world.
As another measure of the sector’s importance, a recent global comparison of the top 15 ports of the world by Menon showed that Dubai comes in 13th place overall. This survey published in 2022 assessed maritime facilities, maritime law and finance, technology, attractiveness and competitiveness, and the port’s role as a shipping centre. Though Singapore came out on top globally, Dubai outranked both Mumbai and Rio de Janeiro and, except for Mumbai, was the only top-15 port between Athens and Singapore. Menton predicts that Dubai will continue to grow in importance and is expected to take 6th place by 2027, albeit with strong competition from Hong Kong, Hamburg, and Copenhagen. Dubai managed to acquire the 3rd place as an appealing location for relocating shipping operations, due to the growing trade needs of the Middle East Region and a strong governmental focus on providing incentives for attracting international investments.
Jebel Ali Port also abuts the Jebel Ali Free Zone (JAFZA), which allows 100 percent foreign ownership of companies based within it, and has zero import or re-export duties. JAFZA also has no restrictions on capital repatriation, foreign employment, or currency. The port’s industrial appeal is increased exponentially by Al Maktoum International Airport, which can be reached within 10 minutes, thanks to the dedicated Dubai Logistics Corridor which directly links the two locations. This combines a 200 sq km area into one multimodal super system, allowing sea-to-air cargo to flow from port to runway in an unrivalled time frame of four hours. Jebel Ali, JAFZA, Al Maktoum International Airport and Dubai South are the pillars of Dubai’s multimodal system, responsible for much of the trade and investment flowing through the emirate. Thanks to its strategic location, JAFZA has attracted numerous local and global steel companies over the years, including Danube Building Materials, Conares Steel, Mammut, Nippon Steel, ArcelorMittal, Tata Steel, Baosteel, and CNBM.
Trade procedures and low risks
The UAE’s appeal to investors is considerably boosted by the transparent and streamlined regulations and procedures involved in the import and export of goods across the country’s borders. The UAE has the shortest completion time frame for export border compliance out of the six GCC states (27 hours). This increases the UAE’s appeal as an international maritime and aviation freight transit and trade hub.
However, Oman’s ports are emerging as key competitors to those of the UAE owing to the significant investment being channelled into four special economic zones along the Omani coast – Sohar, Salalah, Al-Mazunah, and Duqm. However, Oman has a slightly longer time burden for export border compliance – estimated at 28 hours.
The time taken to trade in Dubai is also shortened due to the proximity of major industrial and free zones to port infrastructure, where businesses enjoy a streamlined process of inland transportation and handling. This is in part due to the small size of the country and ongoing investment in the development of internal transport networks and strategic industrial zones, with Dubai and Abu Dhabi at the centre of international trade.
The potential for increased liner connectivity, rail development and expansion of road infrastructure will have a positive impact on the efficiency of ports and terminal handling and improve overall lead times. Such procedures will become even more streamlined with the eventual completion of the Etihad Rail Project. The Etihad Rail – Dubai – Abu Dhabi phase was completed in March 2022 and around 70 percent of stage 2 had been completed by April 2022. While various phases are expected to gradually come online and connect the seven UAE emirate states, the full project is expected to be completed by 2030.
Additionally, businesses face a low risk of being solicited for bribes when dealing with any government department. This is aided in the case of customs procedures due to the streamlined nature of the process and the increasing provision of e-services. This lowers the risk of reputational damage over time and mitigates trade-related legal costs.
Maritime and logistics sectors remain a development priority
The UAE’s logistics market is predicted to grow by 8.41 percent annually to reach USD 31.4 billion by 2026. Contributing towards this growth, Dubai has invested in world-class infrastructure and strengthened its logistics capability, reinforcing its status as a major gateway for global trade. In February 2022, Dubai Maritime City Authority (DMCA) announced a USD 38 million plan to invest in roads and infrastructure to better integrate the maritime city and attract more businesses. The major upgrade to the roads and infrastructure at the DMCA is part of efforts to support the Dubai Maritime Vision 2030, which aims to develop, regulate, and enhance the local maritime industry and strengthen Dubai’s s position as a world-class, premier international maritime hub.
The key policy document for the sector is the Dubai Maritime Sector Strategy (MSS), whose end goal is the creation of a Dubai maritime cluster. This would provide not only ports, brokers, marine equipment, supplies and yards but also the industry’s necessary software component. According to the DMCA, the maritime industry contributes some 7.0 percent of Dubai’s GDP, at around USD 7.3 billion, which puts the emirate alongside other global port cities such as Singapore (7.0 percent) and ahead of Hong Kong (1.1 percent). The sector is also responsible for around 3.3 percent of the emirate’s jobs, with some 76,000 people working in maritime-related industries.
The growing complexity of port operations in the UAE has led to extensive diversification and enhancement of port infrastructure and technology. To improve productivity, the UAE ports are integrating more technological and automated solutions, such as robotics, and artificial intelligence. With the advent of digital technology, ports have become more automated, with interconnected supply chains and limited manpower to perform operations. As a result, various investments are being made in port automation to increase port efficiency. For example, in 2021, Abu Dhabi Ports Group and France-based CMA CGM Group invested approximately USD 153.9 million in the new Khalifa Port Terminal, intending to create a semi-automated container port. Authorities hope that projects such as these will increase the UAE’s attractiveness to international companies, boosting the numbers of those choosing to establish a headquarters and base of operations.
Robust commodity market
By increasing port capacity, the UAE can now meet surging trade volumes in emerging markets. The UAE is one of the world’s top 20 largest exporters and importers of commodities and the largest trading nation in the Middle East. Demonstrating its position as a global trading hub, the country reported record-breaking non-oil foreign trade figures for 2022. The UAE’s foreign trade reached 2 USD 599 billion in 2022, up 17 percent year-on-year. The UAE’s trade growth of 17 percent compares to the global increase of 12.2 percent announced by the World Trade Organisation. According to Ministry of Economy data, the strong growth was also reflected in exports, which were up 6 percent at USD 99.6 billion. Re-exports surpassed USD 163.4 billion for the first time, realising growth of 14 percent in 2021 and achieving a year-end total of AED 167.3 billion. Imports into the UAE also increased by 22 percent to hit USD 340 billion.
The UAE’s non-oil trade has been growing at double-digit rates since 2020, at a time when there are shocks to the global economy in the form of monetary policy directed at stifling an impending recession, and uncertainty around inflation as the war in Ukraine continues. China, India, Saudi Arabia, and the US remain the UAE’s key trading partners, although trading with Turkey grew at the fastest rate, growing by 40 percent to become the UAE’s sixth-largest trading partner. The UAE concluded a wide-ranging free trade agreement with India last year with plans to increase bilateral non-oil trade to USD 100 billion in the next five years. Comprehensive economic partnership agreements (Cepas) were also signed in 2022 with Israel and Indonesia. The Ministry of Economy is aiming to finalise Cepas with Turkey, Georgia, and Cambodia in the first quarter of 2023, as well as targeting deals with Kenya and Ukraine by the middle of the year.
Gold, aluminium, plastics, and tobacco were the leading non-oil export sectors, with iron and jewellery the fastest-growing product sectors. In re-exports, telephones and diamonds were the most important commodities, with the biggest growth coming from aircraft parts and truck parts – underlining the rebound in the global logistics sector.
With the volume of gold and diamonds being traded through Dubai increasing, the emirate is on track to become a key hub for precious metals trading. Its gold and diamond industry has boomed in the past decade, a trend driven by the growth of the Dubai Multi-Commodities Centre (DMCC), set up in 2002 in the Jumeirah Lakes Towers Free Zone. According to official data, gold trade accounts for more than 29 percent of the UAE’s total national non-oil exports and it has a major share in the country’s foreign trade activities. The market is close to 12 times the size it was in 2003, with about 20 percent of the world’s gold now traded through the emirate. It has also emerged as the top trading hub in the world for rough diamonds, overtaking Belgium. Over USD 22.8 billion of rough diamonds were traded through Dubai in 2021. Data shows that the UAE’s rough diamond trade has grown by 76 percent since 2015. Now, the DMCC has an office in the Israeli Diamond Exchange (IDE) in Tel Aviv, and the IDE has an office in the Dubai Diamond Exchange since the opening of diplomatic and trading ties with Israel, the Middle East’s second-largest diamond centre after relations were normalised in 2020.
The DMCC is now looking to Africa to help fuel further growth and says it has a clear Africa strategy to encourage more companies from the continent to use the centre to aid their commodity exports. Ministers from South Africa, Botswana and Zimbabwe attended the DMCC’s diamond conference in 2022, and several governments are now looking to set up offices within the DMCC. The interest in Dubai as a commodity hub is partly driven by African nations’ desire to take greater control over the distribution of their natural resources, potentially bypassing western European entities. This change in attitude places Dubai in a prime position to support the flow of even more commodities.
Geopolitical uncertainties and opportunities for growth
The Ukraine crisis continues to have a major impact on global trade, especially for energy and grain importers, of which the two nations are important suppliers. Moreover, the conflict immediately affected global shipping and damaged supply chains. Some shipping continues to be stranded at ports in the conflict zone, and others have been rerouted from the Black Sea. Russia is a leading exporter of grains and a major supplier of crude oil, metals, wood and plastics, which have a multi-purpose use for a range of products. The Black Sea serves as a major hub for wheat and corn, and restrictions at the moment have in effect shut down the world’s second-largest grain-exporting region. The UAE relies heavily on grain supplies from that region and will need to find alternatives, but it can do so. The UAE’s trade relationship with Russia is minimal, accounting for just 1 percent of the UAE’s total non-oil trade in 2021. However, as global economies have imposed sanctions on Russia, coupled with the UAE’s broadly neutral stance, the UAE’s strong trade and logistics facilities have led to some trade diversion benefits. Russian investment has been diverted from Western economies into the UAE into sectors such as real estate.
The UAE has significant long-term market opportunities to increase bilateral trade, especially in Africa and Asia, as well as to develop its role as a trading hub, but there are significant near-term challenges, given its trade dependency, which left its economy exposed during the height of the coronavirus pandemic. As global demand growth is weakening in response to surging inflation and the fallout from the Ukrainian conflict, the near-term outlook presents some risks. The UAE also faces competition from neighbouring economies to become trade hubs. Developing the transportation sector is a key pillar of Saudi Arabia’s 2030 Vision plan, and Qatar is also making investments in this area. However, the UAE’s existing regional lead (with its logistical and manufacturing capabilities second to none) and strengthening network of bilateral trade ties should allow it to maintain an edge over its neighbours.
Nevertheless, there will be other opportunities for the logistics sector, with the UAE authorities increasingly keen to cultivate commercial relations with Egypt, the Horn of Africa, South Asian states and, since the normalisation of ties in 2020, with Israel. Commercial ties with Israel are developing rapidly. Abu Dhabi Ports, via the Khalifa Industrial Zone (Kizad) and ZonesCorp, has opened its free zone and industrial cluster to Israeli companies, providing them with enhanced access to Abu Dhabi’s leading supply chain and logistics operations. DP World has also bid in conjunction with Israel Shipyards for a stake in one of Israel’s main ports.
However, these broadly positive trends may not suffice to fully offset threats from several other geopolitical developments and pandemic aftershocks. The post-pandemic disruption and spike in global shipping costs could damage transshipment hubs such as the UAE. The ongoing US-China trade friction and growing suspicion of China more broadly in the West could also hurt the UAE’s commercial interests, as could the UK’s withdrawal from the EU; all these developments could have serious negative implications on sea routes, trade volumes and the level of tariffs that could damage UAE interests.
Nonetheless, the UAE is well placed regionally to adapt. The pandemic and accompanying restrictions accelerated the need for digitalising processes – a policy that is pivotal to longer-term broader economic development and diversification plans – including technologies such as blockchain, internet of things (IoT), driverless vehicles, drones, and artificial intelligence. Such technologies, which are gaining traction in the UAE, will help to reduce operational costs, enhance customer experience, and facilitate faster deliveries. The UAE has been investing in various technologies in its ports, making the operations more resilient. The Dubai 10X initiative is aimed at enabling various government entities to anticipate global changes and transform Dubai into a city of the future with projects centered on infrastructure, smart governance, trade facilitation and infrastructure development that will be supportive of the logistics sector. Although the UAE logistics industry faces global and local challenges, businesses in the sector are moving swiftly to adapt and diversify markets, boosting longer-term prospects. Through continuous investment in new technologies and the promotion of new routes and methods, the emirate’s maritime sector looks likely to keep that top spot for many years to come.
The Russian invasion of Ukraine is having mixed effects on the UAE. On the one hand, the conflict has had a significant impact on global trade, especially for energy and grain importers, for which Russia and Ukraine are important suppliers. Moreover, current restrictions in the Black Sea, which serves as a major hub for wheat and corn, have effectively shut down the world’s second-largest grain-exporting region. The UAE is heavily reliant on grain supplies from that region and will need to find alternatives, but it has the ability to do so. Moreover, the UAE’s non-oil sector is considerably exposed to recent global developments – including the aftermath of the pandemic – and the recovery in tourism is likely to be affected by the war in Ukraine. On the other hand, the conflict also offers economic opportunities for the UAE. The strong rise in global oil and gas prices and demand for alternative sources of hydrocarbons will provide short-term fiscal and export profits to the UAE, with spillover effects on domestic liquidity and private-sector economic activity. This coupled with the UAE’s strong policy response during the pandemic should support growth prospects.
- The UAE is one of the most politically stable countries in the Gulf region. It will continue to have close relations with the US, while improved relations with Israel will open doors for new investments and trade opportunities, particularly in the tourism, infrastructure, and technology sectors. Economic ties between the UAE and Turkey are also growing stronger, which will offer greater opportunities, especially for trade and investment. Rising competition with Saudi Arabia may be economically challenging as some Saudi decisions (i.e., pushing multinationals to move their operations to Saudi Arabia,) threaten the UAE’s global, regional, shipment and trade hub position. However, this competition is expected to remain on the economic front and not affect their political cooperation.
- The Yemeni conflict poses the most prominent security to the UAE. In early 2022, the UAE was exposed to a wave of drone and missile strikes from Houthi militants in Yemen. Nonetheless, the UAE’s robust defence systems have been able to thwart Houthi attacks and limit their impact. The UAE will undoubtedly hope to prevent Houthi attacks from becoming normalised in the future, and the Houthis are also not interested in direct confrontations with the UAE. However, the UAE’s continued intervention in Yemen risks provoking Houthi rebels into readopting tactics that target the UAE directly. The mere risk of such an attack would negatively affect the UAE’s perception of security, which is crucial for the UAE’s success as an economic powerhouse in the Middle East.
- Economic growth is expected to decline in 2023. Real GDP growth is forecast to decrease to 3.9 percent in 2023 and 4.3 percent in 2024, compared with an estimated 7.6 percent in 2022. The primary driver of the slowdown is that the 13 percent increase in hydrocarbons recorded last year will not be repeated in 2023 due to the OPEC+ oil production curbs in place. Nonetheless, high oil prices from 2022 and supportive policies towards the non-oil private sector have bolstered economic the fiscal position. Although public and external debt is high this has declined as a proportion of GDP. Ready access to finance at an emirate level and large unofficial and sovereign wealth assets mitigate against sovereign and credit risks.