ANNUAL REPORT 2012

Management Review

MOHAMMED SHARAF
GROUP CHIEF EXECUTIVE OFFICER

“In 2012 we have focused on our existing operations through the delivery of exceptional customer service from improved efficiencies in our terminals. This has allowed us to deliver good revenue growth and manage costs, resulting in a significant improvement in adjusted EBITDA margin to 45.1%.”

Karachi (Pakistan) – Photo by Raheel Khan

Qingdao (China) – Photo by Mr Cheung

Global trade lies at the heart of DP World’s business. Ensuring our ports are well placed to capture current and future trade flows is essential to our success and creating value for all stakeholders.

The patterns of global trade continue to evolve as the balance of economic activity shifts to the south and the east and emerging markets take an increasing share of world economic activity.

Figures from the United Nations Conference of Trade and Development show that in 2011, developing countries had a 40.4% share of global manufactured exports. In some categories the export market share of these countries grew by over 30 percentage points in only 15 years.

While industrialised Asian countries still dominate these trends, one of the growing patterns is for increased intra-regional trade. Over the 2000-2010 period, south-south exports grew from 13% to 23% of world trade. China-India trade has more than doubled since 2007 and Africa is also an increasingly important part of the picture. Trade between China and Africa is likely to be over $200 billion in 2012. The World Trade Organisation has suggested at this rate of increase – 25% year on year – Africa could, within three to five years, surpass the EU and US to become China’s largest trade partner.

Another factor at play is the “Made in the World” phenomenon as manufacturing processes continue to become global; developing countries increasingly act as producers and markets for each other. World Trade Organisation figures show almost 60% of trade in goods is in intermediate goods with the average import content of exports around 40%.

With manufacturing continuing to shift to cheaper locations, middle class consumers in the emerging markets are playing an increased role in global demand for goods. These trends are set to continue.

To date, however, port development has not kept pace with these changes. Volume growth has been almost double the rate of new capacity growth, resulting in a significant lack of global container terminal capacity today.

Shortage of capacity is further exacerbated by the fact that much of the developed world port capacity is over 30 years old and increasingly no longer fit for purpose. This point takes on increased relevance with the arrival this year of a new breed of ultra-large container ships at 18,000 TEU. These vessels are around 400m in length, which is larger than the average 300-350m container berth.

The shift to these new vessels by our customers, the shipping lines, represents a significant operational change on the Asia to Europe routes. This in turn has led to a cascade of sub 8,000 TEU vessels being deployed on ‘smaller’ or emerging trade routes, which can add further to bottle-necks because many of the smaller emerging market ports are not yet capable of handling these larger vessels.

Meanwhile, cargo owners are increasingly focused on short lead times and real time inventories, pushing port operators to improve terminal efficiencies to move goods along the supply chain more quickly. Our investment in London Gateway for example is expressly for this reason, to improve the efficiency of the UK supply chain.

Responding to these different operating challenges is critical to fulfilling our customers’ requirements and ensuring an efficient supply chain. We do this through implementing processes, training and efficient equipment. We are very focused on investing to improve the reliability and performance of our container terminals for the benefit of our customers and we are already seeing results. In Dakar (Senegal) for example truck turnaround time has decreased from 8 hours to 45 minutes, in Dubai (UAE) it has reduced to 25 minutes and in Constanta (Romania) to 21 minutes. This allows a higher number of deliveries and pick ups each day and helps reduce congestion in port cities.

With the average life of a container port concession across the industry in excess of 30 years, DP World must take a long-term view in positioning the Company to respond to these trends.

Over the past five to six years DP World has invested more than $6 billion adding over 20 million TEU of new capacity and growing ahead of the market. Our investment has focused on ensuring we have the capacity to match customer needs by:

matching investment to changing trade lanes (such as in Africa, Turkey, Latin America);

matching investment for larger vessels (such as in London Gateway and Jebel Ali ); and

matching investment to emerging market growth (such as in India).

The investment we are making now will ensure we are the best positioned port operator to respond to these significant changes to the global supply chain. We are already one of the best placed terminal operators to handle these larger vessels across our portfolio. We handled 1,283 ultra-large container ships globally in 2012, 72% more than last year. This has driven higher utilisation across our portfolio and increased our market share.

By 2015 we expect to have approximately 85 million TEU of capacity globally, with 30% of our capacity in the Middle East and Africa, markets that are forecast to grow significantly. Our aim by 2020 is to be operating 100 million TEU of capacity, retaining our 10% market share and our 75% focus on emerging markets.

Uncertainty persists in the global economic outlook. Volumes on major trade routes such as Asia to Europe will come under stress during 2013 owing to a weak Eurozone economy. However, the DP World geographic network positions us effectively to take advantage of the strong intra-Asia trade and Middle East trades, the growing African market and the relatively stable markets of the Americas. We see plenty of opportunity to further expand our portfolio with an emphasis on emerging markets in Africa, Central and South America and Asia.