Good luck trying to move goods in and out of Palestine

At JoTrans at the Dead Sea in Jordan last month, Palestinian Minister of Transport Dr. Mashhour Abudaka began his speech insisting that he would avoid discussing politics. But he couldn’t help it. How could he sidestep the fact, after all, that Israel took Qalandia Airport (renamed Atarot Airport) in 1967, that there is a “total siege in Gaza Strip” and that Palestinians are not allowed to transfer goods from one truck to another?

“We don’t actually have door-to-door in Palestine,” he said. “We have back-to back.” This means that truck shipments of food and supplies entering Palestine from Israel, or Israel from Palestine, must be unloaded and reloaded onto a different truck at a back-to-back area.

Dr. Munib A. Younan, a Bishop with the Evangelical Lutheran Church in Jerusalem, in his newsletter, estimated that a shipment travelling from the West Bank town of Jenin in the North to Hebron in the South, also in the West Bank, would have to be unloaded and reloaded as many as 14 times. Abudaka also explained that Israel has set up at least 650 fixed blockades on the road.

Abudaka added that Yasser Arafat International Airport (formerly Gaza International Airport), is totally destroyed. “Even rehabilitating it will cost a lot of money.” The airport, which opened in 1998 with US$86 million of funding from Japan, Egypt, Saudi Arabia, Spain, Germany and Morocco, was shut down in 2001 after Israeli military forces destroyed the radar station and control tower. In January 2002, the same forces bulldozed the runway. Israel cited concerns that the airport allowed for the transport of threatening goods such as weapons. In 2007, bedouins began to set up tents on the property, and more recently Israelis have suggested setting up their own neighbourhoods there. The closest airport is currently El Arish International Airport in Egypt.

Gaza’s sea port is incapable of accepting containers, according to Abudaka. “There are plans for Gaza Port expansion on paper,” he explained. “But nothing has been implemented.” Israel and the Palestinian National Authority signed a deal to rebuild the port in September 2000, but not a quay has been laid.

Plans for redeveloping pieces of the historic Hejaz Railway which once ran to Haifa, as well, are stalled. The Ministry of Islamic Affairs, according to Abudaka, is holding onto the land. “If the Palestinian Authority were to take over ownership of the land, it would open it up for the Israelis to take over,” he says.

Jordan is moving ahead with its railway development plans … as soon as it can get the cash

“Time is very limited for us,” says Laith Dababneh, Director, Multi Transport Department for Jordan’s Ministry of Transport, on finding investors for Jordan’s rail projects. By mid-2012, Aqaba Development Corporation will have moved Aqaba Port’s phosphate terminal 18 kilometres from its current place, which means the railway which transfers phosphate from the El Abiad, Hassa and Shediah mines to the port (a distance between 140 and 290 kilometres) will also have to move.

“If we do not connect the railway to the new port, we will have 300 trucks entering Aqaba every day only for phosphates,” says Dababneh. When the port reaches its full capacity, this could reach up to 600 trucks, he adds.

The country has finalised its study to upgrade its current narrow gauge network to a standard gauge connecting its main cities. A North-South track would run from the Syrian border through Mafraq, Zarqa, Amman and Aqaba; and an East-West route would go from Irbid to Mafraq, Zarqa and the Iraqi border, with a branch to the Saudi border. Dababneh says the project will cost US$6 billion, including US$4 billion for construction and US$2 billion for rolling stock. He says the project will offer a 15 per cent economic rate of return, for example, in the jobs it provides and trade it encourages.

The financial rate of return for investors, he says, is between 12 and 16 per cent. “There should be a government subsidy for these projects,” he says. “Part of this subsidy is the cost of the land.”

“If the government will subsidise, we will not need to have a yearly revenue guarantee for investors,” he adds.

Dababneh says the government has purchased the land, and is looking to employ a transaction advisor to help it with a public-private partnership and build-operate-transfer tender. To speed up this process, he says the government will soon award a tender for preliminary design, environmental impact analysis and geotechnical studies for the project. This part could take between 10 and 12 months, he says. “We expect an investment tender in the second half of 2009.”

With the global economic downturn slowly making its way to the Middle East
region, the air freight industry is making cautious decisions for the future

If anyone knows air cargo, it is Daniel Fernandez, Secretary General of the International Air Cargo Association. And, although he remains positive, he seems to know tough times are ahead.

“If you’re looking for leading indicators of economic activity in the future, air cargo is a pretty good indicator,” he explained during an interview at the International Air Cargo Forum and Exposition in Kuala Lumpur last month. “Obviously things are a little slow right now, because the world economy has slowed down because of the credit crunch. Companies are pulling back because consumers are pulling back, and then air cargo starts to go down.”

Daniel Fernandez, Secretary General, International Air Cargo Association

Perhaps many in the industry could already see it coming. While regional carriers boasted 12.1 per cent growth, international freight traffic dropped by 0.8 per cent in June, the first decline the industry has seen since May 2005, according to Giovanni Bisignani, IATA Director General and CEO. “The airline sector is in trouble,” he warned at the time. “Losses this year could reach US$6.1 billion, more than wiping out the US$5.6 billion that airlines made in 2007. Falling demand and rising costs are re-shaping the industry.”

In the Middle East, many who are not yet feeling a drop in demand, seem certain that they will. “The impact will come by January or February,” says Mohy Shenashen with Egyptair Cargo. “We’re just expecting it, because we can feel it in Europe. Demand is going down.”

Des Vertannes, Executive Vice President Cargo, Etihad, was keeping positive at the IACA World Air Cargo Forum in Kuala Lumpur. “For Etihad, I am pleased to say that because we have so many projects in Abu Dhabi, the UAE and GCC and because we are part of everything on the Abu Dhabi 2030 Plan, we haven’t got time to show any compassion,” he said in an interview. “We’re too busy coping with what is going on in our world. At the moment, we look as if we are immune to what is going on in the rest of the world.”

Other carriers also aren’t so concerned. “Royal Jordanian is a small niche player, so we are not going to big volume markets like China,” says Ingo Roessler, Vice President Cargo, Royal Jordanian Airlines. “The biggest drops are in those places. Also, to and from the USA we have a small capacity on our passenger services. I would reckon that we will be able to fill that come hell or high water, because there is sustainable demand throughout the year to and from Jordan.”

Oil prices

Emirates is insisting its worst is over. The Dubai-based airline announced an 88 per cent drop in net profit to US$77 million for the six months of its current financial year ending last September 30 from US$643 million during the first half of 2007, but blamed the losses on high oil prices. “Crude oil prices averaged US$122 per barrel for the first six months of the financial year, up from an average of US$67 for the same period last year, whilst the differential between crude and aviation fuel was also up from an average of US$16 per barrel,” the company said in a statement.

The sudden drop in oil prices should solve the industry’s problems, right? Not necessarily. Airlines who hedged over the past year are still paying for the prices they hedged at, and cannot afford to bring their prices down as quickly as oil prices fell. An airline which leveraged fuel at US$100 when it was trading at US$140 in the summer, was screwed in October as oil prices fell to the US$50 range this month. “Some airlines have hedged at very high prices,” says Roessler. “The actual oil price is down and everyone keeps looking at the news saying, ‘You have to reduce the prices!’ But we’re still paying for the hedged prices. Thankfully RJ only hedged in a moderate way. But we still hedged and so did everyone else.”

“If you look at some of the major American carriers, we are talking about losses due to hedging in the area of half a billion dollars,” he continues. “This means that the airlines are not able to pass on more benefits to the market.”

The future

“The oil price is falling, but what we save in fuel, we lose in revenue,” IATA’s Bisignani told the crowd at the Annual General Meeting of the Arab Air Carriers Association (AACO) in Tunis. “This industry will lose US$5.2 billion this year.”

“Even the Middle East is not immune,” he added. “The region’s carriers posted 18.1 per cent traffic growth in 2007. This year, August growth plummeted to 4.3 per cent. Profits of Middle East carriers will fall from US$300 million in 2007 to US$200 million this year. Only a handful of carriers will be profitable, while the majority bleed red ink. The region’s fleet is set to double to 1,300 aircraft over the next decade as we enter a period of global economic uncertainty. The challenge of matching capacity to demand will be difficult.”

He also issued a harsh warning to country’s wishing to privatise their airports, for example Jordan, Saudi Arabia and Egypt who have given concessions to run their airports to management consortiums. “Just look at what happened in Quito. The concessionaire ignored ICAO principles and raised rates by 128 per cent to pre-finance airport construction. You don’t want this type of monopoly abuse here. As you privatise, strong independent regulations to enforce ICAO principles and delivering cost-efficiency are a must.”

Bisignani called for MENA governments to offer greater commercial freedoms for air transport. “Airlines need to operate like any other business – with a level playing fieldand the freedom to access markets and global capital,” he said. “In MENA, we have seen pockets of progress, including open skies agreements and domestic liberalisation. Now the region’s governments must think bigger and act faster.”

Yet Bisignani’s speech left room for hope. “The industry crisis highlights the need for change,” added Bisignani. “MENA has some great advantages – strong oil economies, top notch infrastructure and fuel-efficient fleets. The crisis is a turning point. We must deliver significant change with efficiency and commercial freedoms. If we can do that, I am confident that we can weather this perfect storm and emerge as a stronger and more profitable industry.”

Others seem hopeful for the long run as well. Boeing, in its World Air Cargo Forecast 2008/2009 has said that world air cargo growth will expand at a 5.8 per cent annual rate over the next two decades, with worldwide air freight traffic tripling through 2027.

“Our research tells us that long-term economic growth, freighter fleet renewal and moderating jet fuel prices will stimulate air cargo traffic growth,” said Randy Tinseth, Vice President of Marketing at Boeing Commercial Airplanes. “These positive prospects will prevail despite the industry’s concerns about our current economic challenges. World GDP is projected to average just higher than three per cent during the next 20 years.”

Fernandez agreed. “Things are slow now, but there is a difference between a structural change and what we would call a cyclical change,” he explained. “In other words, there are things that fundamentally change the industry, like 9/11, where from that point on we had to take on the additional burden of security. Fundamentally, that changed the industry; whereas economic downturns are cyclical. This is not an industry in retreat.”

It may be a long and roundabout route, but it gets the job done and clients are happy. That’s the operating policy of shipping companies operating in Saudi Arabia, where customs bureaucracy is a thicket best avoided when possible.

Transport and logistics firms with experience in the region know that importing goods into Saudi Arabia often requires unorthodox measures. An executive at one international courier company describes the route he often uses for shipments destined for the kingdom’s capital, Riyadh: First, the cargo lands at Dubai airport, where they are unloaded and packed onto trucks destined for the Saudi border. As Dubai is a major logistics hub for the region, it makes sense that kingdom-bound merchandise would make its first touchdown on the Arabian Peninsula here, rather than Riyadh, for instance.

Then, at the UAE-Saudi border crossing at Gweifat, east of Abu Dhabi, the truck is sealed. But instead of heading toward Riyadh, the truck’s final destination, the driver takes it through Saudi Arabia up the coast to Bahrain, where it crosses into the island kingdom and does an immediate U-turn. The truck then enters Saudi Arabia again, going through customs clearance at the causeway on Saudi-Bahraini border – where clearance takes a couple of hours – before finally driving to Riyadh.

Why such a circuitous path? Those with less experience in the Saudi transport sector might well be inclined to make the direct trip from Dubai and clear the goods upon arrival at Riyadh’s dry port. They are likely to wait an extra two days or more while the goods wait to clear customs. The simple reason, according to both company executives and government officials, is that customs officials in Riyadh are notoriously slow.

“If it’s coming into Riyadh, it requires a completely different set of documents than if it comes in through Bahrain, and the same for Jeddah,” says one of the managers at the company, who spoke only on condition of anonymity. “So basically, there is no standard for clearance throughout the country. They have the same rules, in general, but it also depends on the customs manager who is available in that port. This is why we have decided to bring 95 per cent of our goods into the country through Bahrain. They are so strict on the documents here in Riyadh, while at the causeway, things are going much easier. I find it strange, to be honest. They have the same rules all over. If you are going to be strict, be strict all over.”

For goods that require clearance from the Ministry of Information, such as books, it gets even worse. At the causeway, there is an official from the ministry who is able to give approvals on the spot. “He gives you an approval directly – yes, this book is allowed, you can go ahead and enter,” says the manager. Not so at the port in the country’s capital – which, ironically, is physically closer to the Ministry of Information – where officials can sometimes keep the books at the airport for up to two weeks pending approval.

It might sound like a plotline from a novel by Franz Kafka, but executives say that is simply the nature of doing business in the kingdom. With a population of up to 28 million, and a relatively affluent one at that, Saudi Arabia is the region’s largest and most important economy. As tales such as these demonstrate, it is also the most difficult one to break into, and a lack of familiarity to the way things work here can lead to a brick wall of bureaucratic delays.

We’re working on it Due to the sensitivity of the subject, none of the company officials interviewed for this article were willing to talk openly about the inconsistent application of Saudi customs laws. Even one government official, who admitted that the relevant authorities are aware of the problem and are working toward a solution, was reluctant to speak publicly about what might be seen as a laudable effort to streamline the customs regime.

Reform-minded officials in Saudi Arabia aim not only to improve the clearance process, but to build the country into a logistics hub for the region. To do so, it has brought in many Saudis who used to work in the private sector to promote investment in the kingdom’s transport and logistics industry. “I’m a logistics background guy, and to bring products into Saudi I used to do that myself,” says one government official when confronted with the story of the roundabout route to Riyadh.

Inconsistency is a hurdle that needs to be overcome, the official admitted, and both the customs bureau and the Ministry of Finance recognise the problem. These agencies are working in conjunction with the Saudi Arabian General Investment Authority (SAGIA) to study the problem and come up with solutions in an attempt to “modernise the process,” the official says.

As though to emphasise the point, he described an even unlikelier route for goods entering the country: the official, when he worked in the private sector, would often bring Jeddahbound goods into Jeddah, but rather than clearing the goods at the port, he would haul them overland Riyadh – over 600 kilometres – to clear them in the capital and send them back to Jeddah.

Accounts from the private sector concur that slow as things may be at Riyadh dry port, they are even slower in Jeddah. “You can see that there is a complete difference in the approach to implementing the same body of law from one location to another,” says the government official. “Is it the same product? Yes. Is it the same country? Yes. Are you going through the same law? Yes. Different execution.”

The government plans to tackle the problem by using King Abdullah Economic City(KAEC), a mega-development that will begin its initial phase operations next year on the Red Sea coast in Rabigh, as a pilot for a streamlined customs process. Under the kingdom’s scheme for transport and logistics development, authorities will then roll out an improved regime to the rest of the country, starting with the other economic cities in the pipeline. The hope is that this will demonstrate to the rest of the customs community that greater efficiency can result in higher volumes – and therefore more revenue for the state.

The port at KAEC is now scheduled to go online in 2011, and crucially, the port will be supervised by SAGIA, which is spearheading the drive to make the country’s bureaucratic framework friendlier to private investors. “Customs are going to be under the supervision of SAGIA, which will ensure that we are top class, efficient and serving the private sector,” says Abdullah M. Hameedadin, Deputy Governor for Economic Cities at the authority.

KAEC will ideally be a model of efficiency, he adds. With a total of six economic cities planned, officials are envisioning an expansion of the improved customs regime. “It is going to the strongest argument,” says Hameedadin. “Because you know what’s going to happen? Everybody will move to the economic cities after that. People will say, ‘Why should I stay using Jeddah port, or wherever?’”

This approach doesn’t impress everybody, however. “There has to be an improvement, but you don’t necessarily create islands of excellence when you need to make the whole country perform better in the area of customs clearance,” says John Sfakianakis, Chief Economist at Riyadh-based SABB bank, formerly Saudi British Bank. “The rest of the country might be left out.”

Geography lessons Going on geography alone, few can doubt that Saudi Arabia should be the transport hub for the Arabian Peninsula. It has the central location, the largest land mass and the longest coastline. Why, then has it been overtaken by Dubai and Bahrain? “I know that Doha Airport and Dubai Airport are handling a greater volume of cargo than all the airports of Saudi Arabia combined – all 33 of them,” says the operations director for another logistics company based in Riyadh. “And most of the shipments landing in these airports are actually bound for Saudi Arabia."

There are several reasons for this. First, as even government officials are now ready to admit, airport development has lagged in the kingdom. With their greater capacity, it is simply easier to fly into and out of the airports in Dubai and Doha. At King Khalid International Airport in Riyadh, a project financed by the oil boom of the 1970s, one entire terminal has never been fully fitted out since the airport opened in 1983.

With help from the private sector, the government in Riyadh is now embarking on a major effort to upgrade the airports, starting with the Hajj Terminal at King Abdulaziz International Airport in Jeddah. In a US$250 million (about SAR937 million) public private partnership, the government selecteda joint venture between local Binladin Group construction and France’s Aéroports de Paris Management to refurbish the terminal, using a 20-year BOT (build, operate, transfer) funding agreement whereby the private sector investment is recouped by managing the airport for a set period. The government expects to pursue similar upgrades to the other main airports in the country.

Doha and Dubai are also major centres for bonded shipping. Cargo facilities at these ports include secure zones where goods for re-export can be unloaded and reloaded, be it from plane to plane or from plane to lorry, without undergoing customs checks. Bonded areas also exist in all three major ports in Saudi Arabia – Damman, Jeddah, and Riyadh dry port – but service is limited and suffers from the same inconsistent execution that plagues the customs law. Moreover, the service suffers from poor marketing. One Riyadh-based transport company executive says he found about it from a client. The government official admitted this was the case, and says that as with the customs law, the government plans to roll out the bonded shipping services to their fullest extent in the new economic cities.

Saudi transport firms also have the eyes set on Electronic Data Interchange (EDI), a system allowing for pre-clearance of goods. In effect, EDI will plug the IT systems of private transportation companies directly into the government’s customs clearance system. An electronic manifest would be sent before the shipment even arrives, and officials would, ideally, pre-clear those shipments that are not suspect. After the plane lands or the ship docks, the goods then sail through customs with minimal hassle. Such a system has been under discussion for over a year now, and many say it could be up to one more year before it gets off the ground. “I would say only the groundwork has been done,” says one executive.

These projects, all of which are designed to bring Saudi customs clearance out of the bureaucratic boon docks and into the 21st century, are part and parcel with the kingdom’s overall plan to shape up the transport and logistics sector. This includes ongoing improvement to the road networks, which private operators say has been impressive; airport upgrades; the development of the economic cities, including the development of the northern city of Hail as a logistics hub; and, significantly, the country’s massive investment in railways. The railway is seen as key to internal movement, as thousands of kilometres of tracks are laid around the kingdom, criss crossing the desert in a network that will ease road congestion and reduce transit time by two to three days.

With all these projects, the Riyadh government aims to bring the transport and logistics business closer to the end users. “We recognise that if we fix ourselves internally, the businessmen will recognise that it will be cheaper for him to take (the logistics business) to where his consumers sit,” says the government official.

Private operators agree the Saudi logistics sector has huge potential, if only the government is able to cut down on the reams of paperwork often required to move cargo into the kingdom. “Saudi Arabia could end up playing the role of leader,” says one manager. The government has shown a willingness to change. The focus is now on the execution.

In the world of money laundering, anonymity and a trusted supply chain remain essential

With a reputation as a global hub for the gold, diamond and property trade, Dubai has historically held a reputation as a haven for illicit money laundering. Each year, with billions of dollars flowing in and out, it remains difficult to trace how and where such funds are ascertained. In trying to clean up its image, the Dubai government has recently introduced stricter measures to clamp down on the shadowy cash trade, but the task has proved formidable.

Though as is often the case, the issue of global currency transactions and their respective legality is by no means black and white. While some move currency to legalise their clients’ unaccounted money, others use the money for trading, letters of credit and money laundering. Millions of dollars are known to be transferred electronically among operators in Singapore, Dubai and Hong Kong for these purposes, lawfully and unlawfully.

As a means of making money appear legal, embezzlers, fraudsters, drug traders and tax dodgers are fully aware of the logistical, as well as financial advantages that Dubai has to offer. Tales abound of Russian and Chinese ships coming into port, unloading shrinkwrapped pallets of greenbacks, with few questions being asked.

“‘Money launderers are no longer the criminals they used to be,” says Norman Inskter, the former president of Interpol. “Today they are astute business people and use the banking system as a way of moving money. When you look out at this sea of construction, you would like to know who owns it all.”

According to Eckart Woertz, a UAE based economist, the initial thirst for development gave local authorities little time to verify all the inflow of capital, which subsequently encouraged money laundering. “But, after achieving remarkable success in a short period of time, they are now realising the need to adopt corrective steps.”

One measure expected to have an impact is the UAE Central Bank recently ordering financial institutions to register details of anyone transferring as little as AED 2,000. At minimum, this will establish a paper trail for authorities to reference when looking into someone’s transaction history.

Last month, the Dubai Islamic Bank announced it purchased integrated antimoney laundering software from Norkom Technologies, with plans to introduce it across the bank’s operations in UAE and Pakistan. The DIB claims the software will “monitor customer transactions and identify suspicious behaviour”.

“The initiative demonstrates DIB’s commitment to improve its defences against money laundering and terrorist financing,” says Waheed Rathore, Head of Group Compliance at Dubai Islamic Bank. “Sustainable growth can only be achieved by maintaining high standards of regulatory compliance.”

In addition to the banks proactive solutions, the Dubai Multi Commodities Centre (DMCC) has pledged to fight against money laundering by ensuring transparent business in gems and other precious commodities.

Undoubtedly, one of the appeals for launderers in choosing Dubai remains its liberal free zone concept. With enticing tax exemptions and 100 per cent freehold ownerships, the areas are perceived by some as safe havens for illicit funds. However, Raymond Termini of Patton Boggs LLP, disagrees and feels established laws are coming on par with the US and Great Britain. Termini offers some advice about the current policies in place, “Within the UAE, there are four federal laws relating to money laundering and counter-terrorism, dating back to 1987,” says Termini. “Both the Ministry of Economy and Commerce and the Central Bank issue circulars on the subject, and the Central Bank issues Directives.”

“Within the DIFC, the Dubai Financial Services Authority (DFSA) has produced its own anti-money laundering rules. The DFSA is the independent regulator that governs the DIFC’s financial services companies, and also ancillary service providers such as law firms,” says Termini.

“Companies must appoint a Money Laundering Reporting Officer (MLRO) and a deputy to act in their absence. The regulations require that companies carry out due diligence checks on potential customers or beneficial owners of funds. They are required to complete a comprehensive customer profile, verify their integrity and locate the source of any funds to be deposited. This duty falls on both company employees and the MLRO.”

“For financial service companies, evidence obtained under the identification procedure must be kept for at least six years after the customers’ account is closed. Other authorised firms, such as law firms, must keep their identification evidence for at least six years after the consummation of any transaction they advised on,” says Termini.

Interestingly, says Termini, if someone is investigated for fraudulent activity, he or she is not allowed to know about it. “No firm or any of its employees may inform a suspected individual that their transactions are being scrutinised for money laundering. Failure to adhere to this policy may result in a fine or imprisonment.”

However, not all smuggled money whether laundered or squandered, has to pass through the mainstream western banking system. Organised crime in the Middle East and South Asia, have long since relied on informal money transfer networks, often between trusted third parties. This process, known as hawala dates back centuries and is considered by the some the basis of the modern day 3PL model.

The extensive use of trusted connections such as family relationships or regional affiliates, are the distinguishing components of the hawala system. Often referred to as ‘underground banking the system makes minimal use of any sort of negotiable instrument or record keeping. Transfers of money take place based on communications between members of a network of hawaladars and hawala dealers. Thus, money is transferred internationally, without actually moving it from one place to another.

Largely used by people working abroad for sending money home to relatives who may not have a bank account, hawala is often misused by those who seek to evade taxes, engage in money-laundering or hide the details regarding the source of funds or their owners. As the process leaves no paper trail (because there are no accounts, cheques, signatures or ATMs involved), hawala is essential to launderers who wish to remain anonymous. However, as hawala works faster and cheaper than conventional systems and reaches places where even post offices do not exist, many low-income workers in the Gulf continue to use it to make their remittances.

The UAE Central bank remains fully aware of the futility of attempting to ban the hawala system, however it says measures are underway to increase transparency. “The system can be used by those who have legitimate reasons for doing so and those who seek to abuse the system for illegal transactions will be identified and stopped by the authorities,” the bank said.

Woertz agrees, and says the efforts to crack down on hawala operators alone will not help. “Today’s banking system has enough loopholes for manipulators to channel unaccounted money and indulge in money-laundering activities,” he added, implying that the “practice will never be rooted out completely”.

A perpetual topic of discussion, money seems to be weighing more and more on peoples’ minds lately. Is the pegging of many Middle Eastern currencies to the dollar going to signal doom?

These days, in such fiscally turbulent times, the topic on everyone’s mind seems to be money. With the recent US$700 billion government bailout in the United States, many in the GCC have turned their attention towards the region’s monetary policies.

As the UAE dirham remains pegged to the dollar, many are concerned the repercussions of such American actions will inevitably reach the shores of Abu Dhabi and the UAE Central Bank. Though the UAE maintains sovereignty over its own monetary system, the Central Bank has had to answer many questions as of late. Most notably, what are we doing to reinforce stability in the money markets?

Consider that inflation has been hitting record or near-record peaks across the world’s biggest oil-exporting region, where most states peg their currencies to the ailing US dollar, driving up import costs. Dollar pegs have forced Gulf states to track US interest rate cuts even though their economies are booming on a more than six fold increase in oil prices in as many years.

Consequently, money supply in the UAE has maintained “rapid growth” over the past 24 months, despite Central Bank measures to curb its increase by borrowing from local banks and investing the funds abroad. Bankers attribute such rapid growth to a sharp rise in private capital inflow, a fiscal boom in the country and higher public spending on development and other projects. The surge in money supply, which is normally associated with inflation, occurred despite the Central Bank’s measures to stem liquidity growth by sharply boosting the issue of certificates of deposits (CDs), as well as investing the borrowed funds in banks abroad.

According to published reports, the Central Bank borrowed more than AED170 billion (almost US$46.3 billion) from the country’s 24 national banks and 28 foreign lenders in 2007. The borrowing, mostly through CDs, has boosted the combined deposits of those banks with the Central Bank to a record AED231 billion (almost US$63 billion) at the end of 2007 from AED58.4 billion (almost US$16 billion) at the end of 2006. Such a drastic influx of capital has been accompanied by only further escalations in deposits throughout 2008.

As a result, the surge in UAE banks’ combined assets to a record AED1.42 trillion (almost US$387 trillion) at the end of June 2008, has catapulted the UAE to the position of the largest Arab banking sector by overtaking Saudi Arabia. The UAE also ranked first in terms of capital and deposits. The inflow of such investments boosted the Central Bank’s net profits by 42 per cent to AED3.778 billion (more than US$1 billion) in 2007 from nearly AED2.654 billion (more than US$722 million) in 2006. However, those measures have had no impact on domestic liquidity, as curbing money supply growth remains the only fiscal tool available to the Central Bank to tackle inflation.

Confronting the record-high inflation, Central Bank governors from the six-member GCC have been laying out a road map to establish a common monetary institution before 2010. GCC central bankers have agreed to create the nucleus of a joint central bank next year in a major step forward for monetary union but signalled that a new common currency would not be in circulation by the 2010 date.

This September, finance ministers of the GCC met in Jeddah and approved the proposals to establish a monetary council and a draft charter for a monetary union, bringing the six member group, including Saudi Arabia, Qatar, Bahrain, Oman, Kuwait and the UAE, a step closer to launching their single currency.

“The endorsement of the proposals constitutes a major step toward adopting a long-sought single currency,” said Abdul Rahman Al-Attiyah, GCC Secretary-General.

Youssef Kamal, Qatari Finance Minister, who chaired the meeting, confirmed the agreement, “We have asked the central bank governors to complete the requirements for the single currency in future meetings,” he said.

The Qatari minister also downplayed the effect of the region’s currency pegs to the US dollar in increasing inflation in the member countries. He hoped that the improvement in dollar’s exchange rate and fall in shipping costs would bring down inflation.

Perhaps most importantly, GCC central bank governors said last month they saw little systematic risk from the US financial crisis as their exposure to troubled US banks and subprime assets was limited.

“As far as the Gulf region is concerned and especially GCC countries, they are very far from these turbulences that are affecting global markets. Because they don’t have any connection with what has happened,” Kamal said, adding that the GCC economies remain strong despite the recent global developments.

But Dominique Strauss-Kahn, IMF Director General, who attended the Jeddah meeting, said the brunt of the financial crisis may still lie ahead and could weigh on the world economy. However, the financial crisis remains as just one of many obstacles that must be dealt with during the progressive steps to a uniform currency.

“Overcoming the current inflationary pressures, developing a clear vision of the powers of the future common central bank, choosing an exchange regime of the common currency and harmonising financial regulation will be critical to this process,” says the IMF chief.

The ministers are scheduled to meet again on October 26 in Muscat to continue negotiations as well as discuss the location of the monetary council. “Achieving a monetary union will be a major challenge as much remains to be done to enable the creation of a common currency,” says Strauss-Kahn.

From before the time of the ancient Egyptians till date, gold has remained a measure of value. Ever wondered, then, what the supply chain of this most precious metal is like?

Did you know that the majority of the gold which is refined annually around the world is recycled material as opposed to newly mined material? In simple words, you probably possess something Nefertiti owned.

“Gold stays around forever,” says Corey Keller, General Manager, Al Ghurair Giga Gold Refinery. “It’s there on the periodic table along with silver, platinum and palladium. It’s not going anywhere as it’s always held value and people are careful to maintain it. It might get found at the bottom of a pyramid, but regardless of where it’s found, once it is, off it goes into the recycling chain,” he says. “If it was found once, it’s probably still in the market.”

Corey Keller, General Manager, Al Ghurair Giga Gold Refinery

It is a wonder then why prices are so high these days if so much gold is circulating in the market with more being mined daily. Supply surely has to be overshadowing demand. “About four to five years ago, the gold market was responding to the basic principles of supply and demand. As gold mines were mining large quantities, supply was more than demand hence prices were low,” says Keller.

In the last year or so, however, exchange traded funds have allowed more people to buy the physical metal easily. Before one would have to visit a gold refinery or a bank to purchase gold and then find a place to store it. And if you wanted to sell, you’d have to do so only at a discount to the banks or the refineries. Other options such as mutual finds were more profitable to invest in. Now, though, the exchange traded fund works much like a mutual fund, where you just pick up the phone and a trader will buy the gold for you, store it, sell it when you want to and send you the money with the profit or charge you for the loss. This easy access to the gold market has sent prices through the roof.

The entrance to the refinery

The supply chain The supply chain of gold essentially starts when someone owns a lease for a piece of ground which has gold in it. The owner of the land then invests hundreds of millions of dollars to put an infrastructure in place to mine the gold.

There are two places where gold is found: Usually, either a historic river bed where you dig up the dirt and gold comes up in the form of little flakes or nuggets, or mountains of rock with gold in it. These mountains are run through a cyanide leach which picks up the gold out of the rocks and the rocks are returned where they were found, minus the gold. These are the two kinds of gold that show up in gold bars.

After gold is found in mines, some mine owners melt the gold on site to determine the quality and value by weight and the metal’s percentage of gold. Alluvial gold from a river bed usually comes out looking like regular gold – nuggets or flakes. Those flakes or nuggets are then sent for a test to determine quality which is fairly consistent all through the river bed.

Transportation How the gold is transported from the mines depends largely on the size of the mines. Most of the huge, international mining giants who are present in places like Ghana, West Africa, have their own helicopter service from the mine site to Accra, the capital city, where the international airport is located. They also use the services of international security freight forwarding companies like Brinks or G4S who use armoured vehicles to transport the gold.

At the airport, the gold is loaded on to a commercial or private plane if the owner has delivered it by his own helicopter. If it has been assigned to Brinks or G4S, from the point the security company is signed off, they ensure completely the safety of the material to the doorstep of the refinery. In either case, the gold is insured for its value before being sent out anywhere. Without the security company the owner has corporate insurance protect the gold and in case of the security company, they always provide the kind of solid insurance policy a shipment of such high value needs. “Transportation and insurance is where all the money is made in the gold business,” says Keller.

A furnace inside the refinery

Refining “It doesn’t matter what form it shows up in at our doorstep,” continues Keller, “because it all goes into the melt sample area.” This is a place in the refinery the customer can come into as well. He is allowed to witness the melt and sample of the material. It’s basically where the gold is cleaned up from the dust and melted and poured into a nice, clean bar. A sample is sent to the lab and another sample is given to the customer to get it checked out in an independent laboratory. Values are then cross-checked. Once the client is satisfied of the accuracy, the refinery purchases the material from the client.

Once the gold has been acquired, it is converted by the refinery from an unusable metal to one that is usable and of investment grade, which is as close as it can get to liquidity or money. Customers of the refinery are anyone who wants the gold bar for investment purposes (to sit on till the price increases) or industrial purposes. Categories that fall in the industrial purpose of gold are: jewelers who melt the gold again and bring it down to 22 carat, 18 carat or 14 carat gold, depending on what kind of jewellery they are planning to make; as well as manufacturers of satellites or computers.

Biggest market Africa, particularly South Africa has the largest gold refineries in the world, which tend to be government run operations. South Africa is on the top of the list for the amount of gold being mined. Canada, too, is on the list for mining as well as China and Russia.

In terms of recycling jewellery, India is by far the biggest market. Keller says, “Going by gold sales, Dubai is somewhere near the top of the list. The Dubai Multi Commodities Centre (DMCC) – a regulatory authority we work under – suggests that 10 to 15 per cent of the annual volume of the metal is run through Dubai, so it’s certainly becoming a big player.”

Why is Singapore held as the benchmark for the logistics industry?

Walking around Singapore, one is unable to escape the observations
most visitors and investors have of the island nation. Singapore is clean. Orderly. Diverse. Startlingly efficient. Modern and highly organised. In the early days of this Asian metropolis, its leaders sought to model the country into the “Switzerland of the East”. Most things, including the governance of the country, run like clockwork. Vehicles that enter city limits at specific times automatically pay for road tolls through a small wireless unit onboard. Singapore’s air-conditioned, clinically clean food courts offer regional and inter- Practically national cuisine in gleaming malls. The population of 4.5 million people never demonstrates. When things are said to happen — they do. ‘Almost perfect’ for business at least.

In too many ways the ambitious young nation resembles the overachieving students its young aspire to be, chasing perfection, top grades and international accolades relentlessly. To be the best. To be recognised. Recognised, they are – Singapore has an enviable business report card that tells the story of how in just 43 short years of nationhood the country has become the gold standard for logistics and business, not only in Asia, but in the world. It’s been touted as the ‘Second most competitive economy in the world’, after the United States, ‘Most Cost-Competitive Place for Business’, trouncing developed western countries and Japan by a long shot. It’s also been proclaimed to be the ‘World’s easiest place to do business’ and have the ‘Best quality for port infrastructure’ not to mention the ‘Best seaport in Asia’ and many more.

The Gold Standard DHL’s John Allan, Global CEO, attributes Singapore’s winning formula to “worldrenowned efficiency, extensive connectivity, excellent infrastructure and great human capital.”

The cluster of air cargo facilities in the country’s eastern end, in and around the world-famous Changi Airport, is home to an integrated cargo village comprising nine airfreight terminals, two dedicated express and courier centres including DHL’s hub, and a cargo megaplex. The area within the cargo village is a free trade zone so all transshipment can be broken down and reconsolidated without needing to clear customs formalities.

As an example of how Singapore is dedicated to continue producing the conducive business environment and infrastructure, the cargo megaplex was built with the aim of easing cargo flow and optimising efficiency — the facility’s components were specially designed with the aim of reducing waiting time and preventing traffic congestion.

Senior Minister for Trade and Industry, S. Iswaran, confirms this dedication, pointing to Singapore being “home to over 7,000 MNCs due to its strategic position within the
Asia-Pacific and our conducive business environment”.

Yet a conducive environment is only half the story. Highly developed, the tiny republic is among the world’s most affluent with a per capita GDP of US$35,163. Its literate, educated and skilled workforce uses English as the language of business, in spite of three other ethnic tongues being official languages. In a region known for corrupt politicians and unstable governments, Singapore’s leaders are said to possess longevity and long term vision. That many of its leaders have experience in the private sector and other corporations explains the pro-business approach in all industry. Free trade agreements help too, with a large number of countries including Australia, the United States, Switzerland, Norway, Iceland, Japan, Korea, India, Jordan, Peru, Panama, New Zealand, Brunei, Chile and more on the way.

Singapore’s skyline at night

Logistics plays a special role in the country. Strategically situated, it is well placed for regional and international business with China, Japan and Korea to the east, India and the Middle East to the west, connected to the Southeast Asian peninsula and Indonesia and Australia to the south. Its East-West location accounts for why it has been a flourishing entrepôt centre and port for most of its known history, when ships coming from the West towards China and India would call at the port of Singapore for supplies. Today, Singapore is the world’s busiest port and a major aviation hub with thousands of links to every part of the world. With robust infrastructure, comprehensive facilities and services supporting its ports and airports, and a good road system, logistics is a key component of the economy.

Singapore Merlion

Best in the class and relentless Despite dominance in several logistical areas, Singapore is not taking anything for granted. Already the world’s busiest transshipment hub, largest refrigerated reefer port and the leading bunkering port, port authorities acknowledge the need to stay competitive, especially since higher volumes are expected. The port, which occupies a large part of the southern and western coast, is investing heavily in expanding its comprehensive range of facilities and services. Port operator PSA Singapore spent S$5 billion (US$3.48 billion) over the last 10 years developing facilities across two key phases. When completed in 2009, annual container capacity across four terminals
is expected to reach 35 million boxes. Phase Three and Four, to be carried out to the tune of S$2 billion (US$1.39 billion), are already underway to expand annual capacity up by 40 per cent by 2013. Though the newest terminal of Changi Airport, Terminal Three, recently opened in January 2008 plans are already underway to build Terminal Four, and give the multi-million dollar upgrades and facelifts to terminals two and three.

Singapore was an early adopter of information communication technology (ICT) for business, and has not hesitated to invest in ICT for the logistics industry. As it stands, the Infocomm Development Authority of Singapore (IDA) and the Maritime and Port Authority of Singapore jointly launched an ambitious S$12 million (US$8.36 million). “Infocomm@ SeaPort” programme aimed at enhancing connectivity and communications for the seaport community, promoting operational and service excellence and increasing opportunities to attract new business. Wireless broadband is now available to ships within 15 kilometres of Singapore’s southern coastline to allow real time communication with customers and business partners. Earlier initiatives implemented, such as the Radio Frequency Identification (RFID), have also borne fruit for its partners. A nation-wide platform, TradeNet, provides an electronic data interchange system for the public and private sectors to exchange trade messages and other information, in addition to a suite of e-Services for the logistics community such as import, export and transshipment documentation procedures.

Things happen quickly in Singapore. Companies can be set up in a matter of days. All kinds of applications and permits, even police reports, can be filed and paid for online. These facilities allow businessmen to apply for employment passes, double tax deductions and even register companies and factories. There is even an online system in place to allow port customers to place pilot orders, tug orders and orders for waterboats.

Challenges to the throne Neighbours are not letting Singapore rest easy. Booming Shanghai has already overtaken powerhouse Hong Kong to become the world’s second largest container port next to Singapore. The Thai Canal plan hopes to emulate the Panama and Suez Canals by cutting across the Isthmus of Kra. While far from being an immediate feasibility, the idea is thrown around every couple of years. If it ever materialises Singapore stands to lose the strategic importance she has held for centuries. Its closest neighbour, Malaysia, whom it was part of very briefly in the 1960s, has launched more than one attempt to challenge Singapore.

The most audacious challenge thus far has been the port at Tanjung Pelepas, situated at a location close to Singapore in the nearest Malaysian state of Johor, and offering cheaper services and facilities. Maersk, which owns 30 per cent equity in the port’s holding company, moved all its operations from Singapore to Tanjung Pelepas in 2000, which was a crushing loss for Singapore, as Maersk was then the largest shipping company there and in the world. This was followed soon after by the departure of Taiwanese giant Evergreen, in 2002. Tanjung Pelapas’ modest size does not yet come close to challenging Singapore’s dominance, but has all the signs that point towards Malaysia’s dedication to challenging her smaller, richer neighbour. Not only is the port at Tanjung Pelapas undergoing continued expansion, there is also an ambitious plan at the federal level aiming to develop Johor into a trade, investment and logistics centre, amongst other things, under the Iskandar project.

Whether Malaysia, Thailand, Shanghai or Hong Kong can overtake Singapore’s ports and airports remains to be seen, but Singapore remains always one step ahead of the competition and is not waiting to find out. For every berth a competitor builds, Singapore will build more. For every facility that a competitor presents as equal and cost-effective compared to Singapore’s, Singapore will point to its comprehensive suite of other services that add value and increase efficiency. With a resilient, focused government leading the charge with business leaders, demonstrated commitment to securing the future and a much lauded workforce and infrastructure, Singapore’s position as the gold standard in logistics is safe, for now.

Streamlining the crude supply chain is one way to help bring down fuel costs.

History will judge the impact of crude oil as unparalleled. Wars are fought over it. Petrodollars are derived from it. Countries lucky enough to possess it are maintained by its existence. In fact, since 1971, oil has sustained the buoyancy of the US dollar. With OPEC pricing oil in dollars, after all, countries are obligated to maintain dollar reserves to purchase petroleum, thus reinforcing the greenback’s strength and demand. In a sense, the gold standard has stepped aside for the oil standard.

In an operational sense, crude oil has many functions. Asphalt roads, plastics, polymers, and petrochemicals all derive from the crude stuff. However the most valuable derivative is gasoline. Consumed daily by motorists around the world, demand remains at an all-time high. Factor in the exponential growth of countries like China and India, and their unquenching thirst for black gold, and you begin to understand just how immersed in petrol the global economy has become. By all accounts, the world needs oil.

It is no coincidence then that the distribution and refinement industries of crude are raking in record profits. Exxon Mobil, Halliburton, BP and Shell are all acknowledging billions in newfound revenues. Whether you perceive their intentions as good or bad, their roles within the economy are vital.

Therefore, it should come as no surprise that oil refineries remain an essential staple in our modern society. Often going unnoticed, their role in the oil-petrol supply chain is a crucial one. Costing billions of dollars to construct and millions more to maintain and operate, their sole intention is to refine and produce on a massive scale. Running 365 days a year, large refineries can be complex operations, often employing thousands of people. Their jobs are thankless ones, in that few consider just where that gasoline they’re pumping into their cars comes from, or how it got to the pumping station.

So how do they do it?

There are three basic steps common to all refining operations, regardless of a refinement facility’s size or complexity. First, the separation process separates crude oil into various chemical components. Next, the conversion process goes a step further by breaking these chemicals down into molecules called hydrocarbons. Lastly, the treatment process combines and transforms hydrocarbon molecules and other chemical additives, to create a host of new products, notably gasoline.

The distribution of crude oil and its derivatives remains diverse. From tankers to pipelines to trains to trucks, each has a defined role within the petrol supply chain. Tankers often carry the oil from exporting country to overseas importing countries.

Pipelines remain the safest, most efficient and economic way of transporting the oil, often long distances. Made from steel or plastic tubes with an inner diametre typically 10 to 120 centimetres, most are buried underground at a depth of one to two metres. Pump stations placed along the pipeline every 80 to 100 kilometres keep the oil flowing at a rate of one to six metres per second.

When transporting crude through pipelines, especially in colder climates, wax has a tendency to buildup, causing flow restrictions. Often pipeline inspection gauges (pigs) will be launched from station to station to clean any wax deposits that may have accumulated inside.

Trains are used to transport the refined crude to major distribution hubs. More efficient than trucks, train tankers have been in operation since the early 1900s. Today, oil transport remains a significant portion of rail freighters’ profits, however, more efficient pipelines are emerging as a cheaper alternative.

Terminals play an important role in oil transportation as well. These facilities allow for the collection of oil and its introduction into long distance pipelines. Terminals can receive shipments via truck or rail, storing the oil in high volumes. Batches of 80,000 barrels each are assembled before they are introduced into the long distance pipelines. Some terminals are also capable of receiving shipments from feeder pipelines. Here again, storage is important and some terminal operators provide leased storage in tank farms where amounts of over one million barrels of crude can be stockpiled, either for later shipment or as a hedge against price fluctuations.

Because of slow production, coupled with the long lead times for the industry, oil supply chain movements are crucial to maintaining stability in the market. Like all industries, crude transportation must be dependable, streamlined and perhaps most importantly, cost efficient.

The Oil Refining Process

Separation

Separation, or distillation, begins by pumping crude oil into pipes running through hot furnaces and heating the oil to vaporise it. The resulting vapours and liquids are then discharged into distillation towers, the tall narrow columns that give refineries their distinctive skyline.

During this process, the lightest materials, such as propane and butane, vaporise and rise to the top of the first atmospheric column. Medium weight materials, including gasoline, jet and diesel fuels, condense in the middle. Heavy materials, called gas oils, condense in the lower portion of the atmospheric column. The heaviest tar-like material, called residuum is referred to as the “bottom of the barrel” because it never really rises.

Conversion

Conversion is where fractions from the distillation towers are transformed into streams (intermediate components) that eventually become finished products. This also is where a refinery makes money, because only through conversion can most low-value fractions become gasoline.

The most widely used conversion method is called “cracking” which uses heat and pressure to literally crack heavy hydrocarbon molecules into lighter ones. A cracking unit consists of more tall, thick-walled, bullet-shaped containers called reactors and a network of furnaces, heat exchangers and other vessels.

Fluid catalytic cracking, or “cat cracking”, is the basic gasoline-making process. Using intense heat (1,000 degrees Fahrenheit), low pressure and a powdered catalyst (a substance that accelerates chemical reactions), the cat cracker can convert most relatively heavy fractions into smaller gasoline molecules.

Treatment

Treatment is the final step before tanker trucks and railroad cars head out of the refinery to deliver gasoline to the local stations. A major part of the refining treatment involves blending, purifying, fine-tuning and otherwise improving products to meet government standards and specifications.

To make gasoline, refinery technicians carefully combine a variety of streams from the processing units. Among the variables that determine the blend are octane level, vapour pressure ratings and other special considerations, such as whether the gasoline will be used at high altitudes. Often performance additives and dyes are added to distinguish the various grades of fuel.

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The 21st century will witness the emergence of a superpower that most agree is awakening to its potential. Chinese partnerships with like-minded Middle Eastern countries are proving mutually beneficial

Six centuries ago, a mighty armada of Chinese ships crossed the China Sea and ventured west to Arabia and East Africa. The fleet consisted of giant nine masted junks and was escorted by dozens of supply ships, water tankers, transports for cavalry horses and patrol boats. The armada’s crew would total more than 27,000 sailors and soldiers. The largest of the junks was said to be over 400 feet long and 150 feet wide.

Loaded with silk, porcelain and lacquerware, these vessels visited ports around the Indian Ocean, where Arab and African merchants would exchange spices, ivory, medicines, rare woods and pearls so eagerly sought by the Chinese imperial court.

The Middle East-Asian channel of trade is reemerging, based on oil, petrodollars and consumer goods

Seven times, from 1405 to 1433, these treasure fleets set off for the then relatively unknown. These great expeditions brought a vast web of trading links — from Taiwan to the Persian Gulf — under Chinese imperial control. All this took place half a century before the first Europeans rounded the tip of Africa in relatively insubstantial Portuguese caravels, claiming to ‘discover’ the Indian Ocean.

The Chinese have a long, storied history in trade with the Middle East. Overland routes such as the Incense Road and Silk Road established trade initially, but maritime trade routes eventually lead to tremendous growth in commercial activities.

This Middle East-Asian channel of trade is again reemerging, based now on oil, petrodollars and Asian consumer goods. Often termed as the ‘new Silk Road’, trade and investment between the regions has quadrupled in the past decade. According to most experts, this trend will continue to rise.

By 2025, forecasts show, China will import three times as much oil from the Arabian Gulf as the United States. As has been well documented, China will be thirsty for oil, as well as a host of other commodities. The Middle East is perhaps the richest region in terms of natural resources. But the wealth source, oil, is not sustainable. As the new Silk Road is by no means a one way street, Middle Eastern countries are increasingly seeking out greater investment in China.

Middle Eastern leaders are looking for ways to sustain wealth and their countries’ economic growth, by pursuing investments in Asian financial and commercial institutions. Many of the Middle Eastern leaders seem more interested in using their accumulated wealth to buy into other established Asian companies rather than developing Middle Eastern brands.

Consider these recent examples:

• Dubai International Capital (DIC) plans to increase its assets from US$7.5 billion to US$25 billion in the next three years, with ‘a significant portion’ of that going into China. Istithmar, the branch of Dubai World in charge of asset management, has set up an office in Shanghai, after completing its first China investment of US$50 million for a 10 per cent stake in Hans Energy, a Hong Kong listed oil and gas logistics company in Guangdong.
• The Kuwait Investment Authority (KIA) has doubled its investments in Asia in the past two years and is now the largest foreign investor in the Industrial and Commercial Bank of China. KIA also has a 15 per cent stake in the Kuwait China Investment Company (KCIC), created in 2005, which manages US$200 million in assets states its primary goal is “to establish itself as one of the premier investment companies in the Gulf by building its capabilities and knowledge in the dynamic and growing economies of emerging Asia.”
• Qatar Investment Authority (QIA) recently announced that it was looking to invest significantly in financial institutions and consumer-oriented export companies in Asia, with a primary focus on China. Signing on with Singapore’s Keppel Corporation, QIA is providing the initial funding for a 30 sq kilometre ‘eco-city’ in Tianjin, China, meant to serve as a model for sustainable development in other Chinese cities.
• Saudi Prince Alwaleed bin Talal Alsaud made his first hotel investment in China last May, paying US$58 million for the leading hotel in Kunshan, an industrial city near Shanghai and is reported to have earmarked another US$1 billion for similar investments. Alwaleed is looking to purchase properties in second and third tier cities where growth is expected to exceed that of the rest of the economy.

When factoring in the investment protectionism from the US and Europe(remember the Dubai Ports fiasco?), where traditionally Middle Eastern countries might have invested, you have the formula for a fast-growing and increasingly lucrative partnership between China and the Middle East.

The Chinese are keeping the production of container ships ‘in-house’

Dubai, it might be argued, has become the unofficial Middle East capital of this new Silk Road – a gathering place of capital, consumers and traders fuelling the growth.

“We see Dubai as a logical place to be,” says Bill Janeri, General Manager of Global Sources Middle East.

“It is the third largest re-export market in the world after Hong Kong and Singapore. That makes Dubai a critical centre for trade. Plus, on the other side of it, it is a place people want to go to, both from the manufacturer’s point of view as well as the buyers. People are able to easily converge here from places like North Africa, Middle East, Turkey and Europe,” he says.

Those who attended the China Sourcing Fair last month in Dubai, bore witness to China’s desire to promote within the region. Offering a diverse marketplace of Chinese goods, ranging from kitchen utensils to furniture to cell phones, one easily interprets the fair as Shanghai’s version of a 21st century air-conditioned souk. Judging by the crowds of Middle Eastern buyers, eager for the latest China has to offer, traffic on the new Silk Road appears to be bustling.

“Buyers in the Middle East are actively looking for new ways to attract consumers and finding new and interesting products that can deliver reasonable margins is one way they are doing it,” says Janeri.

“The opportunities are huge for suppliers, traders and importers positioned to take advantage of global trade,” he added.

Forget the idea that the rise of Chinese competitors simply means cheap, low quality imitations flooding the markets. Rather, Chinese companies are starting to disrupt global competition by changing the way the game is played. Their tool of choice? Cost innovation. The strategy of using Chinese cost advantage is far reaching, in that it offers customers around the world dramatically more for substantially less.

“Product variety, reliable suppliers and cost effective products have become even more important in this year of rising inflation,” says Janeri. “Global trade ultimately benefits consumers who enjoy an unprecedented range of quality products at very competitive prices,” he adds.

Shipping With the amount of goods either leaving or destined for the shores of China, it makes sense that the Chinese are keeping the production of container ships ‘in-house’. The China Shipbuilding Industry Corporation (CSIC) oversees most domestic production and recently has been given some large orders to fill.

Companies, including China Shipping and China Cosco Holdings Co., are buying more vessels as global trade is forecast to grow 5.6 per cent this year, according to the International Monetary Fund. About 90 per cent of those shipments will be made by sea.

China Cosco, the country’s biggest container line, said recently that it will spend US$1.34 billion for construction of eight vessels, each able to carry 13,350 boxes, for delivery in 2012 and 2013. They are the largest dry bulk carriers in China and one of the largest dry bulk shipping operators worldwide. In addition, the group is the largest liner carrier in China.

China Shipping Container Lines Co., the country’s second-largest cargo-box carrier, ordered eight container vessels for US$559.8 million recently to meet demand. They said in a statement, “The purchase of the vessels will expand the fleet size for foreign trade and strengthen shipping capacity in the Europe, Middle East, and North America markets.”

The Chinese railway network is the busiest in the world, moving 24 per cent of global rail traffic with just six per cent of the world’s tracks

Rail transport is the most commonly used mode of long-distance transportation in the People’s Republic of China. The Chinese maintain about 20 principal domestic railway routes with a total length of 76,600 kilometres. It is the busiest railway network in the world, moving 24 per cent of global rail traffic with just six per cent of the world’s tracks.

The freight forwarding and logistics service company, STL, has just recently unveiled plans to build bonded warehouses and an intermodal container terminal at the Kazakhstan town of Khorgos, on the China border. The intermodal hub is due for completion by 2010 and complements the Kazakhstan government’s US$500 million investment to upgrade rail and road infrastructure throughout the country in order to meet demand for booming cargo volumes from China to Central Asia, CIS and Russia.

“We estimate that rail freight volumes to and from China will grow by 300 per cent during the next four years,” says Erlan Dikhanbayev, Managing Director, STL.

China is aware of the benefits of producing planes itself

STL has grown rapidly during the last 12 months opening offices in Singapore, India, Iran and Dubai as trading booms with the resource rich CIS and Central Asia.

“There is demand to expedite transit cargo by rail and road between China and Europe. The upgraded infrastructure and streamlined customs procedures will mean faster transit times between China and Europe,” says Dikhanbayev.

Aviation Between 2007 and 2026, China is predicted to require some 2,800 new passenger and freight planes. China’s aviation industry has learned a lot from developing increasingly sophisticated parts for Boeing and Airbus over the past 20 years, and is eager to put it to use.

With Boeing and Airbus outsourcing as much as they do, China is reaping the intellectual rewards. Currently, China makes doors and some wing parts for the Airbus A320. It is also expected to build around five per cent of the airframe of the new A350. Boeing sources not only doors and tailfins for its 737 from China, but also the rudder of its new 787 Dreamliner. To meet the demand generated by its booming economy, China has acknowledged the benefits in producing the planes themselves, for themselves.

Launching May of this year in Shanghai, China Commercial Aircraft Co (CACC) has grand ambitions. With an initial US$2.7 billion working capital, the state owned manufacturer hopes to be playing ball with the big boys, mainly Airbus and Boeing, within the next 15 years.

“The Chinese people must use their own two hands and their wisdom to manufacture internationally competitive large aircraft. It is the will of the nation and its people to have a large Chinese aircraft soar into the blue sky,” says Wen Jiabao, China’s prime minister at the launch of CACC.

The ARJ21, or Advanced Regional Jet of the 21st century, will be China’s introduction into the aerospace race. With room for 90 passengers (up to 105 in a stretch version), “the ARJ21 will prove China is striving to become a world class aircraft manufacturer,” says Wang Yawei, Vice President of the ARJ21’s financier, the state-run China Aviation Industry Corporation I (AVIC I).

“There’s never been more demand than right now,” says Luo Ronghuai, President, AVIC I Commercial Aircraft Co. Ltd. (CCAC), which oversees the ARJ21 programme.

CACC has inherited the existing ARJ21 regional-jet programme from AVIC I, a state-owned aviation firm that is one of CACC’s main shareholders. The smaller 70-seat jet, which will take to the air for the first time later this year, has already won 170 orders, nearly all from domestic Chinese airlines. CACC sees the ARJ21, and especially the forthcoming 90-seat variant, as a bridge to building a 200-seat rival to the single-aisle Airbus 320 and Boeing 737.

“China’s first jumbo jet is expected to fly by 2020 if everything goes smoothly,” said Wu Guanghui, Deputy General Manager, CACC.

“The government still controls fleet purchases,” says Richard Pinkham, an industry analyst at the Centre for Asia-Pacific Aviation, a Singapore-based consultancy. “That will provide a big boost to marketing efforts.”

So how do the duopolistic aerospace powers feel about this? Boeing says the inevitable competition will be good for business, and an Airbus spokesman describes it as “a natural ambition” for a country of China’s size to make big jets. As both Boeing and Airbus increasingly rely on global supply chains and risk-sharing partners, some of which are involved in the design stage to produce not just components, but entire sections of planes, no country is better positioned to gain from these developments than China. And the Chinese make no attempt to hide their delight over what they have learned and expect to learn, while Airbus regards the inevitable transfer of intellectual property as a necessary cost of doing business.