Gulf companies can capitalise on spare supply chain capacity

• Global demand falling
• GCC imports increasing
• More competitive pricing

Global supply chains have more spare capacity than at any time in the last 14 months – marking a window of opportunity for the Gulf to increase production and cut costs, experts say.

Overall global demand for raw materials and commodities has deteriorated, according to the GEP Global Supply Chain Volatility Index, whereas it has remained resilient in the Gulf.

The GEP index tracks demand conditions, shortages, transportation costs, inventories and backlogs based on a monthly survey of 27,000 businesses. It dropped to 0.43 in September, marking the greatest level of global supply chain spare capacity since July 2023, driven by a deterioration in global demand. 

Factory purchasing activity was at its weakest for the year to date, with procurement trends in all major continents worsening in September. Spare capacity shot up in Asia and also in North America as US manufacturers aggressively lowered purchasing volumes.

“September is the fourth straight month of declining demand and the third month running that the world’s supply chains have spare capacity, as manufacturing becomes an increasing drag on the major economies,” says GEP president Jagadish Turimella.

In contrast Saudi Arabian non-oil companies “raised their activity levels at a robust pace once again” in September “in response to greater inflows of new business”, according to S&P’s Saudi Purchase Managers Index.

New export orders grew in Saudi Arabia, indicating that Saudi companies are finding opportunities abroad, S&P says. The UAE’s purchasing managers’ index also indicated growth, albeit less robustly than Saudi Arabia.

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As global supply chain capacity opens up, the cost of doing business could fall, representing an opportunity for Gulf producers to increase their production, imports and exports.

“If the four-month trend of under-capacity among suppliers globally continues, we anticipate manufacturers extracting more favourable pricing and terms from suppliers,” says Abdel Halim from GEP Consulting’s Abu Dhabi office.

“We’re already seeing third-party logistic providers across the Gulf becoming more competitive in terms of pricing to battle slowing demand.”

In light of these changing market dynamics Halim says GEP Consulting is advising customers to renegotiate transportation costs with sellers. 

It is now cheaper for manufacturers and producers of goods in countries including Saudi Arabia and the UAE to import and export their goods, allowing them to offer more competitive prices.

“Spending power is not slowing down in the GCC region, where imports are steadily increasing,” Halim says.

Air cargo demand growth

Data from the International Air Transport Association shows that total global demand for air cargo rose by 11.4 percent year on year in August, the ninth consecutive month of double-digit year-on-year growth.

Dubai’s flagship airline Emirates is expected to announce an order of more freighters in a push to expand its cargo operations. Etihad Cargo, the cargo and logistics arm of Etihad Airways, is planning to expand its winter schedule, increasing belly hold cargo capacity across key global markets in Europe and Asia.

Similarly Saudi Arabia reported that attacks on shipping in the Red Sea by Houthi rebels have resulted in more than a 50 percent rise in air cargo shipments to the kingdom.

Overall, changes in global supply chain dynamics – not least the China Plus One trend in which companies seek to diversify their supply chains while still using Chinese manufacturers – pose an opportunity for the GCC.

Halim adds: “We expect local companies to increasingly partner with global manufacturers to build facilities in the GCC region where utilities and services are attractive, taxes are low, and demand is steadily increasing.

“As long as the current conflict does not widen, the medium to long-term future for the Gulf region is bright.”