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In BMI's view, the interplay of three main factors is setting the scene for Kenya's ports and shipping sector in general, and for the Port of Mombasa in particular, during the course of 2012. One of the three is the general state of the Kenyan economy. On this front we are reasonably optimistic: despite a number of uncertainties including the weakness of the European economies and political risk associated with the Kenyan general elections due at the end of this year, we believe that the local economy will continue to grow at a reasonable rate, based on resilient domestic demand. We are predicting GDP growth of 5.0% this year, up from 4.1% in 2011.

The second major factor is the economic health of Kenya's immediate neighbours - countries such as Kenya, Uganda, Rwanda and South Sudan. These lie in Mombasa's hinterland and use the port as a key gateway for imports. Here too the outlook is relatively benign, with healthy economic growth expected, likely to boost imports and bring more transit business to the Kenyan port. The third factor is a constraint: the continuing capacity and congestion issues at Mombasa, which are holding back activity levels and boosting logistics costs. Some action is being taken to invest in infrastructure and improve the port's ability to handle both bulk and container cargo, but this takes time. A very ambitious plan to build a new port at Lamu, complete with a regional rail transport corridor has also officially been launched - but here too time is needed before the challenging funding requirements of the project are likely to be met.

Headline Industry Data

- Port of Mombasa tonnage throughput forecast to grow 4.79% in 2012 to reach 20.539mn tonnes. Growth to average 4.4% in the period running to 2016.

- Container throughput forecast to grow 7.35% to reach 826,595 twenty-foot equivalent units (TEUs) in 2012. Box growth to average 6.7% to 2016.

- 2012 total trade set for year-on-year (y-o-y) real growth of 4.0%, and to average 5.6% to 2016.

Key Industry Trends

Lamu Port And Corridor Question Mark

Work has officially begun on the strategically ambitious Lamu Port and corridor project, valued at US$23bn and expected to open up hinterland rail freight links through to Ethiopia and South Sudan. While the vision behind the project is undoubtedly good, BMI has significant concerns. The key threats are a failure to secure full funding prior to construction, the lack of a clear timeframe or structure for the project and the proximity to Somali pirates, all of which have resulted in our cautious stance. We note that the project's US$16bn-23bn price tag is prohibitive, and although the port element is a more realistic US$5.3bn, without the transport corridor, the port will make little sense as existing infrastructure would be insufficient to justify the size of the project. The key issue therefore is the financing: we will be watching developments on this front closely.

Mombasa Struggles With A Familiar Enemy: Congestion

While the Port of Mombasa authorities in January launched a 'Rapid Results Initiative' designed to tackle congestion at the facility within 100 days, observers remain somewhat sceptical. Traders believe the real issue is the port's underlying inefficiencies. BMI agrees that there are deep-running structural problems at the Port of Mombasa, affecting both bulk shipping as well as containers. The issue has become so bad that the port has been losing business to the Tanzanian port of Dar es Salaam, no stranger to congestion itself. Both serve as entry and exit points for shipments to and from the landlocked African hinterland countries of Burundi, Rwanda and the DRC. KPA data shows that exports from these countries, and Tanzania, through Mombasa over the first three quarters of 2011 fell 18.9% year-on-year (y-o-y) to 552,449 tonnes. Export volumes were maintained through shipments from Uganda and South Sudan, neither of which have Dar es Salaam as a viable alternative.

Maersk Boosts Kenya-Middle East Line

Danish shipping company Maersk Line in January doubled capacity on its Mombasa Express feeder service between its hub in Salalah, Oman, and Mombasa, Kenya. This was expected to reduce transit time from 26 days to 19 days. The Mombasa Express service operates two vessels from its subsidiary Safmarine, and will include three further vessels from its other services.

Key Risks To Outlook

BMI is monitoring three mai risks to our ports and shipping forecasts. Firstly, bad weather -specifically insufficient rainfall - during the course of 2012 could have a negative effect on shipping freight demand, in various ways. Inadequate rains could depress agricultural production, keep inflation higher, and weaken household demand, lowering both imports and exports. Second, as mentioned, elections are due by the end of this year; the last time Kenya held general elections in 2007 the country was swept by violence and ethnic in-fighting, shaking the foundations of the economy. We are not expecting a repeat performance, but political uncertainty, even though at a lower level, could also impact on business and consumer confidence.

Finally, we continue to concerned over the state of play at the Port of Mombasa. Growth is dependent on the port being able to cope with the projected increase in custom. If expansion work does not improve turnaround times at the facility soon, then lines could look to other East African ports in place of Mombasa. Modernisation is needed at the port, but still faces a range of obstacles, from poor industrial relations through to corruption and bureaucracy.

Click for Report details:Kenya Shipping Report Q2 2012