The push to industrialise

Gulf governments are spending billions of dollars to diversify their economies

The GCC countries have made building a diversified industrial base a key investment priority since the 1970s. Aware of the dangers of over-relying on hydrocarbons revenues and keen to reduce dependence on imports, the region’s governments have ploughed billions of dollars into developing their manufacturing capabilities.

Bahrain led the way, opening the Gulf’s first aluminium smelter in 1971, operated by Aluminium Bahrain (Alba). Qatar followed, establishing Qatar Steel in 1974. In the mid-1970s, Ras al-Khaimah Cement Company and Dubai Aluminium started operations in the UAE, and petrochemicals giant Saudi Basic Industries Corporation was established in Saudi Arabia.

Aluminium capacity

During the past decade, the push to industrialise intensified and the recent years have seen a wave of government-backed manufacturing projects completed. In particular, the GCC has emerged as a significant primary aluminium producer.

Historically, the industry has been dominated by companies based in Europe and the US. Since 2008, new world-class smelters have opened in Oman, the UAE and Qatar, with a combined capacity of 1.6 million tonnes a year and a total investment cost of $13bn.

By 2012, the Middle East is expected to account for about 10 per cent of the world’s primary aluminium production, compared with just 4 per cent in 2007.

Many more industrial projects are in the pipeline. Some $155.7bn-worth of industrial schemes are currently planned or under way in the GCC, according to regional projects tracker MEED Projects. Of this, petrochemicals schemes account for 67 per cent or $104.5bn, while metals projects comprise 26 per cent.

Saudi Arabia is the most active market with 55.9 per cent of all industrial projects planned or under way in the GCC. The combined value of the industry schemes in the kingdom is $87bn. Most of the projects are petrochemicals-related and include the $10bn Saudi Aramco/Dow Chemical Jubail project and the $20bn Yanbu integrated refinery and petrochemicals scheme, proposed by Aramco and Japan’s Mitsui. The biggest non-hydrocarbons-related project is the estimated $10bn integrated aluminium complex planned by the state-owned mining company Maaden. The final contracts to build the plant at Ras al-Zour were awarded earlier this year.

The scheme involves the construction of a 740,000 tonne-a-year (t/y) smelter project, a 1.8 million t/y alumina refinery, a rolling mill with a capacity of up to 460,000 t/y and a 4 million t/y bauxite mine. Plans to build further aluminium smelters at Jizan and King Abdullah Economic City are also being studied, according to MEED Projects.

UAE schemes

The second largest market for industry projects is the UAE, with $42.7bn-worth of schemes planned or under way. This equates to 27.4 per cent of the region’s total. About $7.3bn will be spent on the expansion of Abu Dhabi Polymers Company’s (Borouge) petrochemicals production facilities. The state plastics producer is currently in the process of commissioning Borouge 2 and is tendering contracts for Borouge 3, which it hopes to award in the third quarter of 2010.

Borouge 2 will be able to produce 540,000 t/y of polyethylene and 800,000 t/y of polypropylene, while Borouge 3 will add 2.5 million t/y of capacity by 2014. Once these schemes have been completed, the firm’s total petrochemicals production capacity will be more than 4.5 million t/y. And a fourth phase of production is also being planned.

A further $20bn relates to Abu Dhabi Chemicals Integration Company’s (Tacaamol) planned chemicals city at Taweelah. Tacaamol will develop one of the world’s largest petrochemicals complexes with capacity for 6.2 million t/y of petrochemicals.

Bahrain is the smallest market in the region with just $2.6bn of industry projects on the cards. This includes the $1.2bn Hidd steel mill project and the proposed $1.2bn expansion of Alba. Bahrain is also building a sugar refinery in the Hidd industrial area and has plans for a pipes manufacturing plant. A sugar refinery is also under construction at Sohar in Oman. The sultanate has $7.4bn-worth of industry projects planned or under way. Other schemes include petrochemicals and pelletising plants for steel and iron ore.

Qatar has just under $12bn of industry projects planned or under way. The largest scheme under execution is the $4bn expansion of Qatar Fertiliser Company’s production facilities. The largest scheme in the pipeline is the proposed $6bn olefins complex at Ras Laffan by Qatar Petroleum and ExxonMobil of the US. This project is still in the study phase.

Kuwait’s Equate is also studying the possibility of building an olefins complex. The scheme is estimated to be worth $3bn. It is just one of five industry projects in the country, which are worth a combined $4.2bn, or 2.7 per cent of the region’s total.

Projects shelved

Unsurprisingly, the global economic crisis has impacted the industry projects sector; there are currently $37.8bn of schemes on hold. Some 72 per cent of all the projects shelved are in Saudi Arabia and they are predominantly petrochemical schemes.

Most of the industrial projects that have been undertaken in the GCC in the past 30 years have been energy-intensive primary industry projects. These have drawn on the competitive advantage provided by the region’s access to subsidised gas supplies.

With gas availability in some GCC states growing increasingly tight, the focus in future is expected to shift to secondary industries, especially plastics and downstream metals.

Faced with competition from low-cost manufacturing hubs such as China and more technologically advanced producers in the West, investors need to be selective about the opportunities they pursue. For many products, it will always be cheaper to import them than to try to reproduce them locally.

Despite the heavy investment made in industry, manufacturing still counts for less than 10 per cent of gross domestic product in most GCC states. The reliance on hydrocarbons revenues can be expected to continue for a long while yet.