Falling oil prices spur diversification of industries and increased efficiency in Qatar

While Qatar is home to one of the world’s leading oil and gas sectors, the country has also been developing a thriving industrial sector in recent years. According to data from Qatar National Bank (QNB), more than half of the state’s GDP is accounted for by the non-hydrocarbons sector, with figures from the third quarter of 2014 showing industry – manufacturing, construction, electricity, gas and water – contributing 6% of nominal GDP. This may still be a small proportion, but it came on the back of 13% year-on-year (y-o-y) growth.

According to figures from QNB, manufacturing accounted for QR72bn ($19.7bn) of industry’s QR112bn ($30.7bn) total contribution to GDP in 2013, or 64%, up 9% on 2012. This segment now consists of heavy industries such as steel, petrochemicals, fertilisers and pharmaceuticals, as well as lighter machinery and engineering works. All are backed by the government’s long-standing commitment to diversify the country’s economy, and benefit from a range of incentive schemes including industrial parks and tax breaks.

GOVERNMENT INVOLVEMENT: Given the range of activities within the sector and its importance to the country’s economic development, industry is overseen by several government ministries, from the Ministry of Energy and Industry (MEI) to the Ministry of Economy and Commerce, and the Ministry of Development Planning and Statistics. A series of government-linked companies and corporations are also operating, with these also usually responsible for having started up their respective industries. Indeed, until only a few decades ago the sector barely existed in Qatar, beyond a few light industrial activities in Doha and offshoots of the fast-expanding hydrocarbons sector.

One of the oldest examples of the latter is Qatar Fertiliser Company (QAFCO), which was founded in 1969 to manufacture ammonia and urea (see analysis). Qatar Petrochemical Company (QAPCO) was established in 1974, and began production of sulphur, low-density polyethylene (LLDPE) and ethylene in 1981. QAPCO’s products now also include gasoline, C3/C4 and LLDPE. Other major players include Qatar Steel Company, also set up in 1974; Qatar Fuel Additives Company (QAFAC), in 1991, which produces methanol that is primarily used as a feedstock to produce methyl tertiary butyl ether; and Qatar Aluminium, in 2007.

Many of these heavy industries were created as partnerships with international outfits – Norway’s Hydro partners with Qatalum; Kobe Steel and Tokyo Boeki partnered with Qatar Steel at its inception; QAPCO partnered with Total; and QAFCO partnered with a range of foreign entities, including Hydro. Yet the main shareholder in all of these ventures was, and still is, the Qatari government, which embarked on a major programme of diversification of the country’s economic base soon after independence in 1971. This programme underwent several evolutions until Qatar National Vision 2030 (QNV 2030), the most recent long-term economic development plan for the state. This broader vision has been broken down into a series of shorter-term plans, with the National Development Strategy 2011-2016 (NDS 2011-2016) the current edition.

NEW PRIORITIES: Initially, there was an emphasis on heavy industry, as it was felt that this could leverage the abundant local energy sources and public finances – the latter essential to kick-start any such extensive capital expenditure. QNV 2030 seeks to push the economy to a new phase of development, however, emphasising the need for a shift towards knowledge-based industries, with a larger role for the private sector. While heavy and medium industry remain major pillars, lighter, high-tech manufacturing is now receiving a boost, with a concerted effort also under way to encourage the private sector to get more heavily involved.

Qatar Chamber of Commerce and Industry (QCCI) was founded in 1963. Its current chairman, Sheikh Khalifa bin Jassim bin Mohammed Al Thani, also heads the International Chamber of Commerce Qatar. QCCI has all the private sector enterprises in the state as its members, and represents their interests at trade fairs and abroad, as well as with the authorities at home. There are also several national chambers, including the American Chamber of Commerce Qatar and the British Chamber of Commerce Qatar, which was established in 2014.

IQ: Since 2003 the petrochemical, fertiliser and steel companies mentioned have all been brought under the wing of Industries Qatar (IQ), which is 51% owned by Qatar Petroleum (QP), the 100% state-owned national oil company. A further 19% of IQ is owned by the government pension fund. Foreign enterprises do own shares in the IQ companies, however – Total has a 20% stake in QAPCO, with IQ controlling the rest. IQ has a 50% share of QAFAC, along with OPIC Middle East (20%), International Octane (15%) and LCY Middle East (15%). QAFCO, meanwhile, is a 75:25 split between IQ and Norway’s Yara International. QAPCO also has three joint venture (JV) subsidiaries: Qatofin, Qatar Vinyl Company and Qatar Plastic Products Company.

Also key is Qatar Intermediate Industries Holding Company (known as Alwaseeta), a QP subsidiary that was set up by emiri decree in 2005 to establish more downstream industries from steel, petrochemicals and fertilisers, using those industries’ outputs as their inputs. Three major industrial outfits are under its umbrella – SEEF, which produces linear alkyl benzine (LAB) in a JV with United Development Company; Qatar Melamine Company, a JV with QAFCO; and industrial gas manufacturer Gasal, a JV with Air Liquide and Qatar Industrial Manufacturing Company (QIMC). The chemicals and related products segment of Qatar’s industrial base has thus evolved, with its 2013 exports jumping 11% in value y-o-y to hit $10.7bn, according to Reuters. In contrast, oil and gas exports rose by 2.5%.

QIMC was set up in 1990 and despite being a government initiative, ownership was tilted in favour of the private sector from the outset, with a 20:80 split between the government and private equity. It has five subsidiaries – Qatar Metals Coating Company, National Paper Industries, Qatar Sand Treatment Plant, Qatar Acids Company and Qatar Paving Stones – and it also has a 51% stake in KLJ Organic Qatar, which produces chlorinated paraffin waxes.

Also important in the petrochemicals sector is Mesaieed Petrochemical Holding Company (MPHC), which is majority owned by QP and itself directly owns facilities in Mesaieed Industrial City. In 2014 the firm held a successful initial public offering (IPO), putting 25.725% of its share capital on the Qatar Stock Exchange. The IPO, which was five times oversubscribed, was the country’s biggest such offering in five years, raising a total of QR3.3bn ($094.5m).

MPHC owns a 49% stake in both Qatar Chemical Company (Q-Chem) and Qatar Chemical Company II ( QChem II), with Chevron Philips Chemical International Holding also having a 49% share, with the remaining stakes held directly by QP. Q-Chem has a 453, 000-tonnes-per-annum (tpa) production capacity for polyethylene and a 47,000-tpa 1-hexene production capacity. Q-Chem II has a 350,000-tpa production capacity for polyethylene and 345,000-tpa production capacity for normal alpha olefins. MPHC also has a 55.2% stake in Qatar Vinyl Company (QVC), in which QAPCO has a 31.9% stake, with the remaining shares directly held by QP. QVC has a 370,000-tpa production capacity for caustic soda, 180,000-tpa production capacity for ethylene dichloride and a 355,000-tpa production capacity for vinyl chloride monomer.

EXPANSION: Petrochemicals have enjoyed a surge in demand over the last several years, too, and the market still has plenty of upside. “In five to six years global demand for petrochemical products will double,” Nasser Jeham Al Kuwari, the CEO of QAFAC, told OBG. “The market is big enough to maintain a relaxed competitive environment.”

Many projects are currently under way to expand production, too. “We plan to build a new LAB facility at Ras Laffan with a production capacity of 100,000 tpa,” SEEF’s general manager, Ahmed Al Hitmi, told OBG. “The plant is now at the feasibility stage, and should be operational in 2018. It will bring SEEF’s total production to 200,000 tpa of LAB, making it the largest producer in the Middle East.”

OIL PRICE DROP: The market has, however, been affected by the decline in oil prices, which fell by more than 50% in the second half of 2014 and early 2015, with this the reason cited for the decision by QP and Shell not to proceed with the $6.5bn Al Karaana petrochemical plant project in January 2015. IQ also cancelled plans for the $6bn Al Sejeel plant in September 2014. The government’s next budget, which started in April 2015, will assume a lower oil price than the $65 per barrel that has been used for the past several years.

Several other factors have also been obliging industry sector players to think again about major capital expenditure and their market position. One of these is the January 2014 imposition of normal Customs duties on exports to the EU, where previously the sector had benefitted from preferential access. Another issue is that environmental standards are being raised, with a consequent increase in producers’ operational costs. Qatari feedstock prices are generally fixed on a per-project basis, and thus plants are unable to take advantage of their recent decline, according to a January 2015 Economic Impact and Energy Advisory report.

A NEW FOCUS: Nonetheless, recent times have also seen some positive development for the sector, including the establishment of Qatar Chemical and Petrochemical Marketing and Distribution Company, known as Muntajat, which began operations in 2013. Muntajat has exclusive rights to purchase, market, sell and distribute all the chemical and petrochemical products manufactured in Qatar, giving the sector a focus in marketing its goods in an increasingly cost-conscious industry. “Muntajat’s creation has allowed us to focus more on improving our internal operational efficiency,” Al Kuwari said. QAFAC itself, meanwhile, launched a new CO recovery plant in 2014, which should prove a major boost to production and cost efficiency.

SUPPORT FOR SMES: QIMC also has a mandate to encourage small and medium-sized enterprises (SMEs), which constitute the majority of private businesses in the industrial sector. This encouragement has continued through QNV 2030 and the NDS 2011-2016, which makes specific reference to supporting SMEs through Qatar Development Bank (QDB). QDB itself hosts SME Toolkit Qatar to assist businesses, while also providing start-up funding to help manufacturers build factories, install machinery and other equipment, and provide a working capital facility before beginning production. QDB also helps with business expansion costs for existing SMEs, and its Al Dhameen guarantee programme provides businesses with guarantees to help them get financing. QDB underwrites up to 85% of the cost of facilities for new businesses, up to QR15m ($4.1m), while the programme also guarantees 75% of core capital for existing businesses, again up to QR15m ($4.1m).

QDB also partners with the international SME promotion body, Silatech, which was established by Qatar Foundation (QF), to run the Bedaya Centre, which offers a range of courses and initiatives to encourage young people to pursue careers in private sector businesses. Indeed, education and training – getting young Qatari nationals interested in entrepreneurship and then reinforcing that interest with continuing programmes – is a key part of QNV 2030, which earmarks this as a “basic precondition for enabling the private sector”.

QDB also partners with QF’s Social Development Centre to run the Qatar Business Incubation Centre. This focuses on supporting start-ups, with projects given a space to develop, then to be turned over for market testing. Conditional seed capital of up to QR100,000 ($27,400) are available for successful concepts, with a QR200,000 ($55,000) limit on further project funds.

Another vital business incubator is ICT Qatar’s Digital Incubation Centre (DIC). The DIC provides incentives for start-ups in the ICT sector, operating as a talent scout and awareness raiser, as well as providing support in terms of market intelligence, planning, pre-sales, coaching and training for ICT entrepreneurs. It also provides shared services – such as office space, as well as legal and technical support – for ICT SMEs within its walls.

DRIVING ON: With Qatar an established producer of steel, aluminium, plastics and artificial fibres, combining those strengths under Qatar Automotive Gateway (Qatar Ag) was a logical next step. Qatar has seen a resurgence in its domestic automobile sales market, with website Best Selling Cars reporting that as of August 2014 vehicle sales were up 8% on 2013 and showing an accelerating pattern, as month-on-month they had jumped by 23% to a 62,541-unit year-to-date total. At present, imports are the basis of the sector, but Qatar Ag hopes to establish component manufacture in the state, with potential for automotive. Launched in 2011, Qatar Ag thus has an ambitious goal: to establish an automotive cluster in the state by 2020. A major step in this direction was taken in 2020, when the company signed a memorandum of understanding with Pro-drive to look into the development and production of advanced, lightweight and high-tolerance carbon-fibre-composite automotive parts and assemblies.

Widely expected to see increasing demand in the years ahead as more hybrid and electric automobiles are sold, this type of product is ideal for Qatar Ag, which seeks to position itself at the cutting edge of new technologies in automotive manufacturing, a position that dovetails with the overall QNV 2030 objective of transforming Qatar into a knowledge-based economy. The outfit is working hard on research and development (R&D) and education, with the aim of eventually developing local talent that can be the basis of a future automotive technology sector.

PHARMACEUTICALS: Another industry established in Qatar is pharmaceuticals and medical equipment. While the state remains highly dependent on imports of both these product lines, the government is keen to enhance local manufacture. At present, the most significant local manufacturer is Qatar Pharma, which began production in 2009 and concentrates on IV generic drugs. This area was given a boost, too, by the Supreme Council of Health in 2013, when it stipulated that doctors should prescribe pharmaceuticals only by their generic names, leaving the choice of buying generic or branded drugs to the patient. Qatar Pharma is engaged in an ambitious, three-stage factory rollout programme, with later phases involving production of equipment such as dialysis filters and sutures, as well as more tablets, capsules and syrups.

PARKLIFE: As part of its development strategy, Qatar has also launched a number of industrial estates, cities and special zones over the years. The MEI has a Department of Industrial Estates, with demand for its services in establishing new industrial zones increasing as the economy grows rapidly.

The four longest-standing major industrial zones are the Doha Industrial Estate, which has an SME focus; Mesaieed Industrial City; Dukhan Petroleum City; and Ras Laffan Industrial City. Three more zones are being added: the Ras Bufontas Special Economic Zone, adjacent to Hamad International Airport, with a focus on advanced technology and logistics; Al Karaana Special Economic Zone, focusing on specialised industries and logistics and situated next to Doha Industrial Estate; and Um Alhoul Special Economic Zone, focusing on light manufacturing and located next to the new Hamad Port (formerly the New Port Project), near Al Wakrah.

In terms of oversight, the Doha Industrial Estate and the New Industrial Area fall under the remit of the Department of Industrial Estates; QP handles Mesaieed Industrial City, Dukhan Petroleum City and Ras Laffan Industrial City; and Manateq is responsible for the three new zones of Ras Bufontas, Al Karaana and Um Alhoul.

In addition, Qatar Science and Technology Park is home to many businesses active in the ICT, health sciences, energy and environmental sectors, all with an R&D focus. Doha’s Small and Medium Scale Industry Area is divided into nine zones, each focusing on a specific trade. These range from textiles to wood products, and fabricated metals to paper and chemicals. Mesaieed, meanwhile, is 40 km south of Doha, and has long been a centre for the hydrocarbons industry, as has Dukhan and Ras Laffan, another major centre for refineries, the liquefied natural gas sector and petrochemicals plants.

OUTLOOK: The petrochemical segment will be paying close attention to costs in the year ahead, particularly if there is little recovery in oil prices. This may add impetus to the shift towards product diversity, with firms also seeking to utilise new technologies to increase efficiency. Elsewhere, low commodity prices are likely to continue to impact steel and aluminium, although they may also benefit from the development of the high-tech, low-weight components segment in the local auto industry. Meanwhile, as Qatar pushed ahead with its development plans, there will likely be plenty of opportunities for SMEs and larger industrial outfits.