Bahrain takes long-term view with significant investments in upstream and downstream industries

From heavy industries largely owned by government entities to regional headquarters for multinational companies, Bahrain has a vibrant manufacturing sector that is growing steadily and playing an increasingly important role in the economy. The global downturn in both crude oil and commodities prices squeezed profit margins despite record production by Bahrain’s petrochemicals plants and aluminium smelter. However, the country is continuing to invest in the most ambitious industrial expansion plans for over a decade to capitalise on future global demand for its output.

The single-biggest investment in the industrial sector is the $3bn project to build sixth potline for Alba. This will be the company’s largest expansion since potline five came on-stream in 2005. However, this individual development is part of a cluster of interrelated investments in Bahrain’s upstream and downstream industries that are designed to fire up the economy, attract additional investment and ensure long-term prosperity for the country’s citizens.

INDUSTRIAL STRATEGY: The cornerstones of Bahrain’s heavy industry were laid in the early 1970s as the government sought ways to capitalise on its oil and gas wealth to create new products and jobs. Alba was formed in 1968, a year after production of crude oil at the Bahrain Field peaked at 79,000 barrels per day (bpd) and a year before the production-sharing agreement was signed with Saudi Arabia on the Abu Saafa oil field. The decision was taken to create a smelting business that would be powered using associated gas from the Khuff reservoir in the Bahrain Field.

Alba grew into one of the world’s major aluminium producers, and a cluster of downstream metal manufacturing businesses were built around the smelter, boosting exports and creating more jobs. Alba is largely government-owned, with the Bahrain Mumtalakat Holding Company controlling 69.38% of shares, Saudi Arabia’s SABIC Investment Company holding 20.62%, and the remaining 10% of shares owned by the public.

Downstream petroleum industries share similar roots. In 1968 Bahrain’s oil refinery boosted production to 250,000 bpd, and in 1997 the state assumed 100% ownership of the facility. Earlier, in 1979, the government established the Gulf Petrochemicals Industry Company (GPIC) in a three-way equal partnership with SABIC and Petrochemical Industries Company of Kuwait. Bahrain National Gas Company (Banagas), which turns associated gas into propane, butane and naphtha, was also established in 1979, under 75% state ownership. In 1985 the Bahrain Aviation Fuelling Company was established with the government retaining a 60% stake.

EMPLOYMENT OPPORTUNITIES: These heavy industries were created to capitalise on Bahrain’s hydrocarbons endowment and provide thousands of jobs for its citizens. The largely government-owned companies in heavy industry remain major employers. Data from a 2015 National Oil and Gas Authority (NOGA) report shows that Bahrain Petroleum Company (Bapco), GPIC, Banagas, Bahrain Aviation Fuelling Company and Tatweer Petroleum collectively employed 4302 workers, including 3422 Bahrainis, or 79.5%. Upstream Tatweer Petroleum employs 787 people including 569 Bahrainis, with the remaining 3515 NOGA jobs in downstream processing and refining. Alba employs another 2650 people, 84% of whom are Bahraini.

However, these high-profile employers represent only a part of the picture. Data from the Labour Regulatory Authority (LMRA) shows that the first quarter of 2016 saw an employment milestone for Bahrainis, with a record 104,451 citizens working in the private sector, 65% of all 160,883 nationals in the workforce. The number of Bahrainis working for the private sector had grown by 42% from the first quarter of 2005 when the figure stood at 73,687. By the second quarter of 2016 the total number of Bahrainis in employment had fallen slightly to 159,711. Of these, 56,174 were in the public sector, while LMRA data for the private sector showed 26,368 Bahrainis were working in trade, 12,330 in construction, 8976 in finance and 55,864 in other occupations. Specific numbers of Bahrainis working in manufacturing are not recorded, but some idea of the numbers of expatriates in the sector can be extrapolated from information about employment visas. In the second quarter of 2016, 9184 visas for manufacturing workers were renewed, a process which must take place every two years, while 4533 new visas were issued. However, in that quarter a slightly higher number of manufacturing worker visas, 4801, were terminated.

FLEXIBLE WORKFORCE: While it is true that Bahrainis constituted just 18% of overall private sector employment of 577,655 in the second quarter of 2016, the country’s citizens are far more willing to work outside the public sector than other Gulf nationals. According to a report prepared by the IMF in 2014, Bahrain had the lowest proportion of its national workforce in government jobs of any GCC country. However, private sector employers do still face competition from high wages in the government sector, with a Bahraini public servant commanding a monthly salary of BD686 ($1820) compared to BD393 ($1040) for a compatriot in the private sector, LMRA data shows. In addition, Bahrainisation quotas require companies to employ one Bahraini for every four expatriates on the payroll, making the private sector employment target for Bahrainisation equivalent to 20% of the private sector workforce. The purpose of the quotas is to stimulate job opportunities for citizens in the private sector, and so help to reduce the burden of public sector salaries on the economy. The IMF noted the public sector wage bill in Bahrain, based on 2013 figures, was among the highest in a sample of advanced and emerging economies, constituting 10.2% of GDP in 2013. Data from the national accounts and the Ministry of Finance showed that by 2015 the public manpower bill had risen to BD1.43bn ($3.8bn), and 12.2% of GDP of BD11.7bn ($31bn) at current prices.

GDP CONTRIBUTION: Manufacturing’s contribution to GDP at current prices in 2015 was BD2.03bn ($5.4bn), up from BD1.87bn ($5bn) in 2014. This represented 17.3% of total GDP, an increase from 14.9% in 2014. In the first two quarters of 2016 the sector’s contribution to total GDP at current prices was 17.3% and 16.7%, respectively.

According to the September 2016 quarterly report from the Economic Development Board (EDB), the manufacturing sector showed steady growth of 4.1% in 2015, but rather more modest quarterly growth of 1.2% and 3.3% in the first two quarters of 2016. In 2015 the trade sector expanded by 1.7%, but rebounded in the first two quarters of 2016 with growth of 2.2% and 2.3%, respectively. The economy as a whole posted growth of 2.9% in 2015, with the non-oil sector up by 3.6%. The EDB forecast non-oil growth of 3.2% in 2016, declining to 2.4% and 2.3% in 2017 and 2018, as anticipated cuts in public spending caused by fiscal pressures across the GCC feed through to reduced private sector activity.

TRADE IN GOODS: The growth of Bahrain’s manufacturing sector has also been reflected in robust increases in non-oil trade in recent years. According to the EDB, the total value of non-oil goods traded increased by around 19% from 2010 to 2015 when the country’s non-oil merchandise trade with the rest of the world stood at $17.5bn. Over the same period the value of Bahrain’s non-oil exports rose by 12%. Bahrain’s top-10 trading partners accounted for 85% of non-oil exports in the first half of 2016, with GCC countries receiving 65% of Bahrain’s exported goods. In the first half of 2016 Saudi Arabia received BD507m ($1.3bn) worth of goods from the kingdom, while the US bought BD128m ($339.5m) of Bahraini goods. In 2015 non-oil exports in dollar terms were dominated by five categories: base metals and articles of base metal (52%); chemicals (11%); mineral products (10%); plastic and rubber products (5%); and pearls, precious and semi-precious stones (5%).

EXPORT CHAMPIONS: Analysis of the 50 most valuable export items made in Bahrain shows the dominance of some of these sectors, but also the variety of goods being made in the country. In 2015 as a whole, the top-50 list included aluminium goods exported for BD800m ($2.1bn), iron and steel items for BD335m ($888.6m), petrochemicals and refinery products (urea, ammonia, methanol and sulphur) with sales of BD153m ($405.8m), and gold jewellery in fourth place with exports worth BD87m ($230.8m). From the wider manufacturing sector, food accounted for BD71m ($188.3m), with the output from the Mondelez factory and Arabian Sugar reflected in the BD41m ($108.9m) worth of sugar exports, BD22.6m ($59.9m) in preparations for making lemonade (the Mondelez product Tang), and BD7.6m ($20.2m) in processed cheese. The top-50 list also included BD71m ($188.3m) of exports of products made from plastics, polymers and fibre glass, BD61m ($161.8m) in textile exports and BD53m ($140.6m) in overseas sales of air-conditioning units.

INVESTMENT IN EXPANSION: Bahrain’s capacity to export some of these key goods as well as petroleum products is set to increase by 2020 thanks to major investments in downstream and heavy industries. The $5bn expansion of the Bapco refinery, for example, will improve the product mix to generate more value when it opens in 2020, but also increase capacity by 35% from 267,000 bpd to 360,000 bpd. In early 2019 Alba’s sixth potline for the aluminium smelter will raise production capacity by 56% from 971,000 tonnes per annum (tpa) to 1.5m tpa. Banagas is also planning to raise $400m to bolster its gas-processing capacities.

OUTPUT LEVELS: These ambitious plans come as some existing facilities are reaching record output levels. In 2015 Alba’s production jumped by 3.1% to 960,643 tonnes, up from 931,427 tonnes, and output continued to climb into the next year. In 2016 production volume reached 971,420 tonnes, an increase of 29,216 tonnes, or 1.1%, compared to the previous year. Sales volumes in 2016 hit 974,014 tonnes, up from 951,944 tonnes in the previous year, an increase of 2.3%.

In 2015 the Bapco refinery achieved its highest volume of combined exports and local sales since 2007, shipping 98m barrels of petroleum products. The production and export of petrochemicals as well as refined gas products both fell in 2015 compared to the year before, according to data published by NOGA. GPIC’s total production of ammonia, methanol and urea dropped 8% from 1.6m tonnes to 1.47m tonnes, while exports of the same products fell 10% year-on-year (y-o-y) from 1.23m tonnes in 2014 to 1.1m tonnes in 2015. Banagas, meanwhile, saw a 2% decline in production of propane, butane and naphtha from 3.7m barrels to 3.6m barrels, while exports of the same products dipped 1% from 3.68m barrels to 3.65m barrels. There were, however, signs that GPIC’s production volumes were picking up in late 2016, when it announced that September 1st had been the busiest production day in the history of the facility, with 3348 tonnes produced, including 1287 tonnes of ammonia.

COMMODITY PRICES: Although there is optimism about the potential impact of Bahrain’s industrial investment strategy, the country does remain vulnerable to market forces affecting a narrow range of industries and the economies of its GCC neighbours. With almost 80% of exports made up of metals, minerals, chemicals and plastics, and the GCC countries accounting for close to two-thirds of non-oil exports, any downturn in global commodity prices or fall off in demand from key markets could have profound implications. Both factors affected the profitability of some of Bahrain’s industrial giants in 2016. The price of ammonia dropped to $200 per tonne in 2016, down from $600 in 2014, and $700 in 2012, while urea was fetching $200 per tonne in 2016, compared to $400 in 2012 and $600 in 2011.

“Low London Metal Exchange (LME) prices are not a problem downstream as most downstream companies are converters, making money on the value-added margin they charge. Metal premium increases are more difficult to absorb as they cannot be hedged and are more difficult to pass on to end users when competing in market segments against Chinese mills,” Jean-Baptiste Lucas, CEO of Gulf Aluminium Rolling Mill Company (GARMCO), told OBG, in regards to price volatility.

MARKET CONDITIONS: Alba was operating in particularly difficult market conditions, as the global price of aluminium collapsed on the back of a stronger dollar and higher exports from China. Its annual net profits fell by 38% from BD96.5m ($256.5m) in 2014 to BD59.9m ($159.5m) in 2015. This was despite a fall of just 7% in Alba’s metal sales over the period. The value of aluminium, set by the LME, tumbled from $2054 in November 2014 to $1466 in the same month a year later. The average LME price for the year was $1663, down some 11% y-o-y, and the price hit its lowest level since 2009.

The Chinese government’s decision to remove a 15% tax on aluminium rods and bars contributed to a rise in exports, according to Alba’s 2015 annual report, and global production reached 57.1m tonnes, up 6% y-o-y, against global consumption of 56.6m tonnes, a 4% increase on 2014. While it expected global demand to grow at this rate, Alba predicted it would be outpaced by supply with China’s output expected to rise by 32.3m tonnes helping to create higher global inventories.

ALBA REVENUES: In 2015 Alba saw sales revenues to customers in Bahrain rise slightly from BD344.3m ($915.7m) in 2014 to BD345.9m ($930.6m), and there was a more pronounced increase in revenues from Asia, up from BD103.2m ($274.5m) to BD121.9m ($324.2m) as well as from the Americas, from BD44.7m ($118.9m) to BD63.9m ($169.9m). However, sales to the MENA region declined from BD169.8m ($451.6m) to BD135.6m ($360.6m). Overall, global sales revenues declined by 7% from BD821.7m ($2.19bn) to BD766.7m ($2.05bn).

In the first half of 2016 y-o-y sales were down from BD405.9m ($1.08bn) to BD322.2m ($857m), a decrease of 21%. Revenues from all other regions except the Americas declined, with the sharpest decreases in Bahrain itself and the MENA region. In a note in its financial statements, Alba points out that the value of orders from two of its primary customers fell from BD125.5m ($333.7m) by June 2015 to BD107.7m ($286.4m) just a year later, representing 10% of sales in each period. However, in January 2017 the firm announced its full-year sales volume for 2016 had increased by 2.3% to 974,014 tonnes (see analysis).

ALUMINIUM ECOSYSTEM: The development of Alba in the 1970s created a downstream ecosystem of manufacturing businesses, including Bahrain Alloys Manufacturing Company, which has casting capacity of 30,000 tpa; Bahrain Aluminium Extrusion Company, which has the capacity to produce 25,000 tpa of flat aluminium products; Bahrain Atomisers International, which produces aluminium powder; and Bahrain Recycling Plant, which processes 120,000 tpa of aluminium dross and scrap to produce alloys and other products.

Midal Cables, which began in 1977 as a joint venture between Intersteel of Bahrain and the Australian firm Olex Cables, produces aluminium cables and owns a number of other companies in the sector, including Aluminium Wheel Company, which has the capacity to produce 400,000 wheel casings per year. In recent years Midal Cables has increased its global footprint by opening a $60m plant in Australia and $50m factory in Mozambique, as well as new production centres in Dammam, Saudi Arabia, and in Turkey. Its plants in Turkey and Bahrain have a combined production capacity of 350,000 tpa, while the factories in Saudi Arabia, Mozambique, and Australia, which have been built to serve Saudi Arabia, Africa and the Asia-Pacific region have a combined capacity of 130,000 tpa.

By broadening its production base at a time of falling world prices in aluminium and locating factories closer to bauxite mining centres in Turkey, Australia and Mozambique, Midal Cables has reduced its need to rely on Alba as its sole source of the aluminium it uses for its manufacturing processes.

Another major aluminium manufacturer in the kingdom is also working to reduce its dependency on suppliers. GARMCO is building a $50m remelt plant that is scheduled to go into production in the fourth quarter of 2017. The facility will enable GARMCO to melt down scrap aluminium so that it can produce 120,000 tpa of its own slabs in-house. “Achieving independence of our total casting needs in this way helps to ensure our own survival and profitability,” John MacNamara, general manager of sales and marketing at GARMCO, told OBG.

IRON & STEEL: Foulath, a holding company focused on the GCC steel industry and 50% owned by the Gulf Investment Corporation of Kuwait, with Qatar Steel also holding a 25% stake, fully owns two iron and steel businesses in Bahrain. Bahrain Steel is a leading producer of iron ore pellets used in steel production and has a total capacity of 11 tpa. United Stainless Steel Company, meanwhile, has the capacity to produce 100,000 tpa of cold-rolled stainless steel.

In addition, Foulath and Japan’s Yamato Kogyo Company own SULB Steel, a producer of structural steels, as a joint 51:49 venture. SULB Steel’s Hidd site includes an iron plant with a capacity of 1.4m tonnes, a melt shop capable of producing 850,000 tonnes and a heavy rolling mill with 600,000-tonne capacity, while a second medium and light section rolling mill in Jubail, Saudi Arabia has a production capacity of 450,000 tpa.

Universal Rolling, which was founded by Bahraini and Saudi investors, has the capacity to produce 200,000 tpa of steel bars from billets and has been in operation since 2009, also at Hidd. Meanwhile, a factory built in the same industrial area owned by Bahrain Ferro Alloys, a subsidiary of ETA Star Holdings of the UAE, to the east of Bahrain, produces 25,000 tpa of ferro-silicon and 35,000 tpa of ferromanganese.

INWARD INVESTMENT: Alongside heavy industries, there is also a significant and growing light industry sector, with 121 companies operating from Bahrain International Investment Park (BIIP), a 2.5m-sq-metre serviced industrial park located five minutes from Khalifa Bin Salman Port and 10 minutes from Bahrain International Airport. Total investment in the park has reached BD743m ($2bn), and the 121 companies there employ some 4500 staff. Of site’s tenants, 53% are from the Middle East, 27% from Europe and 20% from the US, which has a free trade agreement with Bahrain. “Food firms are major tenants, and plastics and electronics are also key sectors that have grown here,” Maria Gilsenan, marketing executive at BIIP, told OBG. In 2016 construction began on a $90m food factory for Mondelez at BIIP. When the facility is operational in 2017, it will have an annual capacity of 90,000 tonnes of TUC, Oreo, Prince and Ritz biscuits.

OUTLOOK: Despite the challenges associated with tumbling global commodity prices, a number of Bahrain’s big industrial players are continuing to expand in the hope of accumulating future profits. Smaller firms are also adapting their offering. For example, Metals of Bahrain (MEBA), which has traditionally serviced oilfield companies, invested BD1m ($2.7m) in October 2016 to open a new facility serving an emerging technology. “We are producing solar panels to sell wholesale to distributors and installers in Saudi Arabia,” Faisal Khalifeh, business development manager at MEBA, told OBG. Forward-looking responses to the downturn bode well for future growth in Bahrain’s industrial sector.