Boosting output: Lower costs of materials and new trade agreements support exports to key markets

One of the mainstays of the Jordanian economy, industry accounts for approximately one-fifth of GDP as well as 15% of the workforce and around 90% of exports. The largest industrial segments are min-ing, chemicals, and textiles and garments manufac-turing; the kingdom is also the largest exporter of pharmaceuticals in the Arab world. The sector is fac-ing significant challenges, such as rising energy costs (that are already high in comparison to regional com-petitors) and difficulties accessing finance, in par-ticular for smaller firms.

However, it also benefits from assets such as a strong natural resource base (principally in the form of phosphate reserves and minerals extracted from the Dead Sea) and the kingdom’s location at the crossroads of the Middle East and Europe. The recent implementation of several free trade agreements (FTAs) is also helping to boost exports, in particular in the textiles segment.

PERFORMANCE: Manufacturing accounted for 17% of GDP at market prices in 2011, according to pre-liminary figures from the Department of Statistics (DoS), while mining accounted for 3.9%. Industrial output (defined as mining and manufacturing com-bined) grew by 9.1% on 2010 figures to JD20.48bn ($28.8bn). Growth was slower in the first nine months of 2012 as a result of a 3.2% contraction in the min-ing sector, although manufacturing rose by 4.2%, for overall industrial growth of 3%. Industrial output for the first nine months of the year represented 19.3% of GDP, down from 20.2% in the same period in 2011.

Foreign interest in the segment has been grow-ing recently; industry captured some 62.9% of all foreign direct investment (FDI) in the country in 2011, up from 52% of FDI in 2010, according to fig-ures from the Jordan Chamber of Industry (JCI). In addition, the manufacturing segment received the largest share of investments – both foreign and domestic – across all sectors under the Invest-ment Promotion Law in the first nine months of 2012.

ADVANTAGES & CHALLENGES: A well-educated workforce is commonly cited among the compara-tive advantages for industry in Jordan. “Advantages for Jordanian industry include the low cost of raw materials and the availability of well-educated, man-agement-level staff and skilled labour,” said Nazzal Armouti, the general manager of concrete tile pro-ducer Jordan Cypriot Construction. “These combined with high levels of innovation in the sector help to compensate for the cost of energy.” The kingdom’s only port, at Aqaba on its short southern Red Sea coastline, also provides it with good shipping access for key Asian export markets.

Its location allows Jordan to take advantage of growing opportunities in neighbouring countries, such as Iraq. “Lots of companies serving Iraq, includ-ing some Iraqi companies, are based in Jordan because it has a better security environment and more such investment will be coming in,” said Saleem Nabulsi, the business development manager at Chem-ical Supplies and Services Company (CESSCO), which is based in the kingdom but primarily focuses on Iraq and other markets in the region. Suhil Telegraph, CEO of United Chemicals Marketing agrees: “Jordan’s industrial sector depends heavily on Iraq. It provides high sales revenues and trading volumes and this trend should continue to swing upward.”

ENERGY DEFICIT: However, Jordanian industry also faces a number of significant challenges, some of which – notably the availability and cost of energy – have become particularly acute in recent times. Reliant on energy imports, Jordan is already at a dis-advantage compared to many other Middle Eastern countries that have plentiful access to low-cost oil and gas. The situation worsened in 2011 and 2012, when cheap Egyptian natural gas imports were repeatedly interrupted by bombings along the Arab Gas Pipeline, as well as an Egyptian government deci-sion to reduce supplies, forcing the Jordanian author-ities to switch to more expensive diesel and fuel oil for much of the kingdom’s electricity generation. With subsidies on fuel and electricity putting heavy pressure on the deficit as a result, the government moved to raise prices in 2012, and there are also plans to hike electricity tariffs for some users in early 2014. “There is no way out for the government other than to increase prices,” Nabulsi told OBG. “Jordan has no natural resources so there is no other solution. How-ever, the price rises will have a very big impact as industry is already struggling to compete,” he said, adding that he believed 2013 would be a difficult year for the sector as a result.

The director-general of the JCI, Maher Al Mahrouq, told OBG that fuel price increases and expectations of electricity price rises constitute the organisation’s highest priority issues, and that the JCI is now ask-ing the government to take action to mitigate the impact on industry. “We are aware of the econom-ic situation so we are not calling for a reduction in prices,” Al Mahrouq said. “However, we are lobbying for rationality in cost increases in order to maintain industry’s competitiveness and we have submitted some suggestions to the government, such as com-pensation for companies in some areas.”

CHANGES: Some positive steps have been made. “The presence of Shell is a positive sign, especially in light of concerns related to the Arab Spring,” said Hazem Al Ramini, the director for petroleum and oil shale at the National Resources Authority. “They had visited us many times before, but have now signed a memorandum of understanding, which is another indication of how Jordan’s prospects have changed.”

Some industrialists say that business in the king-dom has no choice but to adapt to a high-cost ener-gy environment. “Jordan must learn to stay away from energy-intensive areas of industry and focus on niche products with higher added value,” Salim Karadsheh, the CEO of Fine Hygienic Holding, told OBG. Others argue that companies can significant-ly cut their energy expenditures at limited cost, mit-igating the impact of recent developments; Walid R Shahin, the president of the National Energy Research Centre, told OBG that the organisation’s studies sug-gest that companies in the industrial sector could reduce their energy consumption by an average of 28% through relatively low-cost energy efficiency measures that pay for themselves within three years.

High fuel costs are leading local industry to exper-iment with a variety of ways to reduce their energy consumption. For example, in November 2012 Jordan Cement said that it was using 24 tonnes of pistachio shells to fuel its Rashidia plant to mitigate high fuel costs and reduce its impact on the environment.

ACCESS TO FINANCE: Another commonly cited chal-lenge for Jordanian industry is the availability of cred-it. “The situation as regards access to finance has not changed for a long time and is going to get worse,” said Al Mahrouq, citing recent interest rate rises. “Part of the problem is crowding out by the gov-ernment, as it raises around half its debt financing locally.” The problem is two-fold, according to Al Mahrouq: “Banks are unwilling to lend and finance is expensive,” he told OBG, and term lengths are also an issue. “Banks here prefer short- and medium-term financing, whereas industry needs long-term financing. The maximum loan lengths available are seven years, whereas industry needs 15.”

Outstanding loans from banks to industry stood at JD2.4bn ($3.38bn) as of May 2012, according to JCI figures, up slightly from JD2.38bn ($3.35bn) at the end of 2011 and JD1.98bn ($2.78bn) in 2010. The May 2012 total amounted to 14.3% of total cred-it facilities in the country, despite the fact that indus-try contributes significantly more than that to GDP. However, a number of initiatives are under way to improve credit availability, in particular to small and medium-sized enterprises (SMEs) that have been particularly hard hit by the problem (see analysis).

INDUSTRIAL ZONES: Industrial cities and estates play important roles in the sector. A key actor is the Jor-dan Industrial Estates Corporation (JIEC), a semi-gov-ernmental (state-backed but autonomous) body that operates six estates, including the 253-ha Abdullah II Ibn Al Hussein Industrial Estate in Sahab City, just outside Amman; the 117-ha Al Hassan Industrial Estate in Irbid; and the Aqaba International Indus-trial Estate (AIIE), which is managed by the private firm PBI Aqaba under a 30-year concession and has a developed area of 57 ha (within a total of 275 ha).

Investors in the estates benefit from a number of incentives, including exemption from taxes on fixed assets. Furthermore, some of the estates are also qualified industrial zones (QIZs), which give tenants specific trade benefits. Some of the private indus-trial estates and cities include the Al Tajamouat Industrial City on the outskirts of Amman and the Ad Dulayl Industrial Park near Zarqa.

New estates are continuing to come on-line at the same time as existing facilities expand. The newest JIEC project is the 250-ha Muwaqqar Indus-trial Estate, (including a first phase of 118 ha), which opened in 2011. Two more JIEC projects for estates in Madaba and Zarqa are also currently in the pipeline, in addition to the planned development of the future phases of AIIE and Muwaqqar.

PLAYERS: New private investment is also coming into the segment. In November 2012 The Jordan Times reported that a firm called Madrid Industrial Com-pany is planning to construct an industrial city in south Amman at a cost of $5bn. The city will report-edly be aimed at European companies and will begin operations by 2017, according to a partner in the firm, which stated that the company had already established similar industrial cities in South-east Asia. The article said that the project would devel-op 9000 jobs and that the government had decid-ed to designate a 1270-dunum (1 dunum = 1000 sq metres) piece of land in the south of Amman as a development zone for the project.

QIZS: A major spur to the development of modern Jordanian industry and industrial estates was the development of the QIZs, which grew out of legis-lation approved in 1996 by the US Congress allow-ing goods produced under certain conditions – such as those containing a minimum of 8% of inputs from Israel – and in designated industrial zones in Jordan and Egypt to benefit from the terms of the US-Israeli FTA, effectively giving them duty-free access to the US market. Textiles and garments dominate exports from the zones. There are currently 13 QIZs in Jor-dan, 10 of which are privately owned and three of which belong to the state.

The first QIZ, Al Hassan Industrial Estate near Irbid, is the second largest in terms of investments, accord-ing to the Jordan Investment Board. The first exports under the scheme began in 1999, and grew rapidly from around $42m in value to reach $1.2bn by 2006, with textile firms in the zones selling to major inter-national brands such as GAP, Levi’s and Walmart. After 2006, exports from the zones began to weak-en, due to issues such as the expiry in 2005 of the multi-fibre agreement, competition from Egypt as well as the impact of the global economic crisis from 2008 onwards. However, in 2010 exports began to rise once more, thanks in part to the full implementation of Jordan’s FTA with the US (signed in 2000). Goods in the zones already had duty-free access to the US, but the FTA brought additional advantages.

“The procedures under the FTA are shorter; for example, there is no need to issue two certificates of origin or a QIZ certification of origin, which saves time and money,” Hassan Al Nsour, the head of the QIZ section at the Ministry of Industry and Trade, told OBG. As a consequence, the QIZs continue to exist and function as manufacturing hubs, but the QIZ export framework no longer offers exporters prac-tical advantages; according to Al Nsour, only one firm has remained using it.

TEXTILES & GARMENTS: Garments and leather goods represented the second-largest category of industrial exports in 2011, according to JCI data, at 17.4% of the total. Exports of articles of apparel and clothing accessories in the first nine months of 2012 stood at JD559.9m ($787.5m), up from JD540.6m ($760.4m) in the first three quarters of 2011, accord-ing to figures from the DoS.

The development of Jordan’s textile and garment industry is largely a result of the QIZs. “Jordan had a textile industry before the creation of the QIZs, but it was small and exports were particularly low; after the creation of the zones, Jordan started to sell to the global market on a significant scale,” said Al Nsour. While the development of the segment has done much to boost the economy and exports in par-ticular, its effect on national employment has been more limited, as it relies largely on foreign expatri-ate workers; only around a fifth of employees in the industry are Jordanian nationals.

SECTOR PERCEPTIONS: According to research by Better Work, a joint initiative between the Interna-tional Labour Organisation (ILO) and the Internation-al Finance Corporation, Jordanians tend to view employment in textiles and garment factories as having “very low status”, especially for female employ-ees (due to negative perceptions associated with working in a mixed-sex environment and having to come home after dark, according to the report). Working conditions in factories are also generally per-ceived to be poor and wages to be low.

However, a recent ILO study found that the cost of employing migrant workers in the sector was sig-nificantly above the lowest wage that Jordanian women in the sector are willing to work for (the “reservation wage”), suggesting pay is not in itself an insurmountable issue as regards increasing local employment in textiles.

The study proposed that Jordan actually has a “latent” comparative advantage in the sector, even without migrant labour and the US FTA, as its cur-rent low rate of female labour force participation means it has a potentially large reserve of relative-ly cheap labour that could supply the industry. The organisation called for measures including a public outreach campaign by factories to improve the pop-ular image of the industry in order to raise the pro-portion of Jordanians it employs.

MAJOR CUSTOMERS: The US remains the most prominent buyer of Jordanian textiles and garments, having spurred the development of the sector via duty-free access. “Most garment production still goes to the US – around 93% in 2011 – although some goes to the EU, the local market and other areas,” Al Nsour told OBG.

However, Canada is also set to become an impor-tant market for the sector as a result of the Cana-da-Jordan FTA, which came into effect in October 2012. “The rules of origin under the Canada FTA are similar to those under the US FTA and are more favourable than the EU Association Agreement,” Al Nsour told OBG. “The Association Agreement is a bit difficult with regards to the garment industry as it requires production to begin from yarn or to use raw material from EU countries. Jordan does not have yarn, cotton or water to support these activities, and materials from the EU are more expensive in gener-al, though there are some imports from Italy.”

However, the situation here may also see improve-ment as a result of another FTA, this time with Turkey, that came into force in mid-2012. “The FTA will help by allowing us to bring in raw materials from Turkey, which are cheaper than imports from the EU, under a EuroMed certificate of origin. This allows the final product to benefit from the Association Agreement, while the raw materials themselves are Customs-free, reducing costs,” said Al Nsour.

STEEL: The largest steel manufacturer is Jordan Steel, which has a production capacity of 250,000 tonnes per annum (tpa). The firm is publicly listed and no single investor has a stake larger than 7%. It record-ed revenues of JD118.5m ($166.7m) in 2011, up strongly from JD82.8m ($116.5m) the year before.

However, the company is facing similar challenges encountered by others in the sector. At the moment, steel manufacturers are experiencing difficulties due to the increase in energy and transportation costs, especially as the situation in Syria means it can no longer be used as an import route for inputs. Steel is an energy-intensive industry and Jordanian manufacturers are operating at a much higher cost than any of their regional competitors. In terms of the domestic market, steel sales are heavily depend-ent on the construction sector and currently many construction projects have been delayed.

Despite such challenges, companies active in the segment are expanding. For example, Taybeh Steel was reported in November 2012 to be planning to open a new 500,000-tpa rebar mill and direct reduced iron plant, to be completed by the end of 2013. According to media reports, the facility, which will be known as Watani Steel, is being built to meet growing demand from the construction sector in neighbouring Saudi Arabia.

CEMENT: The largest producer of cement is the Jor-dan Cement Company (JCC), which operates two cement factories in the kingdom with a combined annual output of 4.6m tonnes as well as eight con-crete factories. The firm is majority-owned by French construction materials major Lafarge, which holds a 50.28% stake in JCC, having participated in its pri-vatisation; the Social Security Corporation also has a holding of 21.8% in the firm.

Three new players entered the market in the late 2000s, which has led to a significant increase in capacity to around 9.3m tpa in 2011; this was due to the rise to 10.4m tpa with the opening in 2012 of a plant by Modern Cement and Mining, owned by local conglomerate Manaseer. Among the other recent entrants to the sector is the Saudi-owned North Jordan Cement, which opened a 900,000-tpa plant in the kingdom in 2009.

The segment has been facing difficulties recent-ly, especially given heavy competition as a result of new entrants, energy costs and falling demand. In December 2012 the president of the Jordan Asso-ciation of Cement Dealers said that product demand had fallen from around 12,000 tonnes per day to just 8000 tonnes and predicted that consumption would weaken further in 2013.

PHARMACEUTICALS: Jordan is an important region-al manufacturer of pharmaceuticals and was the largest exporter of medicines in the Arab world in 2011, according to the World Trade Organisation data, as well as the second largest in MENA, behind Israel. Around four-fifths of production is for export, with around 90% of foreign sales going to Arab coun-tries, according to the Jordan Association of Pharma-ceuticals Producers. JCI data shows that the sector accounted for around 10% of industrial exports in 2011. The segment’s dependence on exports is under-pinned by the fact that the domestic market is com-paratively small by regional standards; according to data from Hikma Pharmaceuticals, Jordan was the eighth-largest market in MENA in 2011 in terms of private retail sales of medicines, which were worth $216m that year, up 10.4%.

The kingdom’s pharmaceuticals trade surplus fell in 2011, to JD71m ($99.9m) from JD162m ($227.9m) in 2010, prompting the director-general of the Jor-dan Food and Drug Administration to warn in a May 2012 interview with The Jordan Times that the coun-try needed to find new markets.

Exports were down 13% year-on-year in 2011, from JD499m ($701.8m) in 2010 to JD433m ($609m), driven by reduced purchases in Saudi Arabia and Algeria. However, exports for the first nine months of 2012 rose slightly to reach JD259.3m ($364.7m), according to DoS data, up from JD254.6m ($358.1m) for the same period a year earlier.

There are about 16 pharmaceuticals manufactur-ing firms in the country. The country’s largest phar-maceuticals manufacturer is Hikma Pharmaceuticals, which is listed on the London Stock Exchange, and operates five production facilities in Jordan that pro-duce around 455 branded products. In addition to Jor-dan, the company has production facilities in Algeria, Egypt, Morocco, Saudi Arabia and Tunisia. The firm’s branded business is focused largely on the MENA region, where Hikma Pharmaceuticals says it has the largest sales of any regional pharmaceuticals firm and the fifth-largest sales of all drug manufacturers. The com-pany also markets around 50 generic products, sold entirely in the US through West-Ward Pharmaceuticals, a US company it acquired in 1991, and a range of injectables in MENA, the US and Europe.

In January 2013 Hikma Pharmaceuticals acquired Egyptian Company for Pharmaceuticals and Chem-ical Industries for a reported amount of around $22m, adding 35 products to its portfolio, including three cephalosporin anti-infectives, which it counts as one of its specialities. The company first entered the Egyptian market in 2007. The acquisition fol-lowed purchases of stakes in companies in Moroc-co and India in 2011 and in the US in 2010.

MONEY TALKS: Revenues at Hikma Pharmaceuti-cals have been increasing consistently since 2007, when they stood at $449m, reaching $918m in 2011. So too have profits, which grew from $95m to $146m over the same period. The company’s revenues for the first half of 2012 were $532.2m, which was up quite strongly from $394.8m in the same period the previous year; adjusted operating profits were also up, from $59.7m to $82.1m. In November 2012 the company stated that it expected revenue growth for the year as a whole to stand at approximately 20%.

Other pharmaceuticals firms include Hayat Phar-maceuticals and the Jordanian Pharmaceuticals Man-ufacturing Company (JPM). Hayat markets around 56 products and has an 8000-sq-metre factory on the edge of Amman with an annual production capaci-ty of 60m tablets and 30m capsules. Major product lines include antimicrobials, gastrointestinal prod-ucts and anti-hypertensives, which the firm markets both at home and throughout the region. JPM also operates a manufacturing facility in Amman and sells to around 35 countries, producing natural products, including herbal medicines as well as diagnostic products via its DeLass and Aragen subsidiaries respectively, in addition to pharmaceuticals.

“The future of the industry is not for small players. Companies will have to align themselves together as a way to strengthen all operations and allow for special-isation arms that feed back to one powerful entity,” Dr Adnan Badwan, the CEO of JPM, told OBG.

“Through mergers and acquisitions companies can be more productive in marketing schemes and research and development because they will have better access to capital,” Dr Badwan added.

MINING & MINERALS: Mining accounted for the largest share of industrial exports by product seg-ment, at 20.4% in 2011, according to JCI data, though the sector is not labour-intensive, accounting for less than 1% of employment in 2011. The most impor-tant mineral products and exports by far are potash and phosphates, extracted from the Dead Sea and mined from several sites, respectively. Output of both commodities is used largely for the production of fertiliser and fertiliser inputs. A large portion of Jordan’s production of commodities and products derived from them is exported, primarily to Asian countries (see analysis).

As regards other metals, the government in 2011 issued tenders for mining copper and gold in three different areas in the south of the country; howev-er, results have yet to be reported. The country is also thought to have significant uranium reserves, which could eventually be used to fuel nuclear power proj-ects in the pipeline. In mid-2012 the Jordanian French Uranium Mining Company (JFUMC), an affiliate of French nuclear energy firm Areva, confirmed the presence of reserves of around 20,000 tonnes in the centre of the country. However, in October 2012 the Jordan Atomic Energy Commission decided not to extend JFUMC’s mining agreement, which will likely delay the exploitation of reserves.

HUMAN RESOURCES: Industry employed 231,772 people in 2011 according to the JCI, up from 190,015 in 2010. The 2011 figure represented approximate-ly 15% of the country’s total workforce.

Manufacturing alone accounted for 10.2% of employment in 2011, according to the DoS. The gov-ernment has been taking numerous steps to boost employment in industry. One of these is an initiative to create “satellite” factories in villages.

“Families will not send their young people to Amman to work, so the idea is bring factories to vil-lages,” Al Nsour told OBG. To encourage investment, the government provides buildings to the projects for free for five years and also pays 30% of the employees’ salaries. Seven such satellite factories have now been built – six of them producing tex-tiles – and these employ approximately 1500 peo-ple among them. Most of the staff are women and all are Jordanian; while most workers in textile man-ufacturing are foreigners, only nationals are allowed to work in the satellite factories.

Industrialists are now facing a number of challenges with regards to employment. For example, Al Mahrouq said there is a mismatch between demand and supply in the labour market, due to a disconnect between academic teaching and industrial needs. However, industry and academia are work-ing together to improve coordination; for example, in 2011 Hikma Pharmaceuticals and Yarmouk Uni-versity signed an agreement to create an industrial pharmaceuticals facility and also undertake broad-er cooperation and research.

REGULATION & GOVERNMENT RELATIONS: Indus-try representatives state that dialogue with the authorities needs to be improved. “What we are look-ing for is a real and active partnership with the gov-ernment and for it to at least seek our point of view before taking decisions,” Al Mahrouq told OBG. “We are asked for comments too late, when laws are already in front of parliament; we want to be part of drafting laws from the beginning so we can explain the impact on industry early on,” Al Mahrouq said, adding that requests submitted to the government often do not receive a response.

Another challenge cited by industry is bureaucra-cy. “Inspections are an issue,” said Al Mahrouq. “Every industrial firm is under inspection from 16 different institutions and each one visits at least twice a year, for at least an hour, which is at least 32 visits. Fur-thermore, inspectors make contradictory demands; there is a lack of standardisation and coordination between different institutions and sometimes even within the same institution.”

However, Al Mahrouq said interaction between the government and industry is improving, albeit slowly. “Part of the problem is the constant turnover of governments and ministers, which creates quite a difficult situation,” said Al Mahrouq. “You explain an issue and then the minister is replaced, so you need to start from scratch again.”

OUTLOOK: Despite challenges, industrialists say Jor-danian industry is doing well. “Some 40% of growth and 90% of exports come from industry,” Al Mahrouq told OBG. “Jordanian industries have worked hard to raise standards and have a good reputation.”

Given the sector’s export-oriented nature, its future performance will depend to a large extent on growth in key export destinations and in global com-modity markets. However, the recent implementa-tion of several FTAs is set to boost demand for some industrial products, such as textiles, irrespective of the performance of the global economy.

Hopes for a major upswing in domestic energy production and reduced energy prices in the medi-um to long term (see Energy chapter) leave open the possibility of addressing one of the sector’s major challenges and improving industrial competitive-ness. Meanwhile, efforts are being made to improve access to finance, especially by increasing lending to SMEs, which have struggled of late (see analysis).