Broadening the base: Adding value to production is a priority as diversification continues

The economic diversification strategy Qatar has opted for rests on reinvesting the income from hydrocarbons sales. Developing a base for industry and manufacturing has been a pillar of this, with accelerated efforts to grow the sector taking place over the past decade. Building on Qatar’s comparative advantages, the government has focused on developing industrial sectors that support or leverage its energy resources and industry. Developing downstream facilities that add value to energy by-products, for example, has helped build a portfolio of petrochemicals, chemicals and fertiliser companies.

Other investments include developing energy-intensive industries in steel and aluminium that can benefit from Qatar’s low-cost gas supplies. Shipbuilding is another growing segment that contributes to industrial output and supports the energy sector.

National Vision

The Ministry of Energy and Industry is the lead agency charged with building the country’s industrial base. In line with Qatar’s National Vision 2030, the ministry has outlined a plan for the sector, stating that, “The development of industry and encouragement of investments are two major levers towards the optimum utilisation of natural resources given the fact that industrialisation plays a key role in overall economic development.”

The ministry’s industrial strategy highlights the role of Qatar Petroleum, and hinges on developing production in hydrocarbons extraction industries; increasing production capacities of existing petrochemicals, chemical fertiliser, and iron and steel plants; expanding petroleum refining capacity; and encouraging greater private sector contribution to industrial development through the provision of incentives and facilities.

National Support

The state has committed significant support to help achieve these goals. The Ministry of Energy and Industry has pledged to improve the investment climate for the industrial sector, and has been strengthening laws, systems and procedures, streamlining administrative processes, facilitating investments, reforming immigration rules for specialised human resources, and building basic infrastructure in industrial estates.

Other support includes supplies of power, water and gas at competitive rates, cheaper land allocations, waiving of corporate and income taxes, and exemption from export duties on plant and equipment, raw materials and packing materials.

Economic Impact

Qatar’s non-hydrocarbons revenues have continued to grow in line with national strategies to diversify the economy. IMF projections indicate that the non-hydrocarbons sector grew by at least 9% in 2012. Industrial and manufacturing output, boosted by the Pearl Gas-To-Liquids (GTL) facility, was the fastest-growing sector in the economy between the first quarter of 2012 and the first quarter of 2013. According to Qatar National Bank (QNB), manufacturing accounted for 9.8% of GDP in 2012.

QNB reports that manufacturing witnessed 12.5% growth between the first quarter of 2012 and the first quarter of 2013, outpacing GDP, which expanded by 6.2% during the same period. This compares to 11.7% growth in construction, which was the second-fastest sector due to Qatar’s major push to develop infrastructure in the country.

According to the Gulf Petrochemicals and Chemicals Association, the total value of Qatar’s manufacturing output was estimated at $18.2bn in 2012.

This included refining, petrochemicals and chemicals, and other manufacturing segments. Growth in manufacturing is driven mainly by downstream refining and processing output at the Pearl GTL plant, which is the world’s largest, and the smaller ORYX facility. Other downstream activity, such as the production of fertilisers, grew by 40.1% in 2012, according to the “Qatar Economic Outlook 2012-13” report.

Iron and steel grew by 8.8%. The report attributes this to the expansion of Qatar Steel and investments in developing manufacturing works in Mesaieed.

Commodities

Exports of industrial commodities are growing quickly in Qatar. UN Comtrade reported that the value of non-hydrocarbons commodities was $15bn in 2009. This increased to $37bn in 2011, representing growth of 246% over just two years. Exports of aluminium account for a small proportion of this, but were the fastest-growing export commodity during this period. UN Comtrade data shows that the value of exports of unwrought aluminium increased from just $1.2m in 2009 to over $1bn in 2011. The export of ethylene polymers also grew significantly, almost doubling from $1.1bn in 2009 to $2bn in 2011. Mineral and chemical fertilisers also made up a significant portion of commodity exports, increasing from $786m in 2009 to $1.3bn in 2011. Japan, South Korea and India were the main destination markets for these exports.

Industries Qatar

As with most major sectors, Qatar’s industrial output is managed and driven by state-owned companies. Qatar Petroleum is the biggest player, as it owns or manages a portfolio of firms that have developed the country’s downstream capabilities in oil and gas. Industries Qatar, one of its bigger shareholdings in the sector, is a multibillion-dollar company with growing influence in the market. It was established as a joint stock company in 2003 to enable and encourage investment in Qatar’s industrial and manufacturing sector.

The group celebrated its 10-year anniversary with record revenues. According to the company’s 2012 annual report, shareholder equity increased from $1.37bn in 2003 to $6.3bn in 2011, while profits increased from QR1.1bn ($301m) to QR8.4bn ($2.3bn) during the same period. Total assets exceed QR40bn ($11bn), and the number of companies in Industries Qatar’s portfolio grew from 8 to 18 over the last decade. The group operates in three market segments; petrochemicals, fertilisers and steel.

Industries Qatar was formed as part of the government’s broader drive to privatise the management of state-owned companies. It was established by incorporating Qatar Fertiliser Company (QAFCO), Qatar Steel, Qatar Petrochemical Company (QAPCO) and Qatar Fuel Additives Company (QAFAC) under a single umbrella. Qatar Petroleum owned a majority share in all of the firms except for Qatar Steel prior to the reorganisation in 2003. Under the changes, Qatar Petroleum acquired Qatar Steel and subsequently transferred its interests in all four companies to Industries Qatar. Qatar Petroleum divested some of its investment in Industries Qatar, reducing its shareholding from 70% to 51% in 2012. This share was essentially transferred to add to the General Retirement and Social Security Authority’s stake in Industries Qatar to ensure that the country’s industrial output helps in supporting Qatari nationals.

Global Player

The chemicals industry is the second-largest manufacturing segment in the GCC, with regional output estimated at $97bn in 2012 by the Gulf Petrochemicals and Chemicals Association. This is only a small portion, at 2.5%, of global shipments of chemicals, which totalled almost $4trn in 2012. Yet output in the GCC grew at 19% in 2012, outpacing the global average of 9.7%. The sector employs almost 140,000 people, with national citizens representing 34% of sector employees. According to the Gulf Petrochemicals and Chemicals Association, petrochemicals and chemicals accounted for 36% of Qatar’s manufacturing output, or over $6.7bn, in 2012, compared to under 20% of GDP in 2008. Chemicals exports represent 68% of total non-oil exports.

Streamlining Marketing & Sales

In 2012 the government established a central, state-owned company with exclusive rights to purchase, market, distribute and sell Qatar’s production of chemical and petrochemical regulated products to the global market. Qatar Chemical and Petrochemical Marketing and Distribution Company, or Muntajat, is expected to serve as the face of the local downstream petrochemicals and chemicals industries. The company was established under the mandate of Law No. 11 of 2012 in a bid to consolidate Qatar’s position within the global market for chemical and petrochemicals products, and to accelerate exports of its industrial output in these sectors. Muntajat essentially has the mandate to buy and sell output from six key firms – QAFCO, QAPCO, QAFAC, Qatar Vinyl Company (QVC), SEEF and QATOFIN.

According to Mohammed bin Saleh Al Sada, minister of energy and industry, Qatar will invest $25bn to raise total annual production of chemicals, polymers and fertilisers from 10m tonnes to 23m tonnes by 2020. QNB reports that Qatar will have invested $17bn of this by 2017, adding an estimated 1.6m tonnes of intermediate products and 1.5m tonnes of final products to current production capacity. This output is currently sold to private businesses and governments in more than 120 countries.

Muntajat recently took over marketing and distribution responsibilities for low-density polyethylene (LDPE) and linear low-density polyethylene (LLDPE), bringing its portfolio to almost 90% of Qatar’s overall chemical, polymer and fertiliser export output. It is rapidly establishing its global network, recently opening an international marketing company in The Hague, in the Netherlands.

Fertilisers

Qatar is the GCC region’s second-largest fertiliser producer, with an annual production capacity of 10.7m tonnes in 2012, according to the Gulf Petrochemicals and Chemicals Association. This represents 35% of capacity in the GCC. The country mainly produces nitrogen fertilisers, and is the largest producer of urea and the second-largest producer of ammonia in the region.

QAFCO, Industries Qatar’s oldest holding, is the state-owned firm that produces Qatar’s fertiliser output. It was established in 1969 as a joint venture between Qatar, Norsk Hydro Norway, Davy Power Gas and Hambros Bank to produce ammonia and urea using Qatar’s abundant gas resources. QAFCO marked the first step towards developing the country’s industrial base. Industries Qatar owns 75% of it, with global agri-chemical firm Yara International owning the remaining 25%. QAFCO has two subsidiaries, with a 70% stake in Gulf Formaldehyde Company and a 60% stake in Qatar Melamine Company.

QAFCO expanded its capacity as the QAFCO-5 and QAFCO-6 ammonia and urea plants came on-line in 2012. The plants, built at Mesaieed Industrial City, increase QAFCO’s total annual production capacity to 3.8m tonnes of ammonia and 5.6m tonnes of urea, according to the company. Total investment in the facility is estimated at $3.8bn, with QAFCO-5 costing around $3.2bn and QAFCO-6 some $610m, according to Chemicals Technology. The facilities were financed with bank loans, as well as QAFCO’s cash reserves and operational cash flows.

Petrochemicals

QAPCO and QAFAC are the main petrochemicals companies in Industries Qatar’s portfolio. QAPCO was established as a joint venture with France’s Total Petrochemicals in 1974. Total owns a 20% stake in the company, with the rest under Industries Qatar. QAPCO has an additional three joint ventures that round off the country’s petrochemicals market – QATOFIN, QVC and Qatar Plastic Products Company. QAFAC’s shareholding includes 50% by Industries Qatar, 20% by OPIC Middle East Corporation, and 15% each by International Octane and LYC Middle East Corporation.

Qatar Petroleum supplies ethane as feedstock for QAPCO’s ethylene plants, which in turn is used to produce LDPE. QAPCO unveiled its third LDPE plant in 2013. The QR2.3bn ($630m) facility has an annual production capacity of 300,000 tonnes of LDPE, bringing the country’s total capacity to 700,000 tonnes of LDPE per annum.

QAPCO owns a 31.9% stake in QVC, with Qatar Petroleum owning 12.9%, and Mesaieed Petrochemical Holding Company owning 55.2%. The company uses 20% of the ethylene produced by QAPCO to produce ethylene dichloride, vinyl chloride monomer and caustic soda. These products are sold to companies to manufacture PVC products, alumina, pulp and paper, and detergents.

QAFAC’s revenues in 2012 were almost $1bn. The company produces methanol, which is exported to Asia and Europe or used as feedstock for QAFAC’s other plants that produce methyl-tertiary-butylether (MTBE). “Demand for methanol is rising 10% year-on-year and demand for MTBE is up 5.9% annually. Due to proximity and pricing structure, Asia is the most attractive market,” Nasser Jeham Al Kuwari, QAFAC’s general manager, told OBG. MTBE is an additive in petrol. Most of QAFAC’s MTBE is exported to the Gulf region, with limited supplies exported or used by Qatar Petroleum. QATOFIN, established in 2009, produces LLDPE at its plant in Mesaieed Industrial City. The company is a joint venture between QAPCO, which owns 63%; Total Petrochemicals, which owns 36%; and Qatar Petroleum, with 1%. QATOFIN is conducting feasibility studies to increase production over the next decade. In 2013 Qatar Petroleum and Shell awarded a preliminary engineering and design contract for Al Karaana Petrochemicals Complex, which will be built in Ras Laffan Industrial City. The front-end engineering and design (FEED) contract was awarded to Fluor, with a broad scope of building a steam cracker, a monoethylene glycol plant, a linear alpha olefin unit and an OXO alcohols unit. Qatar Petroleum has an 80% share in the project, with the rest under Shell. Also under construction in Ras Laffan Industrial City is the Al Sejeel Petrochemical Complex, owned by Qatar Petroleum (80%) and QAPCO (20%). The $5.5bn project, set for completion in 2018, is designed to produce a total of 2.2m tonnes per annum of polymers, including polypropylene and polyethylene resins, and will feature one of the world’s largest mixed-feed steam crackers. The FEED contract for the project was awarded to Tecnimont in mid-December 2013. The project will create 1500 jobs for Qataris. Q-Chem and Q-Chem II are jointly owned by Qatar Petroleum and Chevron Phillips Chemical International Qatar Holdings, and produce high-density and medium-density polyethylene, and other products. Q-Chem II also entered into a joint venture with QATOFIN and Qatar Petroleum to establish Ras Laffan Olefins Company (RLOC). The facility consists of the world’s largest ethylene cracker unit, with a total capacity of 1.3m tonnes per annum. RLOC’s ethane feedstock is supplied by Dolphin Energy, AKG and QATOFIN via a 128-km pipeline.

Feedstock

Qatar’s petrochemicals and fertiliser industry is built on the back of low-cost feedstock from Qatar Petroleum’s production.

RasGas is developing the Barzan gas plant in partnership with ExxonMobil, in part to supply the petrochemicals sector with feedstock. The first phase of this project will be completed in 2014, with Train 2 coming on-line in 2015. The plant is expected to supply approximately 2bn standard cu feet per day of gas, and will be used domestically to feed power stations and industrial projects.

Shell’s $19bn Pearl GTL plant will also add to Qatar’s ability to supply its petrochemicals firms with input. The plant is the largest of its kind and is expected to produce 3bn barrels of oil equivalent of natural gas over the life of the project.

Metals

In addition to developing an industry around supplying chemicals and petrochemicals that benefit from inexpensive feedstock from Qatar’s gas supplies, the country has also invested in developing output of steel and aluminium. Qatar steel, fully owned by Industries Qatar, was established in 1974 and now employs over 1600 people at its plants in Qatar. Industries Qatar reported revenues of QR6.2bn ($1.7bn) from its steel businesses in 2012, representing growth of 6.8% over the previous year.

The company has plans to double the current annual production level of 2.7m tonnes to more than 5m tonnes over the next five years. The firm is close to boosting the rate of supply with a 1.1m-tonne-capacity plant being built for an investment of some QR1.2bn ($329m). Qatar Steel will also benefit from another two years of supply from its two oldest furnaces, which were to be decommissioned in 2013 but will now stay on-line until 2015.

The sector is posting impressive growth figures, driven by strong demand in Qatar and the broader GCC. The growth in supply fits Qatar Steel’s ambitions to expand abroad. While a significant portion of existing output serves the local market, Qatar Steel is increasingly looking to play a broader regional and even global role. It has a subsidiary, Qatar Steel Company FZE, in Jebel Ali Free Zone in neighbouring Dubai, which was established in August 2003 to meet demand for steel products within the GCC and in international markets.

In 2013 Qatar entered into a joint venture with Algeria to build a plant with a total capacity of 4m tonnes per annum. The first phase of construction is estimated to cost $2bn, with an expected opening in 2017. The terms of the deal will give Algeria 51% of the joint venture under Sidar and the National Investment Fund, and 49% to Qatar under Qatar Steel and Qatar Mining.

Other major holdings include a 25% stake in Gulf Industrial Investment Company and United Stainless Steel Company in Bahrain, 50% in Qatar Metals Coating Company and 29.74% in South Steel of Saudi Arabia. In March 2013 Qatar Steel signed an agreement to supply up to 600,000 tonnes per year of direct reduced iron to South Steel. This secures revenues for Qatar Steel’s plants and strengthens its reach within the region.

Niche Markets

There are other smaller players in Qatar’s steel industry, including Al Watania Steel, which belongs to Egypt’s Al Attia Group. The firm established itself in Qatar in 2003 and is a growing supplier of reinforced steel. It has a current monthly output of 4000 tonnes, but has plans to increase this to 10,000 tonnes. Khalifa Steel, which was established in 2009, operates factories to cut and bend steel, and to weld wire for construction projects.

Qatar is also actively investing in mining. Qatar Mining Company, a state-owned firm established in 2010 with a goal of investing in the mining and metals sector, has a strategy of targeting existing assets, developing new projects and investing in exploration.

More recently, Qatar also established a presence in the aluminium sector. Qatalum, which was established in 2007 and started full production in 2011, is joint venture between Qatar Petroleum and Hydro Aluminium of Norway. Its plant has a maximum capacity of 585,000 tonnes of aluminium products per annum. According to the firm, its products are used in industries ranging from automobiles and construction to engineering and consumer goods.

Outside the metals market, companies such as Nakilat are further broadening Qatar’s industrial base into niche market segments. Nakilat is primarily a gas transport firm but has recently invested in ship building facilities under Nakilat Damen Shipyards Qatar, established in 2010, and ship repair and maintenance facilities in partnership with Keppel at the Erhama Bin Jaber Al Jalahma Shipyard in Ras Laffan Industrial City. Nakilat Damen Shipyards Qatar recently signed a deal to construct Qatar’s first fast luxury vessel. This builds on Nakilat’s existing capacity as the world’s largest liquefied natural gas (LNG) transport firm, with a fleet of 54 LNG vessels.

Small & Medium-Sized

The government established Qatar Industrial Manufacturing Company (QIMC) in 1990 to develop broader participation in small and medium-sized industries. QIMC is partially owned both by the government and by private interests. It was established with QR200m ($55m) in capital, which was raised to QR300m ($82m) in 2006. QIMC currently has investments across the GCC, with stakes in 13 operational projects in various sectors, including chemicals, petrochemicals, construction materials and food processing.

Outlook

Although the economy will continue to be dominated by hydrocarbons production for the foreseeable future, strategic investments in key industrial segments will help ensure it diversifies into high-growth areas. These investments will also help ensure that Qatar captures additional value from its resources in the form of higher-value-added downstream products. While global economic conditions may present some challenges, local and regional demand is likely to remain strong, ensuring a positive outlook for Qatar’s growing industrial base.