Business reforms foster the development of Bahrain's manufacturing and heavy industries

Since the 1970s Bahrain has made a concerted effort to diversify its economy, with efforts visible in the vibrant manufacturing segment and from the growth of the kingdom’s heavy industries. Despite the drop in state revenues due to lower global oil prices in recent years, Bahrain continues to invest in its industrial sector, notably with the $3bn expansion of Aluminium Bahrain (Alba), which will see production grow to 1.5m tonnes per year – a rise of over 500,000 tonnes.

Meanwhile, Bahrain continues to capitalise on its oil and gas resources, with significant investment in the downstream petrochemicals segment. This is highlighted by the $5bn being spent on the modernisation taking place at Bahrain Petroleum Company and the $515m gas plant expansion by Bahrain National Gas Expansion Company (see analysis). In September 2017 1961. Sheikh Khalifa bin Salman Al Khalifa, the country’s prime minister, urged the local business community to focus on industrial development, while calling for a radical change in national industries. He aims to promote goods with the “Made in Bahrain” brand both locally and in the larger region, and pledged to follow up on the implementation of plans to improve the business environment in order to invigorate the economy.

ECONOMIC PERFORMANCE: Revenues from oil and gas fell to BD1.4bn ($3.7bn) in 2016, down from BD1.6bn ($4.2bn) in 2015 and BD2.7bn ($7.2bn) in 2014, according to the 2016 consolidated accounts published by the Ministry of Finance (MoF). Oil and gas revenue accounted for 75% of all state income, little changed from 2015 – although down from an average of 87% in 2011-14 – pointing to the overwhelming importance of the sector to the economy.

According to the Bahrain Economic Development Board (EDB), manufacturing output has risen by 80% over the last 10 years, meaning the manufacturing and logistics sector is now the third-largest contributor to the economy, accounting for 14.4% of GDP in 2016. Manufacturing activity grew by an average of 0.5% in first three quarters of 2017, versus an average GDP growth rate of 2%. This was after the sector grew by 1.3% in 2016 and 3.2% in 2015.

Speaking to local media in July 2017, Husain Rajab, director of manufacturing, transport and logistics at the EDB, said Bahrain plans to invest over $32bn in key infrastructure projects over the next few years, with one-third of the total expenditure earmarked for manufacturing projects. Rajab pointed to opportunities for investment and growth in key subsectors, such as industrial supplies, food and beverage, and fast-moving consumer goods (FMCGs).

According to the EDB, Bahrain attracted more than $200m worth of investment into its manufacturing and logistics sector in the first half of 2017, which is expected to create around 1000 new jobs over the next three years. The EDB suggested that this level of investment is due in part to a substantial increase in the number of international companies looking to set up shop in Bahrain and use the country as a regional hub for serving the Gulf and beyond.

BUSINESS REFORM: Over the last two years, Bahrain has gone through major business reforms with the goal of making the kingdom more inviting for foreign firms. “The transformation project was so elaborate that we overhauled our whole process of doing business. Throughout the journey, we changed several laws affecting labour affairs, foreign investment, finance, commerce, industry and tourism,” Zayed bin Rashid Alzayani, minister of industry, commerce and tourism, said at the opening of the 32nd Metal Bulletin Conference in September 2017.

He told the audience that the overhaul had led to an increase in the number of registered companies in the country, growing by 160% in 24 months. He added that less than 2% of all business activities are now restricted to 100% Bahraini ownership. “We can confidently say that we have one of the most transparent, progressive and open economies in the GCC, if not beyond,” he said.

According to Bader Fareed Alsaad, director of industrial areas operations at the Ministry of Industry, Commerce and Tourism (MICT), significant improvements have also been made in applying for the use of industrial land. “Starting from January 2017 we have been working on improving the application process,” he told OBG. “In the past, applications for land could take months, if not years, depending on the availability of land. Now it takes only 18 working days if the application is complete, including a feasibility study. Industrial land in Bahrain is scarce, and we have gone through existing industrial areas in an effort to recover plots that are not being utilised.”

Alsaad also pointed to issues in the process of standardising land leases, as well as to rate increases in industrial areas to improve related services. “We raised the price from 500 fils to BD1 ($2.65) per sq metre per year for industrial activities. The price had been static for nearly 20 years,” he added. “The increase was not large – the price of land is still very cost competitive in comparison to the other GCC states.” The MICT reported that industrial plot violations – including non-payment of rent, subleasing, activities infringing upon the lease agreement and expired lease contracts – dropped 69% in 2016 thanks to an increased focus on the development of the industrial sector.

EXPORTS & IMPORTS: The value of the kingdom’s non-oil exports has remained stable, reaching $4.72bn in the first eight months of 2017 – largely in line with the $4.82 recorded in the same period of 2016. Bahrain-origin exports were valued at $3.81bn, up 16.9% year-on-year (y-o-y). A large part of this increase was due to rising metal prices, with global aluminium and iron prices, in particular, trending upward.

The value of re-exports dropped 27.6% to total $1.4bn for the entirety of 2017, according to the EDB, using provisional data for the fourth quarter. same time, imports amounted to $13.2bn, a 14.1% increase over the previous year.

According to the Observatory of Economic Complexity, Bahrain’s total exports were valued at $12.6bn in 2016, making it the 60th-largest export economy in the world, while it imported $11.5bn worth of goods and services. Top exports included refined petroleum products ($3.63bn), crude petroleum ($2.19bn), iron ore ($776m), aluminium wire ($699m) and aluminium plating ($501m). Saudi Arabia led as the top export destination, with $2.34bn, followed by the UAE ($2.23bn), the US ($1.41bn), Japan ($1.12bn) and Qatar ($611m).

WORKFORCE FIGURES: In the second quarter of 2017 Bahrain employed 763,618 people, up 1.2% y-o-y, according to statistics from the Labour Market Regulatory Authority. The majority of these workers (606,357) are non-Bahraini. The private sector employed 598,877 of the total, down from 603,156 in March 2017. Between March 2002 and June 2017 the private sector in Bahrain averaged 455,395 employees, peaking in December 2016 at 611,229.

The labour cost gap between Bahraini and non-Bahraini employees in target industries, which includes small-scale manufacturing, increased to a spread of BD340 ($902) per month – up BD32 ($85) from the previous year – with locals earning more. For Bahrainis, the public sector median wage stood at BD691 ($1832) per month, up 0.7% y-o-y, while private sector wages were far lower at BD407 ($1079) per month, although this was a 3.6% increase over the second quarter of 2016. The number of new regular work permits issued during the second quarter of 2017 was 33,498, down 32.4% annually, with the share of regular work permits issued to organisations employing less than 10 workers representing 49.4% of the total.

According to the EDB, Bahrain offers a strong competitive advantage for businesses looking to locate in the country in the form of an educated workforce with young, talented, industry-skilled human capital. Further, labour costs in Bahrain are 21% lower than in Saudi Arabia, 18% lower than in Qatar and 11% lower than in the UAE. Within manufacturing, 80% of employees are non-Bahraini and total employment in the segment stands at roughly 78,000 people.

When looking at the major companies operating in Bahrain, aluminium giant Alba has an 84% Bahrainisation rate, with German chemical company BASF operating at 74%, logistics giant DHL at 53%, consumer goods company Reckitt Benckiser at 36% and confectionary giant Mondelez International at 35%. Companies abusing the kingdom’s Bahrainisation Law, which requires firms to employ at least one Bahraini for every four expatriate workers, will be fined BD300 ($796) for every foreign worker not covered in their quota – the equivalent of one month’s minimum wage for a Bahraini working in the private sector. Since April 2017 companies can also have their visas refused if they are caught breaking the law.

ALBA: Established in 1968, Alba is among the world’s largest primary aluminium smelters and acts as a cornerstone of the economy. The company, which began operations in 1971 with an annual capacity of 120,000 tonnes, now has a maximum smelting capacity of 1.2m tonnes per year. More lines were added in 1981, 1992 and 2005, the latter of which raised output by some 860,000 tonnes per year.

In 2016 Alba produced 971,420 tonnes of aluminium, a record for the company, and was able to outperform the industry despite challenging market conditions. The construction of a new production line, Line 6, is expected to raise total output to 1.5m tonnes annually when operational. The Line 6 addition will make the facility the largest single-site smelter in the world.

In July 2017 Alba announced that the concrete foundation of Line 6 had been laid and that the $3bn expansion project – which was 40% complete at the end of the year – was scheduled to finish in 2019.

A year prior, in April 2016, Alba appointed US company Bechtel as the engineering, procurement and construction management contractor for the line, and in October of that year Alba closed a $1.5bn syndicated term loan facility for the project – the biggest corporate loan to ever be issued in Bahrain.

The expansion is a key component of the country’s industrial strategy to further utilise its resources to develop more upstream and downstream opportunities, as well as create more jobs. As of 2017 the company employed 2681 people.

COMPANY STATISTICS: Alba is majority owned by Mumtalakat, the kingdom’s sovereign wealth fund, which controls 69.38% of the company’s shares. Saudi Basic Industries Company holds 20.62% and the remaining 10% is owned by the public. In its 2016 annual report the company said that it expected 2017 to be another challenging year, with volatile prices on the London Metal Exchange, higher US dollar interest rates, continued pressure from Chinese overproduction and a new US president.

Despite this, in 2017 Alba saw sales revenue of $2.29bn, up from $1.8bn in 2016, according to the 2017 annual report. Roughly 40% of revenue was represented by sales to customers in Bahrain, while 23% were sales to Europe. Other MENA countries, the Americas and Asia each contributed 12% to revenue. The year before, 45% of sales went to customers in Bahrain, 17% to Europe, 10% to other countries in the MENA region, 11% to the Americas and 17% to Asia. Categorically, 34% of sales in 2016 came from extrusion billet, 30% from liquid metal, 14% from standard ingots and 11% each from foundry alloys and rolling slabs.

Alba is pushing ahead with cost-saving measures, with the company’s Project Titan Phase I having achieved savings of $148 per tonne. Phase II aimed to reduce costs by a further $100 per tonne, but actual savings in 2017 were $79 per tonne.

ALUMINIUM ECOSYSTEM: Since the establishment of Alba, a thriving aluminium segment has grown around the company, with a cluster of downstream metal manufacturing businesses and associated activities built around the smelter; Alba sells approximately 50% of its output to local downstream industries.

In his speech at the Metal Bulletin Conference, Alzayani said the Bahraini aluminium industry as a whole has seen total investment in excess of $5.2bn, with exports valued at $1.7bn and a GDP contribution of 12%. He added that the industry employs 12,184 people, and that Line 6 is expected to further stimulate activity. “Simply put, the downstream sector could not have existed without Alba, nor could Alba grow so rapidly without the local offtake. It is a long-lasting partnership and one we believe will grow even further with the launch of Alba’s potline 6,” he said.

Major players in the aluminium ecosystem include Gulf Aluminium Rolling Mill Company (GARMCO), which was founded in 1981 and is one of the largest downstream aluminium facilities in the Middle East. In April 2017 Mumtalakat Holding Company announced a new $55m recycling and aluminium casting facility at GARMCO, with construction already under way at the time. The re-melt facility was expected to increase GARMCO’s production capacity by around 150% to 200,000 tonnes of aluminium slabs per year, with maximum operational capacity to be reached by November 2017, lowering the overall cost of metal.

Another important company is Midal Cables, a joint venture between Intersteel of Bahrain and Australian company Olex Cables, which started operation in 1977. It was the first company in the region to manufacture and export aluminium and aluminium alloy rods, as well as overhead conductors, wires and conform extrusion products. Moreover, in 2006 Midal Cables became the first company outside North America and Europe to manufacture next-generation ACCC aluminium conductors with a composite core.

In 2015 Midal Cables opened a $65m aluminium factory in Mozambique, expanding its global footprint. The new facility has an annual output capacity of 50,000 tonnes, and is targeted towards markets in nearby nations such as South Africa, Namibia, Kenya and Nigeria. The firm also has production facilities in Saudi Arabia, Turkey and Australia, with an overall production capacity of almost 500,000 tonnes per year. Midal Cables also has a joint venture focused on aluminium wheel castings, founded in 1992 in partnership with Al Zayani Investment and BBS Kraftfahrzeugtechnik of Germany. The company, Aluminium Wheel Company (AluWheel), has the capacity to produce 400,000 wheel casings per year.

Other players in the ecosystem include Bahrain Aluminium Extrusion Company, founded in 1977 with a current annual production capacity in excess of 33,000 tonnes. The firm focuses on aluminium doors, window frames and other products for the construction industry. Bahrain Alloys Manufacturing Company, which commenced production in 1996, has a casting capacity of 30,000 tonnes per year. Meanwhile, Bahrain Recycling Plant, established in 1988, processes aluminium dross and re-melts aluminium scrap from Alba and other downstream companies. The plant has a current annual capacity of 15,000 tonnes, with plans to expand capacity to 22,000 tonnes by 2020.

OTHER METALS: Created in June 2008, Foulath is an investment vehicle and holding company focused on the steel industry in the GCC and the broader MENA region. It is half owned by the Gulf Investment Corporation of Kuwait and 25% owned by Qatar Steel. Foulath has established companies across the entire steel value chain, and has full ownership of two iron and steel businesses in Bahrain: Bahrain Steel and United Stainless Steel Company.

Bahrain Steel, a leading producer of iron ore pellets used in steel production, operates two pelletising plants in the country that have a combined annual capacity of 11m tonnes. United Stainless Steel Company, which produces cold-rolled stainless steel, has a production capacity of 100,000 tonnes per year. Its Al Hidd facility also possesses a direct reduced iron plant with an annual capacity of 1.5m tonnes, a melt shop able to produce 850,000 tonnes per year and a 600,000-tonne capacity heavy rolling mill. The company further operates a medium and light section rolling mill in Jubail, Saudi Arabia that can produce 450,000 tonnes of goods per year.

Foulath also has a joint venture called United Steel Company with Yamato Kogyo Company of Japan, which is the Middle East’s first fully integrated medium and heavy beam and structural steel sections producer.

Other downstream steel manufacturers include Universal Rolling, established by Bahraini and Saudi investors and located in Hidd. The company’s facility, which went into operation in 2009, has a capacity of 200,000 tonnes per year of steel bars from billets.

Mueller Middle East, a joint venture comprising Bahrain’s Mumtalakat Holding Company, local industrial projects developer and investor Cayan Holdings, and Mueller Industries of the US, is set to open its first regional copper tube manufacturing facility in Bahrain in 2018. The group aims to tap into and serve the increasing demand for quality copper tubes within the GCC. The facility, located in Bahrain International Investment Park (BIIP), will produce commercial copper tubes to serve air-conditioning and refrigeration equipment manufacturers in the region (see analysis). The factory is projected to create more than 200 jobs.

INDUSTRIAL ZONE UPGRADES: In recent years Bahrain has prioritised the expansion and upgrade of its industrial zones, which are the main operational locations for many of the kingdom’s industrial and multinational companies. In August 2017 the MICT said it was taking measures to ensure the quality of the main roads that serve these areas. As part of these efforts, roads are to be re-planned in eight industrial zones, with the creation of adequate parking areas for cars and trucks as a related objective.

Moves to strengthen electricity and water services will follow in 2018, and in coordination with Bahrain’s Electricity and Water Authority, the ministry is currently undertaking an extension of the water network in the south-western part of the South Alba industrial area, with roughly 50 industrial plots expected to benefit. A number of the industrial areas are constructed on land reclaimed from the sea, with reclamation work on an industrial zone in East Sitra to start in 2018 in order to tackle the mounting shortage of space.

LIGHT INDUSTRY: While heavy industries continue to dominate the scene, Bahrain is also attracting light industries and manufacturers aiming to take advantage of the kingdom’s strategic location in the region, as well as its free trade agreements (FTAs) with various countries around the world. Companies that add at least 40% value to their products in Bahrain enjoy duty-free exports to the rest of the GCC, the US, Switzerland, Singapore, Norway, Iceland and the Greater Arab Free Trade Area, as well as duty-free imports of raw materials, machinery and spare parts.

According to Alzayani’s September 2017 speech, Bahrain’s FTAs and other economic benefits offer a 30% cost advantage when compared to countries in the rest of the region. Per the EDB, total operating costs for companies involved in industrial activities in Bahrain are between 8% and 23% cheaper than in Dubai, 16-23% cheaper than in Saudi Arabia and 28-30% cheaper than in Qatar. This analysis is based on a workforce of 100 employees, construction and leasing costs on 5000 sq metres of built-up land, one business licence and a monthly usage of 500 KV of electricity and 500 cu metres of water.

In May 2017 Armacell, a leader in flexible foam for equipment insulation and engineered foams, began construction of a $16m manufacturing facility in Bahrain. Located in BIIP, the 10,000-sq-metre factory will initially employ around 100 people and focus on producing high-density materials and elastomeric insulation for heating, ventilation and air-conditioning systems. In the same month, textile and fashion distribution firm Armada Group of Kuwait also began construction on a $50m regional distribution centre in the Bahrain Logistics Zone, which is expected to create 400 direct jobs over the next three years (see analysis).

HIGH-POTENTIAL ACTIVITIES: Industry insiders see certain offerings, such as FMCGs, as having significant promise going forward. “The potential across the GCC for FMCGs is big,” Ebrahim Zainal, chairman of Bahraini food industry company Trafco Group, told OBG. “There should be more focus on local production.” Zainal highlighted the fact that by establishing a manufacturing line in Bahrain, companies are able to export through the FTAs, a significant benefit given the number of such agreements Bahrain has with strategic markets. However, hurdles remain. “The limitation of industrial land is the main challenge, and this is something the private sector cannot provide,” Zainal added. “The government should offer reasonably priced infrastructure.”

Others point to a market that, although small, is favourable to businesses of all sizes. “Bahrain lacks natural resources compared to our GCC neighbours, but we continue to punch above our economic weight in terms of foreign direct investment inflows,” the MICT’s Alsaad told OBG. He pointed to the decision by Mondelez International to establish a second food factory at BIIP, which is expected to be operational in the first half of 2018, with an annual capacity of 90,000 tonnes of biscuits. In the initial two- to three-year phase, the plant will produce Oreo, Barni cakes, Ritz, belVita, Prince and TUC biscuits.

The EDB believes that manufacturing of medications has strong potential as well, with the GCC pharmaceuticals market worth an estimated $12bn per year and 90% of demand currently being met by imports. According to a case study by BMI Research, health care expenditure in the MENA region is set to witness a compound annual growth rate (CAGR) of 7.1% between 2015 and 2021, with pharmaceutical sales to see a CAGR of 6.9%, reaching $38.6bn.

According to MoF data, in 2016 Bahrain brought in BD128,400 ($340,500) from pharmaceutical product licences and fees. While this number may seem small, it was up substantially from BD32,111 ($85,200) in 2015. There is a belief that locally based producers can quickly capture market share in this industry. The size of the Bahraini pharmaceutical market is estimated at around $378m, but with opportunities to export across the border to Saudi Arabia, which has a market size of roughly $7.52bn, there are significant opportunities.

At present, Bahrain offers pharmaceutical products through Bahrain Pharma, which was established in 2010 and produces 25m bottles of syrups and 9bn soft gel capsules per year. Gulf Biotech will manufacture 57m vials of parenteral drugs when its facility goes into commercial production in early 2019.

OUTLOOK: With significant investment taking place across industrial activities and an increasing number of international companies setting up shop in the kingdom to take advantage of its location and favourable FTAs, the manufacturing industry looks to be in a good position for the medium term. Moves by the authorities to expand and upgrade the infrastructure of the kingdom’s industrial zones will also be welcome news to investors. As with any sector, diversification brings economic stability and encourages the entry of more companies. The growing focus on lighter industries, FMCGs and pharmaceuticals bodes well for Bahrain in this regard; however, it is likely that a more open environment will bring new demand for industrial land.