Diversification driving manufacturing growth in Kuwait

As part of Kuwait’s efforts to expand and diversify its economy, the country has moved to invest in its infrastructure capacity, while a programme to boost oil production levels has stimulated growth in the petrochemical and construction segments. Alongside continued moves to improve the skills of the workforce, as well as to nurture small and mediumsized enterprises (SMEs), Kuwait’s industrial sector looks set to grow over the coming years.

Figures

In 2013 manufacturing accounted for 6.8% of GDP at current prices, according to the Central Statistical Bureau (CSB). The total value of the manufacturing sector in constant prices in 2013 was KD3.17bn ($10.9bn), compared to KD2.78bn ($9.6bn) in the previous year. Similarly, the total value of non-petroleum exports was KD1.85bn ($6.4bn) in 2013, up from KD1.66bn ($5.7bn) in 2012.

Oil continues to play a major role for economic growth in Kuwait, which has relied mostly on hydrocarbons exports as its main source of public finance and foreign exchange. The recent drop in global crude oil prices thus undoubtedly represents a concern for Kuwait in the short term, given that oil and gas accounts for around 95% of export earnings. In 2014, according to CSB figures, hydrocarbons made up 95.2% of Kuwait’s exports, with a value of KD26.83bn ($92.43bn) out of a total of KD28.19bn ($97.12bn), pointing to the need for economic diversification as a priority in the years ahead.

Strategy

The authorities are well aware of the need to diversify Kuwait’s industrial and trading base. The country already has several advantages in this regard, including an ample capital base with which to fund investment in new industrial capacity, as well as its location at the head of the Gulf. This makes it well situated for trade with countries in the GCC region, as well as fast-growing emerging markets in both South Asia and South-east Asia.

Additionally, sanctions that have prevented international trade with Iran should be relaxed over time as a result of the Lausanne negotiations under way in the summer of 2015, providing a further boost to Kuwait’s commercial relations within the Middle East.

The government’s development strategy is guided by Kuwait Vision 2035, which seeks to reduce the country’s reliance on hydrocarbons exports over the long term. Kuwait Vision 2035 envisages a series of investments, as well as economic and social reforms, that will transform Kuwait into a regional centre for trade and finance. It encompasses a broad range of activities, from improvements in education and health care, to transport infrastructure upgrades, as well as the construction of industrial zones and business parks. Further to this, the plan seeks to broaden the role of the private sector, introducing simpler and more transparent administrative procedures over time, and improve skills and training.

NDP 

Kuwait Vision 2035 is underpinned by the National Development Plan (NDP), launched in 2010 with an investment package worth $108bn from 2010 to 2014. Released shortly after the global financial crisis, the NDP was partly intended as a stimulus package to allow the economy to avoid falling into recession, but was also an opportunity to obtain infrastructure improvements at a much lower price than would have been achievable at the height of the oil boom in the mid-2000s.

As part of the NDP, the government allocated significant amounts towards transport upgrades, including $1.2bn for Mubarak al Kabeer (MAK), a new port on Boubyan island, as well as upgrades at Kuwait International Airport to raise its capacity from 9m passengers a year currently to 25m passengers a year by 2020. Investment is also under way on new roads, nine new hospitals and up to 70,000 new homes.

In addition to improving connectivity within the country, and hence its economic competitiveness over the longer term, the plan gave a short-term boost to demand for cement and other building materials. While some of the projects envisaged under the NDP were affected by delays, MAK port is set to open in 2016, while the new Jaber Ahmad al Sabah hospital is also scheduled to open in 2016 at a cost of KD300m ($1.03bn).

Moreover, the KD34.2bn ($118bn) Kuwait Development Plan (KDP) 2015-20, approved in February 2015, will build on the achievements of the NDP. The plan will cover over 500 projects across all sectors, including transport, infrastructure, utilities and energy. For instance, the Kuwait National Petroleum Company (KNPC) is set to invest $35bn on expanding oil and gas projects over the next five years, while the $20bn Kuwait Metropolitan Rapid Transit system will also gain momentum in 2015.

In a boost to the construction sector in particular, the KDP will also facilitate several new contracts for roads and bridges, increasing demand for building materials (see Construction chapter).

Oversight

A number of public and semi-public bodies are charged with regulating and supporting industry in Kuwait. First, the Ministry of Industry and Commerce is the most senior government department responsible for oversight of the sector, including the registration of companies. Second, the Kuwait Direct Investment Promotion Authority is an independent agency charged with attracting foreign direct investment (FDI) into the country.

Third, the Industrial Bank of Kuwait (IBK) is a government-owned specialised financial institution that supports the development of industries in Kuwait by providing credit. Last, the Public Authority for Industry is tasked with expanding and diversifying the country’s industrial base, as well as promoting the development of strategic industries.

Investment Climate

According to the World Bank’s annual “Doing Business” report for 2014, Kuwait ranked 86th out of 189 countries, and 8th out of 20 economies in the MENA region.

Kuwait ranked first regionally in terms of protecting minority investors, but only 17th in terms of the procedures required to start a new business. Net FDI inflows amounted to $1.84bn in 2013, compared to $2.87bn in 2012, according to World Bank figures.

Kuwait is party to a number of trade agreements, including the GCC Customs Union and the Greater Arab Free Trade Agreement. These allow for tarifffree access to a market of more than 150m people. Further trade agreements are currently under discussion on a bilateral basis between the GCC and the EU, which would give Kuwaiti companies access to the world’s largest single market.

A number of incentives are available to foreign investors, such as those included in the Foreign Investment Law No. 8 of 2001, which allows them to benefit from a 10-year tax holiday on investments in Kuwait, thereafter paying a flat rate of 15%. Customs exemptions are also available on imports of machinery, raw materials and semi-finished goods.

Finance

Some industrialists have reported that the cost of industrial finance in Kuwait can be higher than is generally the case for some other sectors in the region. However, to longer-term investors, the steadier returns available from industry look more attractive than the sometimes uncertain profits from more speculative types of investment in fields such as real estate. Moreover, IBK finance is available at an interest rate of 3.5%, with financing of up to 65% available for virgin projects, and up to 100% for expansion projects for proven customers.

Meanwhile, in 2014 the country’s parliament approved a KD2bn ($6.89bn) National Fund for Development of SMEs. As well as offering credit on favourable terms to young entrepreneurs, the fund will provide valuable know-how, including training in marketing and business planning.

Land

Obtaining land remains one of the major potential obstacles for industrialists in Kuwait. Most land in Kuwait is owned by the state and has been set aside for military or oil extraction purposes.

Several industrial and infrastructure projects have gone ahead on a build-operate-transfer basis, so as to obviate some of the strictures on land usage. For example, the port at Shuwaikh has a dedicated free trade zone, within which 100% foreign ownership and tax-free operation is available.

Petrochemicals

After oil and gas extraction, and refining, petrochemicals is the single largest industry in Kuwait, with the bulk of its production exported to markets in Asia. In 2010 the KNPC unveiled a $90bn investment programme to increase production from roughly 2.9m barrels per day (bpd) of crude in 2011 to around 4m bpd by 2020.

Alongside this, the company is upgrading its refinery system at a cost of some KD4bn ($13.8bn) in order to meet increasingly rigorous environmental standards in Asian markets. Under the programme, the 200,000-bpd refinery at Shuaiba is to shut down, while the refineries at Mina Abdullah and Mina Al Ahmadi are to have their capacity upgraded to around 800,000 bpd combined. Additionally, a brand new refinery is planned at Al Zour with a capacity of 615,000 bpd. This will raise the country’s total refining capacity from around 900,000 bpd to 1.4m bpd by 2017, when Al Zour opens.

Although the recent drop in global oil prices is likely to have some effect on Kuwait’s public budget in 2016, these hydrocarbons projects have largely had their budgets set already. As such, they appear likely to remain largely unaffected.

Main Players

The increase in crude and refined oil products is set to benefit the Kuwaiti petrochemicals industry by providing more feedstock. As early as 1963, the country set up the Petroleum Industries Corporation (PIC), originally as a fertiliser producer, as a means to keep more of the added value from its oil at home. Since then, the company has expanded to add lines in olefins and aromatics.

Approximately 70% of PIC’s production takes place in Kuwait, although there are also production sites in other Gulf countries, Europe and the Americas. Most of the company’s production takes place through its various subsidiaries and partnerships with other producers. Besides PIC, there are two other main petrochemical groups in Kuwait, Al Qurain Petrochemicals Company (QPIC) and Boubyan Petrochemical Company (BPC).

QPIC, which was founded in 2004, is a subsidiary of the local holding group Kuwait Projects Company (KIPCO), although PIC holds a 10% stake in the company. QPIC reported net profits of KD27.5m ($94.7m) in the 2013/14 financial year, up from KD22.2m ($76.5m) in 2012/13, and reported the total value of its assets as KD364.3m ($1.26bn) in 2013/14, compared with KD299m ($1.03bn) in 2012/13.

BPC was founded in 1995 and is listed on the Kuwait Stock Exchange. It operates a number of joint ventures with PIC and also has interests in packaging materials. BPC reported profits of KD27.5m ($94.7m) in 2014, up from KD26.4m ($91m) in 2013.

Equate Petrochemicals Company was founded in 1995 and commenced operations in 1997. It is a joint venture between PIC (42.5%), Dow Petrochemicals (42.5%), BPC (9%) and QPIC (6%). Equate produces ethylene, polyethylene and ethylene glycol for direct sale and produces benzene, styrene, polypropylene, monomers and paraxylene and aromatics for other PIC subsidiaries.

In total, the company produces over 5m tonnes a year of petrochemicals. As of 2015, capacities at Equate’s factories stood as follows: ethylene at 1.8m tonnes a year; polyethylene at 825,000 tonnes a year; ethylene glycol at 1.2m tonnes a year; paraxylene at 829,000 tonnes a year; styrene monomers at 450,000 tonnes a year; polypropylene at 140,000 tonnes a year and benzene at 393,000 tonnes a year.

From November to December 2014, Equate carried out a month-long de-bottling and shutdown at its polyethylene plant. This forms part of a larger ongoing de-bottling process due to be completed in 2016, raising capacity from around 825,000 tonnes per year to just under 1m tonnes per year.

Other sector players include the Kuwait Olefins Company, which is owned by the same parties as Equate, according to the same proportions; the Kuwait Aromatics Company (TKAC), which is owned by PIC (40%), KNPC (40%) and QPIC (20%); and the Kuwait Styrene Company, which is a joint venture between TKAC (57.5%) and Dow (42.5%).

Gulf Petrochemical Industries is a three-way joint venture between PIC, the kingdom of Bahrain and the Saudi Basic Industries Corporation, and produces ammonia, urea and methanol in Bahrain. PIC also has two ventures further afield: ME Global, which produces mono-ethylene glycol and di-ethylene glycol in Canada, and the Equipolymers Company, which produces purified terephthalic acid and polyethylene terephthalate in Germany. Both are joint ventures with Dow, on a 50:50 ownership basis.

In addition to its existing capacity, PIC is planning to increase production of olefins, which are generally more profitable. A new plant, Olefins III, is in the planning stages, with total investment in the region of $7bn-10bn. The company is reportedly looking at using a mixed cracker, which would allow liquefied petroleum gas, naphtha ethane or propane to be used as feedstock, depending on the economic situation at any given time. Initial estimates for production capacities at Olefins III were: ethylene at 1400 kilotonnes per annum (kta); linear low-density polyethylene at 450 kta; high-density polyethylene at 450 kta; glycols at 625 kta; and polypropylene at 450 kta. Locations remain under consideration but the most likely site appeared to be at Al Zour, which would allow for further integration of the refining and petrochemicals industries in Kuwait.

Food & Drink

Food and beverages is another significant industry in Kuwait, with a gross value added of KD142.49m ($491m) in 2012, according to the CSB. The country’s rising population has increased demand for foodstuffs, making for ample potential for growth in the food processing industry.

The most significant players are the Kuwait Food Company (branded as Americana) and Kuwait Danish Dairy Company (KDD). Americana is listed on the Kuwaiti bourse and reported net profits of KD52m ($179m) on the back of sales of KD922.4m ($3.18bn) in 2014, compared to net profits of KD50.6m ($174m) and sales of KD866.9m ($2.99bn) in 2013. It operates nine consumer brands, in addition to a number of MENA food and beverage franchises.

KDD, meanwhile, is a closed shareholding group, with operations in food manufacturing (such as tomato paste, juices and ice cream) and packaging.

Building Materials

Kuwait’s rapidly growing population is ensuring that the construction industry remains buoyant. In 2012 Capital Standards, a local ratings agency, estimated that building materials companies accounted for some 47% of the total manufacturing segment. Substantial imminent construction projects include the hospitals programme, the new port and the NDP housing programme, as well as projects planned under the KDP, which has provided a roadmap for the construction sector for the years to come (see Construction chapter).

Kirby Building Systems, which is a subsidiary of the Kuwaiti holding group Al Ghanim Industries, is one of the largest pre-engineered steel buildings companies in the world with five production sites globally, located in Kuwait, Ras Al Khaimah in the UAE, India and Vietnam. Total production capacity stands at around 400,000 tonnes a year.

National Industries Group started life as a building materials firm, although it has since branched out into oil and gas services, infrastructure and utilities. It reported profits of KD36.8m ($126.8m) on the back of sales of KD126.6m ($436.2m) in 2014, compared with profits of KD16.6m ($57.2m) and sales of KD116.9m ($402.7m) for 2013.

Gulf Cable and Electrical Industries Company is the largest single privately held industrial firm in Kuwait, and exports to the GCC and Iraq. In 2014 it registered revenues of KD112.4m ($387m) and profits of KD4.57m ($15.7m), against revenues of KD97.8m ($337m) and profits of KD10m ($34.5m) in 2013.

Kuwait Cement Company is the second-largest manufacturing company in the country. It produces Portland, sulphate resistant and masonry cement, and reported sales of KD83.5m ($288m) and profits of KD23.8m ($82m) in 2014, compared to sales of KD69m ($238m) and profit of KD17.1m ($59m) in 2013. Through both direct and indirect means, the government holds just under 30% of the company.

R&D: Until today, there has been relatively little investment in research and development on the part of Kuwaiti industry. This is partly because the country’s universities remain oriented around teaching, with research tending to be a lower priority. Moreover, Kuwait’s industrial base continues to consist principally of primary processing industries, with only a small segment producing higher-value products. That said, Kuwait Vision 2035 aims to shift the country towards a knowledge-based economy, with reforms planned for the education system. With a more promising regulatory environment for SMEs, and as primary and downstream industries continue to expand, research is also likely to benefit.

Outlook

The recent drop in oil prices appears unlikely to have a marked effect on Kuwait’s petrochemicals industries. Although some projects have suffered from cost uncertainties and administrative delays, they are not overly vulnerable to short-term price fluctuations, premised as they are on meeting growing long-term demand in Asia. However, industries that are more oriented towards meeting domestic consumer demand may witness a slowdown if the government undertakes a retrenchment in current spending levels. At the same time, given that investment in infrastructure has remained largely unaffected in recent years, the outlook for construction materials in particular is more positive. While industry in Kuwait continues to rely heavily on the petrochemicals and construction segments, therefore, the growth of export opportunities and the promotion of SMEs mean the sector is likely to see greater diversification over the medium and long term.