Bahrain invests in capacity expansion as non-oil sector drives growth

After a year characterised by falling global prices for both crude oil and aluminium, there is a surprising degree of optimism in Bahrain’s economy. With major investments in its infrastructure being financed by the Gulf Development Fund and Aluminium Bahrain’s (Alba) sixth pot line moving ahead, there is a sense that Bahrain is busy, from its factory floors to its construction sites. At the same time visitor numbers are up, particularly from Saudi Arabia, increasing custom and confidence for retailers and hoteliers. If the country’s wealthy neighbours in Kuwait, the UAE and Saudi Arabia continue to follow through with their promises to fund development in Bahrain, while making cuts in their own domestic expenditure plans, the country could find it emerges from a period of global economic instability much better equipped.

Performance Indicators

In June 2015 Bahrain’s Economic Development Board (EDB) published data showing GDP growth was being driven in large part by the non-hydrocarbons sector and predicting its role would be more pronounced in both 2015 and 2016. Overall, Bahrain’s economic growth in 2014 was 4.5%, which compared favourably to the performance of its GCC neighbours, with Saudi Arabia’s economy expanding by 3.5% and the UAE’s by 4.6%.

In Bahrain the oil and gas sector expanded by 3% in 2014, while non-hydrocarbons sectors grew by 4.9%. Furthermore, the EDB was predicting Bahrain’s oil and gas sector would remain flat in 2015 and 2016, forecasting annual hydrocarbons sector growth of 0% and 0.4% compared to 4.5% and 4% in non-hydrocarbon sectors. Growth in the non-oil sector was pronounced in the fourth quarter of 2014 and the first quarter of 2015, with manufacturing expanding by 7.6% and 5.9% year-on-year, respectively, construction surging by 12.5% and 7.5%, and transport and communication pushing ahead at 9.4% and 7.3%.

Ramping Up

This strong growth in non-hydrocarbons activity was driven in part by the onset of infrastructure projects in the kingdom. In June 2015 Alba announced it would be going ahead with a sixth pot line, a $3.5bn project designed to boost annual production by 55%, or 514,000 tonnes, to 1.45m tonnes, making it the world’s biggest single-site smelter. Construction is set to start in 2016 and production is expected to commence from the new pot line in 2019. The announcement augurs well for the firm and the aluminium sector, which, according to the Central Informatics Organisation, employed more than 4500 people in 2012, 82% of them Bahraini. Alba’s decision to expand at a time of falling aluminium prices also sends a positive message to the rest of the GCC region and the world beyond.

Gas Subsidies

Despite the expansion of the non-oil sector, the aluminium industry and the wider manufacturing sector cannot be seen in isolation from Bahrain’s oil and gas sector. A key factor in deciding whether the new aluminium plant would be built was the price the company would have to pay for gas in the future and the extent to which the real price of this fuel would continue to be subsidised by the government. The official announcement from Alba did not state whether a gas price agreement was part of the final approval granted for the project.

However, the state’s Bahrain News Agency (BNA) reported in January 2015 that industrial hydrocarbons users would have to start paying more for gas and that incremental increases would follow each year. The first price rise from $2.25 per million British thermal units (Btus) to $2.50 was introduced on April 1, 2015 and the tariff will increase by $0.25 each year until it reaches $4.00 in 2021. The annual impact on Alba of a $0.25 increase is expected to be $30m.

According to the US Energy Information Administration, the Henry Hub spot price for natural gas in North America was $2.68 in September 2015, giving Alba an $0.18 advantage over its US competitors that would work out to $21.6m by the same reckoning. However, if subsidies were to be removed entirely and Alba were to buy gas at the market rate, it could also be exposed to fluctuations in the price of its fuel. The Henry Hub spot price for natural gas was $13.42 per million Btus in October 2005 and $12.69 in June 2008.

New Factory

Mondelez International (formerly Kraft Foods), the world’s biggest manufacturer of confectionery, chocolate and biscuits, has announced it is spending $90m on a new local plant to diversify the product offering of its existing factory in the Bahrain International Investment Park (BIIP).

According to BIIP’s project director, Gerry Sharkey, this could be great news for other businesses. “Mondelez wants its suppliers to be on site, and the company is insisting on it. So there is a great opportunity for packaging firms and for suppliers of sugar, vegetable oil and flour,” Sharkey told OBG.

The new factory, which will produce biscuits for export throughout the Middle East and North Africa, is due to start production in 2016. Mondelez has had a factory at BIIP since 2007. It has a production capacity of 110,000 tonnes a year and makes Kraft Cheese and the powdered drink Tang. The current factory employs 200 people and Mondelez International estimates the operation has injected $275m into the local economy through wages and the purchase of goods and services since its inception.

Foreign Investment

BIIP, a 2.5m-sq-metre business park that took three years to build, has been operating since 2005. International investors from more than 25 countries have set up operations at the park, which provides modern facilities in Hidd, close to both Khalifa Bin Salman Port and Bahrain International Airport with direct road access to Saudi Arabia via the King Fahd Causeway. There are over 4500 employees at BIIP and this figure is expected to reach 12,000 at the project’s completion.

“We are limited now by the scale of projects and can only really cater for clients seeking plots of 20,000 sq metres or less,” Sharkey told OBG, adding that the shape of proposed developments could also be a factor. “Most people in the manufacturing sector want to build long, straight buildings that enable a linear manufacturing process to take place, and so it is not always easy to accommodate them in the remaining space we have available.”

Businesses at BIIP are involved in manufacturing foods, building materials, chemicals, fibre glass components, wire, paper and plastic packaging, software development, pharmaceuticals and electronic systems, and there are also service companies specialising in logistics, training and financial services. Tenants include BASF, Siemens, Reckitt Benckiser, GE, NCR and American Express. Although BIIP is an international industrial park, it is not a free trade zone. This is a distinction its management team is keen to emphasise, because international companies based in GCC free zones are required to pay a 5% duty when selling from their free zone locations into the countries of the Gulf. However, international companies are entitled to 100% foreign ownership in Bahrain and the whole country has a very favourable tax regime. “If you add these things together and the 5% that tax exemption saves you, Bahrain is a very attractive place to invest,” Sharkey told OBG. In 2014 JBF Industries, a Mumbai-based company with a regional centre in Ras Al Khaimah, built a $200m factory on the site to produce polyester film. It was attracted by Bahrain’s proximity to Middle Eastern markets, but also by the country’s free trade agreement (FTA) with the US.

Textile Tariffs

One sector that has been thriving in Bahrain thanks to the FTA with the US is the textile, garment and home furnishing industry. However, there are fears that thousands of jobs and hundreds of millions of dollars in exports from Bahrain to the US could be jeopardised unless a clause in the agreement is amended. The original FTA included a tariff preference level that allowed textile firms to avoid paying duty on garments and home furnishings manufactured in Bahrain from material that had been imported from a third country. This clause is due to expire in July 2016, despite attempts in 2015 by US Senator Bill Nelson and members of Congress Gwen Graham and Jeff Miller to have an extension granted for a further 10 years. Bahrain-based clothing manufacturers MRS Fashion, Ambattur and Nobel, and home furnishing manufacturer West Point Bahrain employ 6200 people, and apparel and textiles make up 27% of Bahrain’s exports to the US. US government figures show that in 2013 imports of woven apparel from Bahrain were worth $107m while miscellaneous textile articles were worth $64m, giving a total of $171m, while the single biggest export from Bahrain to the US was aluminium worth $181m.

Trading Partners

Data released by the EDB in June 2015 gave an insight into Bahrain’s most important trading partners. During the period from January to May 2015, China was the leading source of imports, accounting for goods worth BD254.97m ($671.7m) out of total imports of BD1.95bn ($5.1bn). The UAE was next, with goods valued at BD186.6m ($491.6m), followed by the US, with BD156.86m ($413.2m).

When it came to export markets, Saudi Arabia was first, receiving non-oil exports of BD250.7m ($660.4m), constituting 28% of the total for the period of BD897.4m ($2.4bn). The UAE was the second-most-important export market, worth BD153.7m ($405m), followed by the US, which received goods worth BD105.41m ($277.76m) from Bahrain from January to May. After aluminium products, the third-most-valuable export commodity in the first five months of 2015 was iron ore, with BD67m ($176.5m) worth shipped overseas in the period.

Iron & Steel

These exports reflect a series of investments that have been made in Bahrain since 2008 by Foulath, a holding company focused on the GCC steel industry. It is 50% owned by Gulf Investment Corporation of Kuwait and Qatar Steel has a 25% stake, with the rest of the equity divided among institutional Kuwaiti investors. Foulath owns three companies in Bahrain: Bahrain Steel, which imports iron ore from Brazil and then converts it into iron ore pellets that are used in steel manufacture; United Stainless Steel Company (USCO), which is described as the Middle East’s first re-roller of stainless steel; and United Steel Company, a joint venture with Japan’s Yamoto Kogyo Company that makes steel beams and structural sections. Bahrain Steel has been importing its iron ore from Brazil and was affected by delays in the first shipments from Anglo-American’s giant MinasRio iron ore mine. Foulath was predicting in 2015 that its Bahrain Steel plants would be operating at its full capacity of 11m tonnes per annum in 2016 and so able to meet demand from the GCC’s steel industry. The firm told Trade Arabia in January 2015 that the raw material supply problems that had limited output to 4.8m tonnes in 2014 had been overcome.

Family Businesses

Although Bahrain has successfully attracted foreign direct investment from its GCC neighbours and others, there are also significant home-grown conglomerates. In 2015 Yousef Bin Ahmed Kanoo Holdings, one of the region’s oldest family firms, celebrated 125 years in business, while Y K Almoayyed and Sons Group marked its 75th year.

EY’s “Family Business Yearbook 2015” notes that 14 of the world’s 500 biggest family businesses are from the Middle East. The EY study points out that in 2013 the top 10 Middle East family businesses generated $327bn in revenues and employed 238,435 people. Y K Almoayyed and Sons Group, which employs more than 5000 people, has branched out into various sectors like property, automotive imports and dealerships, heavy equipment, electronics and home appliances, furnishing, building materials, building systems, contracting, concrete and retail. In many of these enterprises it has worked with international partners; its automotive division alone has the Bahrain agency agreements for Nissan, Infiniti, Renault, Ford, Lincoln, Foton, Great Wall and Quick Lane Auto.

Joint Ventures

Although Y K Almoayyed and Sons is a conglomerate with a diverse portfolio, the firm’s managing director, Mona Y Almoayyed, told OBG it was always interested in pursuing joint ventures that played to strengths in Bahrain’s economy and the wider GCC market. “We are looking for opportunities in new areas, for instance in restaurants, in tourism and hospitality,” Almoayyed told OBG. “The personal and social services sector has also been very strong here and so we might consider plans for schools or hospitals, perhaps even a spa. We would be interested in pursuing joint ventures with foreign companies in some of these areas.” As a group, Y K Almoayyed and Sons is also looking to expand its business operations in Saudi Arabia, possibly through bringing international licence agreements to the country with a focus on wholesaling rather than retailing.

Retail Expansion

The Middle East Council of Shopping Centres (MECSC) lists 14 shopping malls in Bahrain, ranging from smaller community malls to the Bahrain City Centre, which has a gross leasable area (GLA) of 155,000 sq metres, and according to MECSC data for 2014, annual footfall of more than 12m. In October 2014 construction work began on The Avenues, a single-storey mall being built with the owners of The Avenues Mall in Kuwait, which boasts 42m visitors a year, according to MECSC.

The new mall in Bahrain is being built on the corniche by Bahrain Bay and, according to local media reports, will have a GLA of 38,000 sq metres arranged on one level as part of a site that will cover 265,000 sq metres. This new destination mall is due to open in 2016 and aims to draw some of the millions of Saudi Arabians who visit Bahrain’s big shopping centres at the weekend and during holidays. Bahrain’s retail sector expanded by 4% in 2014, as per EDB figures, and according to data from Bahrain’s Central Informatics Organisation, the retail and wholesale sector contributed BD521.7m ($1.4bn) to GDP during the year.

EDB figures show more than 6m registered visitors travelled to Bahrain in the first five months of 2015, up 11% on the previous year. Of this, 4.97m visitors came from Saudi Arabia across the King Fahd Causeway, which suggests another strong performance from the retail sector can be anticipated. These GCC visitors are critical to Bahraini retail. “There are nearly no Russian and Chinese buyers in Bahrain, unlike in Dubai. Most purchasers are from the GCC or are expats who work in Bahrain,” Mohammed Jaffar, chairman of Asia Jewellers, told OBG.

Outside of malls, e-commerce accounts for a growing part of the retail market, and this trend is expected to continue going forward, particularly among younger shoppers. “The younger generations will buy clothes and shoes online, for instance, because they know they will be delivered in two days, and if they don’t fit they can be returned free of charge. I see great potential in online retail,” Almoayyed told OBG.

Supporting Entrepreneurs

In 2015 Bahrain introduced a number of initiatives to bolster the support it already gives to start-up companies and smaller enterprises. The Ministry of Industry and Commerce joined forces with the International Finance Corporation to launch an online platform offering advice on accounting, finance, marketing, human resources and law. The new portal is being promoted by Bahrain Development Bank (BDB), the Bahrain Chamber of Commerce and Industry, and Tamkeen, the government agency set up to offer vocational training and support for individuals and businesses. BDB and Tamkeen also agreed to add an additional BD20m ($52.3m) to the Tamkeen Enterprise Finance Programme, which is designed to offer funding for tech start-ups and other new businesses. In May 2015 Bahrain hosted the second MENA Angel Investors Summit, which was attended by 200 angel investors and 45 start-ups from the region.

AbdulRahim Abdullah Fakhro, deputy chairman of the Bahrain Small and Medium Enterprises Society, believes support for the sector is vital for the future of the economy and will help the country’s business sector to grow. He is particularly optimistic about the prospects for IT start-ups. “We have young intelligent people and they have the ability and the capacity to be good business people,” Fakhro told OBG. “All they need is to be given good direction when they start their business.” Almoayyed also believes that it is vital for the kingdom to foster the growth of start-ups. “When you go to Europe or America, you see a big middle class, but here you tend to find very rich people or poor people, and organisations like Tamkeen and the Bahrain Chamber of Commerce are helping people to create opportunities for themselves and so create a more affluent middle class,” she told OBG.

Outlook

The industrial sector’s near-term prospects appear strong as hundreds of millions of dinars are set to be spent on new factories, shopping malls and infrastructure projects. As a base from which businesses can target GCC markets, particularly Saudi Arabia, Bahrain retains a continuing appeal for international investors. In the medium term, the kingdom is expected to face some choppier waters, given the declines in prices for commodities of central importance to the local economy, including oil, aluminium and iron ore, which will likely have an impact.