How Bahrain is diversifying its industrial sector

The manufacturing sector is the second-largest contributor to non-oil GDP, behind financial services. Some of the kingdom’s key industrial players have expanded their production capacity in recent years, significantly bolstering heavy industry and downstream potential, most notably in the aluminium segment. Aluminium is Bahrain’s biggest non-oil export, and Aluminium Bahrain (Alba) is integral to overall industrial performance.

Strong logistics infrastructure is integrated with a network of industrial zones and free zones, where foreign and local investors enjoy a range of regionally competitive incentives. This has helped to make the kingdom home to an ever-growing network of manufacturing and distribution multinationals and supported the government’s diversification drive. While such companies are vital to sector growth, the government has recently made strengthening local manufacturing small and medium-sized enterprises (SMEs) a primary focus.

Structure & Oversight

The Ministry of Industry and Commerce (MoIC) is responsible for sector oversight. The primary goals of Bahrain Economic Vision 2030, the long-term plan for national development, include enhancing economic competitiveness, infrastructure and the investment environment. These goals are at the heart of MoIC strategies.

Improving digital capabilities in order to streamline bureaucratic and administrative procedures is key to attracting greater investment flows, as is collaboration with other key organisations, such as the Bahrain Economic Development Board, the investment-promotion agency; Tamkeen, a semi-autonomous public agency focused on strengthening the private sector; and Export Bahrain, which promotes local exports and the Made in Bahrain trademark. These organisations work in partnership where their remits overlap.

Meanwhile, nogaholding – the investment arm of the National Oil and Gas Authority which functions as an energy investment and development company – owns stakes in many of the largest domestic industrial companies, including Bahrain Petroleum Company and the Gulf Petrochemical Industries Company (GPIC).

New Strategy

The Industrial Sector Strategy 2022-26 seeks to facilitate the expansion and diversification of national production. By 2026 it aims to increase the industrial sector’s GDP contribution to BD2.5bn ($6.6bn); raise the proportion of industrial exports from its 2019 level of one-third of the total to 80%; and raise Bahraini employment in the sector to 25.3% of the total. Advancing Bahrain’s Industry 4.0 capabilities – namely through a new Industrial Innovation Centre that is set to be inaugurated – and investing in a circular carbon economy are other central goals of the new strategy, alongside encouraging investment in digital and technological products and solutions, and strengthening industrial infrastructure and local value chains.

SME development is seen as key to the latter. Traditionally, the local SME ecosystem has been dominated by four types of business: personal services, retail, eateries and construction contractors. “Now, the focus is on facilitating SME entry into the high-productivity, high-value sectors identified by the government, such as manufacturing and Industry 4.0-related spaces,” Jarmo Kotilaine, Tamkeen’s chief strategy and data analytics officer, told OBG. “But access to capital must be improved. Renting a retail space is simple enough, but establishing a factory is much more capital intensive.”

Bahrain is targeting specific segments to propel manufacturing sector growth, including downstream aluminium and petrochemicals production, renewable energy components, pharmaceuticals, micro-electronic goods, food and fast-moving consumer goods.

Enhanced trade and synergy between the kingdom’s large companies and SMEs is also being encouraged, which should encourage local producers to ensure their products meet international standards. At the same time, the Industrial Excellence Award seeks to promote healthy competition among local enterprises and improve quality. In addition, internships for technical and vocational graduates will be established, and Tamkeen will develop suitable training programmes, contribute to private sector workers’ salaries, and evolve its SME incubation and acceleration initiatives. Business licensing procedures will be digitised and streamlined, and business solutions will be tailored to specific challenges encountered by domestic companies. Meanwhile, the MoIC will collaborate with other GCC nations in implementing region-wide guidelines to promote cohesion in areas such as policy creation and urban planning that can support industrial zones.

Size & Performance

The stresses of the Covid-19 pandemic were reflected in a 5.7% decline in the manufacturing sector in 2020 in real terms. The downward trend culminated in a 9.2% year-on-year (y-o-y) contraction in the fourth quarter of 2020, according to data from the Ministry of Finance and National Economy. Manufacturing contributed 14.1% to real GDP during the first three quarters of 2021, representing a y-o-y decline of 0.3%. In the first quarter of 2021 the sector contracted by 1.9%, before growing by 2.3% in the second quarter and declining by 0.3% in the third. While this indicates a slight regression into negative growth, there are still strong signs of sector revival.

The consumer price index ranged from -3% to 0.6% in early 2021, before rising to 0.9% by the end of September. In nominal terms, the manufacturing sector contracted by 7.6% in 2020, before rebounding with growth of 7.5%, 24.2% and 15.6% over the first three quarters of 2021, respectively. In contrast to real growth, these figures offer insight into the impact of pandemic-related price fluctuations.

In terms of foreign direct investment (FDI), around BD1.9bn ($5bn), or 14.8%, of the total BD12.5bn ($33.2bn) of FDI stock was invested in manufacturing enterprises in the third quarter of 2021. This was the second-highest total of all non-oil sectors, behind financial services, which accounted for 67%.

Meanwhile, data from the Central Bank of Bahrain shows that loans and advances to the manufacturing sector have increased by 140% since 2012, totalling close to BD1.3bn ($3.4bn) by the end of 2021. The asset-intensive nature of manufacturing gives banks confidence in lending to the sector, which bodes well for sector expansion and SMEs wishing to enter the market.

Exports

Enhanced logistics capacity and export trade are integral to broader economic expansion plans. In 2020 Bahrain exported products to more than 150 countries, worth a combined $8.1bn. Aluminium accounted for $2.6bn of that total, with unwrought alloys and non-alloys contributing $1bn and $959m, respectively. Non-alloyed aluminium wire, rectangular alloyed aluminium plates and alloyed aluminium wire were also among the kingdom’s top export products that year, achieving values of $367m, $170m and $92.7m, respectively. Iron products recorded the second-highest export value, at around $950.6m.

Export growth has spearheaded a rebound in foreign trade volume following the easing of pressure in global supply chains. Exports in the third quarter of 2021 reached BD1.2bn ($3.2bn), 75% higher than the level recorded for the corresponding period of 2020. Rising commodity prices were a significant contributor to that growth, with the price of aluminium, for example, jumping by 61.9% y-o-y in the third quarter of 2021.

The government plans to harness Bahrain’s geographic location to boost re-exports. A 22.3% y-o-y increase in re-exports was experienced in the third quarter of 2021, driven by the reinvigoration of the regional non-oil economy and subsequent spike in demand. Furthermore, Export Bahrain announced that the organisation had facilitated over $100m worth of exports from local manufacturing SMEs between its 2018 inception and June 2021.

Aluminium

Aluminium production is the primary driver of non-oil industrial output and a significant contributor to overall GDP. In 2020 the kingdom was the seventh-largest aluminium producer globally and second in the Gulf region, behind the UAE, which placed fifth globally. International aluminium production reached 65.2m tonnes in 2020. Bahrain contributed over 1.5m tonnes, or 2%, of that figure, up from 1.4m tonnes in 2019. The UAE’s output was 2.6m tonnes that year, while China, the world’s largest aluminium producer, had an output of 36m tonnes.

The majority-state-owned smelter Alba dominates activity within the segment, and the 2019 completion of its Line 6 expansion project boosted annual capacity by 540,000 tonnes to over 1.5m tonnes, making it the world’s largest single-site aluminium smelter outside of China. As a result, in 2021 Alba achieved a new annual production record, with output at 1.56m tonnes. This, in tandem with improved investment performance, saw Alba report a profit of around BD451m ($1.2bn) for 2021, a 46-fold increase from BD9.7m ($25.7m) in 2020, underlining the company’s importance to wider industrial and economic performance.

Downstream

The 2020 export figures reflect the well-developed downstream aluminium industry. Gulf Aluminium Rolling Company (GARMCO) – established in 1981 by the governments of Bahrain, Saudi Arabia, Kuwait, Oman, Iraq and Qatar – is a major player in this space and recent expansion work has helped it reach an annual production capacity of 165,000 tonnes. Its product range includes aluminium sheets, coils and foil. GARMCO also has facilities in Australia, China, Europe, South Korea, Thailand and the US. In spite of this significant global presence, and turnover in excess of $450m per annum, the company announced in early 2022 that, due to pandemic-related challenges, it had negotiated a reorganisation agreement with its creditors, which allowed it to remain operational. Midal Cables – a joint venture between Australia’s Olex Cables and Bahrain’s Intersteel – and Bahrain Aluminium Extrusion Company are also key downstream players. The former manufactures aluminium rod and wires, overhead line conductors, aluminium-clad steel and multiple extruded products, while the latter can produce 32,000 tonnes of extruded aluminium products per annum, 70% of which is exported to Gulf nations and 30% to the local market.

In November 2021 leading European metal producer Aleastur – in which Bahrain Mumtalakat, Bahrain’s sovereign wealth fund, owns a significant stake – launched its new $15m grain refiner and master alloys facility in Bahrain. The site, which is the first of its kind in the GCC, will feed local and regional smelters and cast houses, boosting product quality. Approximately 85% of its output will be exported, with annual revenue estimated to hit $53m by 2025. Sergio Martinez, CEO of Aleastur, explained that convenient access to the Gulf, South-east Asian and Indian markets, along with Bahrain’s skilled workforce, competitive operating costs and 22 existing free trade agreements – including with the GCC and the US – were central to the firm choosing Bahrain as its Gulf headquarters.

Additionally, the MoIC recently announced plans to construct a 470,000-sq-metre aluminium downstream zone close to Alba’s main factory as part of the government’s Strategic Projects Plan.

Strategic Investment

The Strategic Projects Plan is a large-scale infrastructure development programme, for which the government is seeking $30bn in private investment. It includes the 1.1m-sq-metre US Trade Zone, which is currently under construction and due for completion in 2025, at a cost of roughly BD75m ($198.9m). The zone is designed to strengthen trade between the two countries, which in 2019 amounted to some $1.8bn. The broader development plan will also see five new islands constructed on reclaimed land, which will expand Bahrain’s land mass by up to 60%. The lack of available, infrastructure-ready land is a constraint on sector growth and a barrier to investment. The new islands will help to tackle these issues, with one of the islands – Fasht Al Adhm – to house extensive industrial and logistics infrastructure.

Upgrades

In 2021 the MoIC unveiled a BD90m ($238.7m) package of upgrades to its industrial infrastructure network. Bahrain has seven industrial zones – Salman Industrial City, which houses important sites such as the Al Hidd industrial area and Foulath Holding’s steel complex; and the Mina Salman, Ma’aneer, Sitra, Al Mazara, Al Lhaasay and Haffera industrial parks – which attract significant local and international investment.

In spite of the government’s removal of utilities subsidies as part of its fiscal consolidation programme, the range of other incentives offered at the industrial zones – such as 100% foreign ownership, zero corporate and personal income tax, the benefit of Bahrain’s free trade and duty-free trade agreements, strong infrastructure and facilities, and duty-free imports of raw materials and equipment – means they remain attractive investment destinations.

Salman Industrial City is pegged to receive a BD10.2m ($27.1m) upgrade to its sanitation facilities, while a further BD12m ($31.8m) upgrade to the infrastructure of the eastern section of the city will also be carried out. Al Hidd’s infrastructure, meanwhile, is expected to undergo a BD12m ($31.8m) upgrade. The projects are all scheduled to be completed before July 2024. In addition, another BD2.5m ($6.6m) will be spent to develop roads in and around the industrial zones.

Investment Park

Salman Industrial City contains Bahrain International Investment Park (BIIP) and Bahrain Logistics Zone, both of which are free zones. BIIP offers companies the opportunity to either construct premises or move into pre-built factories. At $2.66 per sq metre per year, it offers the region’s lowest industrial rents. This has proven beneficial to the government’s efforts to attract investment in targeted sectors. US-owned Mondeléz International and Danish company Arla Foods, which includes brands such as Kraft and Dano, opened new premises in the park in 2018 and 2019, respectively, strengthening local value chains. Pharmaceutical company Gulf Biotech is also a resident, while local paint manufacturer Legend Paints opened its BIIP factory in January 2022, boosting downstream petrochemicals production in the country.

In 2021 Italian corporation Ariston Thermo launched its 7000-sq-metre facility in BIIP, which has the capacity to produce up to 250,000 electric water heaters per year. The company is targeting markets in the MENA region to export its products.

Renewable Energy

The most lucrative of the government’s targeted sectors is renewable energy components and new fuels, and Bahrain already has some established solar panel manufacturers. Furthermore, the country’s advanced hydrocarbons and petrochemicals facilities could be adapted for blue and green hydrogen production and storage.

Bahrain’s high levels of sunlight and ample winds – conditions necessary for green hydrogen production – in addition to substantial reserves of natural gas, a skilled energy sector workforce and advanced transportation facilities, mean the country is well placed to establish a significant presence in this nascent market.

Converting hydrogen products into ammonia makes them safer to transport, and GPIC alone converts up to 1.5m tonnes of natural gas into ammonia and methanol each year, indicating preparedness to compete. It is estimated that by 2050 the GCC green hydrogen industry will be worth between $70bn and $200bn. While the UAE and Saudi Arabia have invested heavily in hydrogen facilities, Bahrain initially took a passive approach, as its relevant bodies assessed the viability of hydrogen derivatives as potential fuels. However, in December 2021 the Sustainable Energy Authority announced plans for a $150m, 20,000-sq-metre, 4-MW green hydrogen plant – a clear signal of intent.

Sustainability

Robust environmental, social and governance (ESG) frameworks and strategies are increasingly important to attracting investment. While the existing industrial infrastructure could facilitate the transition to renewable energy production, its current key industries are energy and emissions intensive.

Due to strong demand from China, the Gulf Petrochemicals and Chemicals Association (GPCA) has forecast significant regional petrochemicals expansion. Bahrain’s key petrochemicals players are moving to capitalise, with GPIC inviting investment in the expansion of its urea and ammonia plants, while nogaholding is planning the construction of a new polyethylene and polypropylene plant. In light of anticipated expansion, the GPCA is urging a keener focus on sustainability. In 2021 GPIC signalled its intent to leverage its presence in the agri-nutrients market to support global sustainable agriculture practices, while also detailing plans to enhance its operational efficiency, reducing energy consumption and investing in carbon-free technologies.

Other key domestic players are implementing initiatives that will boost the country’s sustainability credentials. In 2020 GARMCO unveiled its GARMCO Green Initiative, under which the company will manufacture high-quality products from recycled aluminium and increase its uptake of energy-efficient practices. In December 2021 Alba launched a roughly 2.5-ha spent pot lining treatment plant that will convert waste from aluminium production for use in other industrial materials, such as cement. Alba also released its ESG roadmap in April 2022. The framework has six priorities in line with the government’s goal of achieving net-zero emissions by 2060: decarbonisation; green energy and aluminium; the circular economy and secondary aluminium; employee welfare; collaboration and partnership; and transparency, communications and due diligence. However, there are questions as to how such a change may ultimately impact pricing. The company also launched a ESG Taskforce Committee to evaluate ESG-related initiatives and monitor progress.

Outlook

Cuts to government subsidies and subsequent higher input costs present challenges for the sector, but also opportunities, with investors likely to gravitate to high-value areas of production. Furthermore, manufacturing infrastructure is well developed, supporting the scaling of production capacity to meet overseas demand, and planned upgrades to downstream capacities should extend already strong and established value chains. As a relatively small country, Bahrain remains dependent on imported goods and inputs, but the expansion of its land mass is set to bring with it major development of industrial capacities, boosting exports and supporting long-term growth.