Moving downstream: Expansion into higher-value and niche markets aids diversification

The local industrial base has continued to show impressive growth throughout 2011 and into 2012. Supported by hydrocarbons, the Gulf state has embarked on a process of diversification that has seen the establishment of a steady flow of downstream projects.

INDUSTRIAL MIGHT: The state has exploited its competitive advantage in energy and, to a lesser extent, labour and land to build a robust and successful industrial sector that competes both regionally and globally in a number of segments, including aluminium and petrochemicals. However, Qatar still has some work to do as it looks to head further downstream and into higher-value markets. As such, the manufacturing sector should continue to grow as new industries based around finished products and niche technologies emerge.

The non-hydrocarbons sector continues to flourish, even as the oil and gas sector, buoyed by high hydrocarbons prices, has reclaimed its place as the mainstay of the economy, accounting for 51.7% of nominal GDP in 2010 and 57.7% in 2011, data from the Qatar Statistics Authority (QSA) show. Indeed, according to the IMF, non-hydrocarbons GDP was expected to maintain its growth rate of 9% in 2012, while hydrocarbons real growth was expected to slow to 2.9% for the year.

MANUFACTURING: Manufacturing drives a good proportion of this growth outside the extractive industries, and is the second-largest non-oil and -gas segment. It made up 10.6% of nominal GDP in 2010 and 9.9% in 2011, according to the QSA. In real terms, this sector expanded by 22.4% in 2010, making it the fastest growing non-hydrocarbons sector that year. This momentum slowed somewhat in 2011, with manufacturing’s contribution to GDP rising by 4.5% in real terms.

Wael Shtayeh, the CEO of Investment Holding, a local industrial group, said, “Qatar has to intensify encouraging downstream industrialisation by providing the private sector with land in well-developed industrial areas, incentives on duty and tax exemption and the necessary financing in order to realise and secure a sustainable future economic growth.” This helped Qatar to bolster its export mix, with non-oil and -gas exports increasing by 52.6% to QR39.1bn ($10.7bn) in 2010.

DIVERSIFIED HOLDINGS: Such exports account for 14.9% of total exports and have largely been driven by the emerging industrial base. The industrial sector witnessed the largest jump in net profits in the first nine months of 2011, increasing by 69.5% y-o-y for listed companies. Aggregate sector net profits were QR8.7bn ($2.4bn) by the end of the third quarter of 2011, accounting for 31.1% of the market’s total profit.

The driving force behind this impressive showing, and an industrial leviathan in its own right, is Industries Qatar (IQ), an industrial holding company with interests in petrochemicals and steel. The firm, which is 70% owned by Qatar Petroleum (QP) and 30% by a mix of local institutions and individuals along with foreign shareholders, accounted for 22.4% of the total market’s net profit in the first nine months of 2011, according to Global Investment House, a Kuwaiti investment company. For the full 12 months, the company had revenues of QR16.5bn ($4.5bn) and net profits of QR7.9bn ($2.2bn) in 2011, a 44.6% increase on 2010.

In the first quarter of 2012, net profits dropped by 8.9% on a yearly basis, but increased by 13.1% on a quarterly basis. This decline was the result of a drop in profitability in the fertiliser and steel segments.

Despite this jolt at the beginning of the year, the company is extremely optimistic for 2012. According to its recently released five-year plan, IQ expects to garner revenues of QR18.3bn ($5.03bn) in 2012, with net profit reaching QR8.3bn ($2.3bn). The company has also forecast group revenues to reach QR24bn ($6.6bn) by 2016, with net profits exceeding QR11bn ($3.02bn).

In a statement about its first-quarter results, IQ’s chief coordinator, Abdulrahman Al Shaibi, said, “The results were broadly in line with the group’s budgeted expectations. The petrochemicals segment was the main profit contributor, accounting for over 40% of the group’s net profit and earnings before interest, taxes, depreciation and amortization, but this is expected to change as the year progresses and the group benefits from the launch of the Qatar Fertiliser Company ( QAFCO) 5’s second ammonia train and QAFCO 6.”

FERTILISER: The ramp up in operations QAFCO’s new ammonia and urea plant will likely have a positive impact on IQ’s profitability in 2012. QAFCO, which is 75% owned by IQ and 25% by Yara Netherland, was established in 1969 as a way of utilising the country’s vast natural gas reserves. The firm has become one of the leading players in the global fertiliser industry and the world’s largest single site producer of ammonia and urea.

QAFCO 5, which was opened in December 2011 at a cost of $3.2bn, will increase the company’s ammonia production by 73% to 3.8m tonnes per year and its urea production by 43% to 4.3m tonnes per year. QAFCO 6, which is expected to come on-stream in the second half of 2012 at a cost of $610m, will increase the company’s urea production by a further 1.3m tonnes per year. This will cement QAFCO’s position as a global heavyweight in the fertiliser business. The company has said it will be targeting markets in South America where demand for urea is high. QAFCO’s supply seems to be hitting the market at an auspicious time.

A combination of strong population growth, high agricultural commodity prices and robust biofuel demand is likely to strengthen global fertiliser demand over the coming years. According to the International Fertiliser Industry Association, after a contraction in fertiliser demand of 7.6% in 2008/09, consumption has been steadily growing over the past three years. In 2010/11, world fertiliser demand was estimated to be up by 5% to 172.1m tonnes, while in 2011/12 it is expected to grow by a further 2.5% to 176.4m tonnes. This growth is expected to continue unabated up to 2015/16, when world demand is anticipated to reach 191.1m tonnes, corresponding to an average annual growth rate of 2.6% over the next five years, according to the International Fertiliser Industry Association.

As China’s rapid growth and poor soil absorbs the vast majority of its domestic urea supply, the market for this product is expected to be tight over the next 12 months. However, with urea supply expected to grow at an average annual rate of 5% between 2010 and 2015, reaching 190.5m tonnes in the latter year, the International Fertiliser Industry Association forecasts that the market could be oversupplied by the middle of the decade. While this could suggest clouds on the horizon for the fertiliser segment, QAFCO has built strong relationships with customers and distributors in 35 countries and has now embarked on a policy of diversifying its products into a higher value range.

According to the company’s stated policy, it is looking to maximise production of granular urea, which is more appropriate for technology-dependent cultivation methods in developed markets. It is also hoping to produce sulphur-coated urea, which can be sold at a premium over conventional granular urea.

FEEDSTOCK ADVANTAGE: QAFCO has a competitive advantage over many other fertiliser companies as a result of its input costs. This extends to land, labour and power costs but is most evident in feedstock costs. According to Global Investment House, Qatar supplies natural gas for local consumption at subsidised prices ranging from $1 to $1.50 per million British thermal units (Btu). With natural gas accounting for as much as 90% of the cost of nitrogen-based fertiliser production in the US, according to the US General Accounting Office, subsidised feedstock is a key advantage.

ADDED GAS PRODUCTION: Much of the country’s industrial development is based on the abundant and subsidised supply of gas to industry. With this in mind, authorities are expanding production, though for the short to medium term some industrial firms anticipate competition for feedstock. Nasser Jeham Al Kuwari, the general manager of Qatar Fuel Additives Company, said, “One of the main challenges in expanding industry is the need to secure feedstock. The large number of projects coming in at the same time means you have to compete for the feedstock and ensure your supply.”

The latest development, the Barzan gas project, was confirmed in January 2011. Under the stewardship of QP and ExxonMobil through the operating company RasGas, 1.4bn cu ft per day of sales gas will be produced in two trains for the domestic market. While the majority will go to the power generation sector, some is likely to be made available for industrial projects. This development will complement the Al Khaleej Gas project, inaugurated in 2006, and also operated by RasGas. Through the two Al Khaleej plants, 2bn cu ft per day of gas is piped to domestic customers, including Ras Laffan Power Company, the Qatar Power Company, Ras Laffan Olefins Company and Oryx GTL.

Other refining and processing projects also support the downstream activities. The recently commissioned $22bn Pearl GTL project, a joint venture between QP and Royal Dutch Shell, should also aid the industrial sector. The plant, the largest of its kind in the world, produces 140,000 barrels of oil equivalent (boe) per day of gas-to-liquids, including naphtha, and 120,000 boe per day of natural gas liquids. Perhaps the biggest beneficiary of such projects is QAFCO’s sibling at IQ, the Qatar Petrochemicals Company (QAPCO). Indeed, much of Qatar’s industrial growth is dependent on the availability of gas, a situation limited at the moment by the moratorium on the country’s almost 900trn cu ft of reserves in the North Field. According to William Pottiger, the senior urban planner at Mesaieed Industrial City, “We’d expect in 2013 or 2014 if the gas cap is lifted a fairly rapid increase in industries then. The big attraction here is the power and gas.”

PETROCHEMICALS PLATFORM: Indeed, this has led to a thriving petrochemicals industry. The country currently has a capacity of 9.2m tonnes per year, out of a GCC regional capacity of 77.3m tonnes, according to the Gulf Petrochemicals and Chemicals Association. The leading player is QAPCO, a company 80% owned by IQ and 20% by Total Petrochemicals Company of France, which through a number of joint ventures has established a dominant position in the local market. Established in 1974, the company has become a major global producer of ethylene and low-density polyethylene (LDPE). Current production levels stand at 720,000 tonnes per annum of ethylene and 700,000 tonnes per annum of LPDE, once the LDPE-3 petrochemical plant starts production in 2012. This QR2.2bn ($604m) investment has added 300,000 tonnes of LDPE production to the company’s books, making it one of the largest single site producers of LPDE in the world.

QAPCO’s ethylene production also feeds the Qatar Vinyl Company, a joint venture between QP, QAPCO and Arkema of France. The company, established in 1997, was the country’s first venture downstream in the petrochemicals industry and has a current capacity of 330,000 tonnes of vinyl chloride monomer, 200,000 tonnes of ethylene dichloride and 730,000 tonnes of caustic soda. QAPCO has also established Qatofin with Total (36%) and QP (1%) to produce 450,000 tonnes of linear low-density polyethylene (LLDPE).

The Qatar Fuel Additives Company (QAFAC) has joined the petrochemicals mix in Mesaieed, producing methyl tertiary butyl ether (MBTE) and methanol both for local use and export. Being under the umbrella of IQ, QAFAC takes carbon dioxide from QAFCO’s production to use in its products, and supplies MBTE to QP refineries to boost octane. QAFAC has a capacity of around 610,000 tonnes per year for MBTE and more than 980,000 tonnes per year of methanol.

Qatofin, as well as Q Chem II, a joint venture between QP (51%) and Chevron Phillips Chemical International Qatar Holdings (49%) that produces a combined total of 700,000 tonnes per year of high-density polyethylene (HDPE) and normal alpha olephins (NAO), are supplied by the Ras Laffan Olefins Company. This firm, which is the product of a joint venture between Q Chem II (53.31%), Qatofin (45.69%) and QP (1%), has developed a 1.3m-tonne-per-year ethylene cracker, one of the largest plants of its type in the world.

LOOKING DOWNSTREAM: The country has built a robust chain of petrochemicals companies around the hydrocarbons industry, moving downstream from its voluminous ethylene base. However, there are no plans to rest on these laurels. According to a February 2012 report in the Peninsula newspaper, the government expects investments of $25bn for expanding the domestic petrochemicals industry over the next decade. According to the minister of energy, Mohammed Saleh Al Sada, Qatar expects to boost its petrochemicals production capacity to 23m tonnes per year by 2020.

To connect the upstream and downstream, in 2005 Qatar Intermediate Industries Holding Company was established under the full ownership of Qatar Petroleum. The firm was created to form joint ventures and partnerships with international and private sector companies in midstream projects. Its largest ongoing project is a new petrochemicals plant in Mesaieed, for which it brought together a number of local and international service companies.

Projects like these open space for private sector involvement in a largely state-run industry. This is paying off, with local manufacturing and services firms taking hold and serving the oil, gas and petrochemicals industries. For instance, one such home-grown company, Delta Doha, is now stepping outside of Qatar’s borders with its oilfield equipment and competing with international names like GE Energy.

In petrochemicals, the government is looking to both bolster primary and existing production and also move even further downstream towards finished products. According to Dominic Carlone, the head of strategy and systems at Mesaieed Industrial City, which is owned by QP and home to most of the country’s petrochemicals industry, the areas developing a light industry zone will dovetail with the current petrochemicals output. “We want to get investors to take these products ( petrochemicals) and produce further downstream products, such as polypropylene or plastic bags,” said Carlone.

This strategy has been in place for some time. The National Development Strategy 2011-16, authored by the General Secretariat for Development Planning, places an emphasis on petrochemicals as a means of diversifying the economy and reducing the dependence on hydrocarbons rents. The strategy highlights plans for QR88bn ($24.1bn) of QP investments between 2011 and 2016, QR7bn ($1.9bn) of which will be used for the expansion of IQ in the petrochemicals sector.

PROJECTS IN THE WORKS: Plans for further petrochemicals projects are already in the works. In December 2011, for example, it was announced that QP and Royal Dutch Shell had signed an agreement for a joint study into a potential $6bn petrochemicals plant. Situated in the industrial city of Ras Laffan, the plant could produce 1.5m tonnes of monoethylene glycol per year by 2016. A statement by Shell said that the addition of other olefin derivatives could boost the plant’s output to more than 2m tonnes per year of finished products.

This was followed by an announcement in February 2012 that QP and QAPCO had signed an agreement to develop a large petrochemicals complex in Ras Laffan Industrial City by 2018, at an estimated cost of more than QR20bn ($5.5bn). QP will take an 80% equity stake in the project, while QAPCO will take the remaining stake, jointly developing and operating the plant. The complex is expected to produce 1.4m tonnes per year of ethylene, 430,000 tonnes per year of linear LDPE, 850,000 tonnes per year of HDPE, 760,000 tonnes per year of polypropylene and 83,000 tonnes per year of butadiene. As such, the capacity of QAPCO and the sector will be greatly increased.

The government is hoping that with the relatively inexpensive cost of production in the country, it can boost the margins on Qatar’s natural gas reserves. While petrochemicals prices dipped in the second half of 2011, the long-term forecast is more positive, suggesting that the country will be well placed to bolster its industrial export revenues. An April 2012 report on the GCC petrochemicals sector by the Kuwait Financial Centre (Markaz), an investment company active in asset management, corporate finance and private banking services, forecasted petrochemicals price pressure to continue through the middle of 2012 due to concerns over global growth, but said there will be “incremental demand growth” in the longer term stimulated by demand from emerging economies, the phasing out of older plants in developed economies and a tightening of supply as a result of international sanctions on Iran.

GOING WITH GLOBAL DEMAND: Indeed, global consumption patterns are moving in the right direction for Qatari producers. Global polyolefins consumption is set to increase from 111m tonnes in 2006 to 200m tonnes in 2020, according to ChemSystems, a firm providing data for the petroleum and chemicals industry. Of this consumption, HDPE will represent 28%; LLDPE, 19%; and LDPE, 12%, suggesting that Qatar’s expansion in these petrochemicals could be a timely move.

Markaz suggests that GCC producers should be able to maintain prices and margins, but there remain some significant challenges for the industry. While Qatari producers do not suffer from the same squeeze on feedstock supply facing other regional producers, they are prey to the same market difficulties that could impact future revenues. Anti-dumping charges in markets such as India and China could make it difficult for Gulf producers to penetrate these markets in the future, while the rapid escalation in shale gas production in the US, and the concomitant fall in natural gas prices there, could change the dynamics of a market that has been very attractive to regional producers.

While Qatar can do little to influence the shifting patterns of global demand dynamics, the country is already working to mitigate the impact of supply growth in key markets. For example, while China’s move towards self-sufficiency could deal a blow to Gulf exporters, Qatar has worked hard to get a foothold in this huge market. In January 2012 it was announced that China National Petroleum Corporation had signed a deal with QP and Royal Dutch Shell to build a $12.6bn refinery and petrochemicals complex in the eastern Chinese city of Taizhou. Upon completion, the project, which will import condensate and other feedstocks, will produce 400,000 barrels per day and 1.2m tonnes of ethylene.

This suggests that Qatar will be able to retain a strong position in the global petrochemicals industry, using its inexpensive feedstock to build a comprehensive sector both at home and abroad. However, producers may not have quite the same advantage in the future. In February 2012, Reuters reported that QP is considering an increase in feedstock prices. Abdulrahman Al Shaibi, the director of finance at QP, told Reuters, “I think prices for feedstock have been way below prices on the international market. We are considering raising the cost of the feedstock. However it would still remain within a range which could be seen as a subsidy.”

SUPPLYING GAS: While this could tighten margins slightly in the petrochemicals sector, it is unlikely to dramatically change the equation for most producers. Indeed, the availability of gas in Qatar will continue to give it a significant competitive advantage over its counterparts in the region and further afield. Furthermore, Qatar has established a strong environment more broadly for investment in the industrial sector.

A prime example of this is the emergence of Gasal. The company, a joint venture between QP, Qatar Industrial Manufacturing and Air Liquide of France, has developed a network of industrial gases in the country’s two main industrial areas, Ras Laffan and Mesaieed. Gasal primarily supplies its products to large industrial firms. For example, in Mesaieed Industrial City, the company provides piped nitrogen and liquid oxygen and nitrogen to a number of strategic industries, including Qatofin, Q Chem II and Qatar Steel. In the Ras Laffan industrial area Gasal supplies nitrogen to Ras Laffan Olefins Company and Oryx GTL.

The company, established in 2006, currently produces 1500 tonnes per day of oxygen and 2500 tonnes per day of nitrogen, as well as minimal quantities of argon. According to Christian Last, the CEO of Gasal, “The reason for our initial establishment was to make Qatar independent and self-sufficient [in these gases] and to provide gases to strategic assets such as the LNG plants and steel plants. We have also brought down costs and created efficiencies as not each plant is having to create its own air separation unit now.”

Gasal is now looking at the prospects of hydrogen and other gases, as well as bolstering its helium export capacity, which should help push up profits, with prices for the gas used in the electronics and health care manufacturing industries remaining high.

STEEL PRODUCTION: This local gas infrastructure does not only help the petrochemicals and chemicals industry on the peninsula, but also its thriving metals industry. Indeed, Qatar Steel, a wholly owned subsidiary of IQ, was Gasal’s first customer. Like the Gulf state’s petrochemicals companies, Qatar Steel has been able to take advantage of the favourable environment for industry on the peninsula. Another energy-intensive industry, steel production, has been a key component of the country’s industrial base since the establishment of Qatar Steel in 1974.

Until recently the only steel producer in the country, Qatar Steel has a production capacity of around 2m tonnes of steel a year, with a capacity for 1.2m tonnes of molten steel and 740,000 tonnes of rolling mill. This will be increased by more than 50% by 2013 when a new 1.1m-tonne-per-year plant is commissioned.

The company also faced a new competitor in 2012, when Al Watania Steel, formerly a steel trader, began production at its 400,000-tonne-capacity plant. It currently produces 4000 tonnes per month of steel, with plans to more than double this in the near term.

This additional supply is beginning to hit the market in anticipation of a rapid increase in demand for building materials over the coming years. According to Mohammed Ahmad Al Saadi, the general manager of Al Watania Steel, “There are lots of projects that will require a lot of building materials and not just rebar, but also cement and finished products. There’s the port, sports facilities, the highways and the rail all requiring a large volume of building materials.” While Al Saadi questions whether the planned local capacity will be able to meet this surge in demand, he is confident that local production will be able to compete with imports: “Local and regional players are able to remain highly competitive against big suppliers such as Turkey.”

OTHER SEGMENTS: This expansion of the country’s steel capacity has also been complemented by the growth of its aluminium sector. In September 2011, Qatalum, a 50-50 joint venture between QP and Hydro Aluminium of Norway, reached full production capacity at 585,000 tonnes per year. The firm has become a major player, accounting for almost 20% of the GCC’s 3.1m tonnes of aluminium capacity. With 7% of total global production in 2010, according to Deloitte, the GCC is well placed to become an aluminium powerhouse.

Such projects illustrate Qatar’s undoubted prowess in heavy industries. However, over the coming years, the country’s industrial base is likely to diversify further with the emergence of a number of light and high-tech industrial clusters. According to the National Development Strategy 2011-16, an emphasis on enterprise creation, research and development, and science and technology should support the expansion of the manufacturing base over the coming years.

The early signs are positive. For example, in January 2012, Qatar Automotive Gateway (Qatar AG), a company charged with developing an automotive manufacturing cluster on the peninsula by 2020, signed a memorandum of understanding (MoU) with Prodrive of the UK to study the development of advanced carbon fibre composite automotive parts and assemblies. In a statement commenting on the MoU, Ahmed Sorour, the CEO of Qatar AG, said, “We place very high importance on investing into knowledge-based industries which come at the forefront of the new automotive value chain, and particularly when Qatar’s resources offer a significant competitive advantage to our customers.”

OUTLOOK: This suggests a bright industrial future for Qatar as the government looks to further diversify the economy. Capitalising on the country’s hydrocarbons wealth, the government, in partnership with the private sector and international investors, has already built a highly successful downstream sector that is returning strong industrial growth figures for the country. Indeed, Qatar has become a global actor in petrochemicals and has established large-scale players across a number of heavy industries.

While such companies will continue to be wary of global market conditions, the environment in Qatar has put them in a position to return substantial margins. With this platform in place, the movement further downstream should seem much less daunting.