Regulatory reform and infrastructure development expected to attract investors to Omani industrial sector

In January 2016 the Oman Supreme Council for Planning published the sultanate’s ninth five-year plan, covering 2016 to 2020. The plan is the final component of the government’s long-term Vision 2020 development strategy, focused on reducing reliance on the energy sector’s contribution to GDP and boosting non-petroleum industrial activities such as mining and quarrying, manufacturing, and building and construction.

Diversification

According to data from the National Centre for Statistics and Information, non-petroleum industry accounted for 19.8%, or OR5.33bn ($13.8bn), of GDP in 2015. Under Vision 2020, this share is expected to grow to 29% by the end of the decade. However, the sector faced rising pressure from reduced state spending and the ongoing economic downturn in 2015-16.

While constant GDP figures were not available as of November 2016, nominal GDP in the sultanate contracted by 13.8% in 2015, and non-oil GDP grew by 2.7%, of which industrial activity increased by a marginal 0.4%, accounting for 21% of GDP, according to the Central Bank of Oman (CBO). Figures released by CBO indicate that manufacturing accounted for 51.3% of total activity in the non-petroleum industrial sector in 2015, followed by construction (38%), electricity and water supply (7.3%), and mining and quarrying (2.5%). The latter experienced the largest proportional growth, at 13.8%, while electricity and water supply followed on 11%, and construction was up by 8.6%.

Manufacturing

Despite making up the largest share of the non-petroleum industry, manufacturing was the worst-performing segment in 2015, recording a 6.7% decline in output to OR2.94bn ($7.6bn), according to the CBO. “Manufacturing is difficult in Oman given the small domestic market, and thus a lack of economies of scale,” S. Gopalan, CEO of Reem Batteries and Power Appliances Company, told OBG. Furthermore, cash flow conditions for manufacturers tightened in 2016, with customers requesting longer payment conditions and bank interest rates doubling in the first half of the year.

Building Up

Construction is another major non-oil contributor, accounting for close to 6% of GDP and a significant percentage of local employment. The $6bn industry has recorded a compound annual growth rate of 7% since 2013, buoying growth for basic industries such as steel and cement, which in turn feed ancillary manufacturing units. Though sustained low oil prices are having a measurable impact on the industry by slowing down government spending and payments, the medium- to long-term fundamentals of the construction industry in Oman remain strong. “While the country has made substantial investment into export infrastructure, the ports could use some upgrading as they are not capable of handling all of the mineral and rock exports from the country,” Sreekumar Nair, CEO of explosives manufacturer Al Fajar Al Alamia, told OBG, suggesting further work is in the pipeline. There are obstacles. “Delayed payments is an issue that has seriously affected the construction space, particularly for government projects,” Mohammed Al Hashani, managing director of United Gulf Pipe Manufacturing, told OBG. “However, the construction and commissioning of desalination plants is normally overseen by private companies, so the risk for these projects is much lower.”

Cement

Two state-owned companies, Oman Cement and Raysut Cement, dominate the cement industry and are responsible for a combined market share of 57%. Raysut Cement’s output for the first half of 2016 was up 6% year-on-year, from 1.9m to 2.02m tonnes per annum (tpa). Meanwhile, Oman Cement’s output increased by 20% over the same period to 1.2m tonnes.

Collectively, the sultanate’s annual capacity of 7.6m tonnes provides nearly enough supply to meet its estimated domestic demand of 8m tonnes, according to EFG Hermes, a leading investment bank in the MENA region. The sultanate also buys almost 3.5m tonnes of cement imports from the UAE. With the UAE’s cement industry grappling with overcapacity and exporting 60% of its cement production, under-priced sales to nearby Oman continue to weigh on local cement companies, driving down domestic cement prices from OR30.90 ($80.25) per tonne in 2008 to OR24.80 ($64.40) in 2015.

Supported by higher sales volumes, overall revenues for the cement industry are nevertheless expected to grow, and both Oman Cement and Raysut Cement are taking a rise in consumption as a cue for capacity expansion projects, with confidence that any output surpluses can be exported.

Subject to feasibility studies, the two companies aim to set up a cement plant under a new joint-venture, Al Wusta Cement, in coordination with the Duqm Special Economic Zone Authority. A cement distribution terminal constructed by Raysut Cement at the Port of Duqm was due to start operations by the end of 2016. Given its proximity to the port, the Al Wusta plant should primarily serve export markets, though it will also supply future demand in the Duqm region.

Steel

Although lower oil prices and economic headwinds have delayed certain infrastructure investments, domestic demand for rebar is expected to keep pace with projected growth in construction. China is the largest and most contentious player in the market, facing charges of dumping products at predatory prices in the GCC, undercutting the sales and profits of local producers. To stem the tide of low-priced imports and help the domestic industry compete, local producers are lobbying for minimum import pricing on steel products.

Salim Al Mashekhi, chairman of the Omani MG Group, which owns Dhofar Steel, told OBG that Oman imports about 1m tonnes of rebar annually and stands to benefit from a 15m-tonne market in the GCC region, of which around 3m-4m tonnes is currently imported. “Oman continues to import a lot of steel, which shows that the market remains strong, and with many infrastructure and construction projects ongoing, we do not expect this to slow down anytime soon,” he said.

Seeking to take advantage of such market opportunity, Dhofar Steel plans to upgrade its existing billet manufacturing plant in Sohar Industrial Estate, converting the plant into a major rolling mill by the end of 2016. Roughly 30% of the initial rebar manufacturing capacity of 10,000-15,000 tonnes per month will be allocated to the local market, Al Mashekhi told OBG. “The balance – 70% – will be targeted at export markets within the Arab region, the Middle East and Africa, where our products are already performing well,” he added.

Other recent developments in the Omani steel market include the March 2016 inauguration of a newly expanded and integrated Jindal Shadeed Iron and Steel (JSIS) complex at Sohar Industrial Port. Part of the $18bn Indian steel conglomerate OP Jindal Group, the expansion of the JSIS 2m-tpa steel-melting shop includes a rebar mill with a capacity of 1.4m tpa, intended to compete with China and other steel-surplus nations in the region’s $6bn rebar market.

Aluminium

In the refined metals sector, the aluminium industry faced a challenging 2016, with inconsistent demand affecting revenue projections. Production nevertheless continued to gather momentum, with increased capacity expected in line with government efforts to boost aluminium exports in the GCC.

Oman’s National Aluminium Product Company (NAPCO), one of the leading manufacturers of aluminium in the GCC, experienced a record year of production in 2015, growing 45% by volume and raising revenue by more than 30%. The company is doubling production capacity at its plant in the Rusayl Industrial Estate to 42bn tpa as part of its commitment to support the government’s long-term goal of developing Oman into a regional manufacturing centre. Roughly 65% of production is exported, while 35% is sold domestically.

Robert Holtkamp, CEO of NAPCO, told OBG, “While continuing to grow to meet regional demand, firms like NAPCO are also coping with falling profit margins resulting from the doubling price of natural gas feedstock in 2015, the potential doubling of electricity costs and increased competition with the state for bank funds, which have driven interest rates up from 2.5% to 6%.”

Copper

Along with steel and aluminium, the GCC’s construction industry also supports growth in copper processing in Oman, with regional diversification and infrastructure development creating demand for copper tubes, the basic components for every freshwater and cooling system in the region.

To meet this demand, the Middle East Investment Company, Mohsin Haider Darwish Invesco, Hussain bin Salman Ghulam Al Lawati and Al Habib Holdings are investing $46m in a 15,000-tpa copper tube mill in Sohar Free Zone that will generate products used in the manufacturing of heating, ventilation, air conditioning and refrigeration systems. A 35,000-sq-metre land lease agreement was signed in April 2016, with an additional 30,000 sq metres of land set aside to increase the plant’s capacity to 30bn tpa in the future. Construction was scheduled to commence before the end of 2016, with full production anticipated by October 2018.

Automotive

Through its automotive-related investments, the Oman Investment Fund (OIF) has emerged as the chief architect of the government’s strategy to kick-start the development of a domestic auto industry. The OIF is currently supporting back-to-back investments by Iranian and Qatari firms for the first-ever automotive ventures in the sultanate.

In June 2016 Qatari-owned Karwa Automobiles signed a deal with the OIF for the establishment of a 1m-sq-metre auto assembly plant at Duqm Special Economic Zone (SEZ). Planned capital expenditure of around $160m – 30% by Oman and 70% by Qatar – will be used to build a bus assembly plant with a capacity to produce around 2000 units per year of an assortment of buses, trucks, cars and other vehicles for distribution throughout the GCC and North Africa.

In early 2016 the largest automobile manufacturer in the Middle East, Iran Khodro Industrial Group, struck a similar joint-venture deal with the OIF, valued at $15m, for the establishment of a car assembly line at Duqm. The project will begin with an initial capacity of 10,000 units annually in the first phase – including the Peugeot, Renault and Suzuki brands – which will then be scaled up to 20,000 units in a $30m second phase. The bulk of auto exports are expected to be targeted at markets within the GCC, as well as countries in the wider Middle East region that are covered by free trade agreements.

Anti-Dumping

These deals have the potential to underpin the development of a major auto industry, with significant upside for Oman’s diversification strategy. However, there are challenges to be overcome for this to be possible. In the automotive battery segment, for example, local firms like Reem Batteries are facing an Asian product glut, as well as increased costs resulting from the withdrawal of subsidies and rising costs for local manpower. To remain competitive, companies have been cutting costs on labour and power, and scaling back capital investments by prolonging the life of production plants. The GCC also recently passed an anti-dumping resolution to address these concerns, and Oman has lodged a complaint, which, if found valid, will go forward to the World Trade Organisation. “The new GCC Common Law on Anti-dumping should help protect manufacturers across the GCC from dumping by producers that operate at artificially low prices, particularly from Asia,” Reem’s Gopalan told OBG. The issue is one that affects a range of industrial sub-segments as well. “Competition from low-cost producers is significant in the Gulf,” Asok Kumar, general manager of plastics manufacturer Gulf Plastic Industries, told OBG. “GCC governments have supported the competitiveness of local industries using subsidies, something that we would like to see continued to ensure that Omani industrial companies remain competitive.”

Oilfield Services & Equipment

The slump in oil prices over the past two years has caused a ripple effect along the entire oil and gas value chain. Cost-cutting initiatives among operators has had a major impact on the bottom line of oilfield service and equipment players, forcing many companies to significantly reduce their cost base, including their workforce.

Firms that deal with oil and gas companies directly have experienced a reduction of opportunities. “Most oil companies have been restricting their requests for quotes and tenders, and existing tenders are being refloated in pursuit of higher discounts,” Murtaza Jariwala, executive director of Vanguard Engineering & Oilfield Services, told OBG. “So we have seen a lower volume of business going through in 2016. Our margins are being squeezed, and we have had to respond in some cases by reducing prices to keep the business.”

For UK-based KCA Deutag, an international drilling and engineering company, activity has remained largely unaffected by low oil prices, given that profits are locked into long-term contracts with operators. Opportunities for growth, however, are connected to operator needs, including tenders for rig fleet renewal or new wells planned for more project expansions.

Industrial Infrastructure

Free zones and industrial estates offer strong potential as revenue drivers for Omani industry, attracting foreign investment, new industries and start-ups through lower taxes and development incentives. The sultanate’s first industrial estate was initiated in 1983 at Rusayl, close to Muscat, under the auspices of the Authority for Rusayl Industrial Estate. Further estates followed in Sohar, Raysut, Nizwa, Sur and Buraimi, and in 1993 responsibility for managing the facilities passed to a newly created entity, the Public Establishment for Industrial Estates (PEIE).

Free zones at Sohar, Salalah and Al Mazunah have since been introduced to complement the industrial estates, along with a SEZ established in 2011 in Duqm that remains the largest SEZ in the MENA region at 2000 sq km. General incentives offered to investors in the Free Zones Law promulgated by Royal Decree 56/2002 include 30 years of tax-free operations, Customs exemptions, 100% foreign ownership and no minimum capital requirements.

Intended to jump-start key industries, liberal spending on infrastructure, including the Port of Duqm and the SEZ, is a central component of economic policy. Accordingly, public spending to support domestic industry is expected to move forward despite the strain on finances resulting from lower energy revenue.

However, some believe that more can be done to support industrial growth by developing trade networks. Prem Maker, managing director of Areej Vegetable Oil and Derivatives, which has operations in the country, told OBG, “Oman needs to work to sign more free trade agreements. Far from undermining Omani industry, as some fear it will, this would help Oman onto the path towards becoming a global trading centre.”

Sandan, Sumail & Al Mazunah

Recent and planned developments in industrial infrastructure include the February 2016 launch of Oman’s first integrated light industries city – the 250,000-sq-metre Sandan Light Industrial Park project, a private initiative by Sandan Development focused on the automobile market. The diversified Sumail Industrial Estate in Al Dakhiliyah Governorate, which is run by the PEIE, aims to create jobs by attracting tenants in specific sectors, including the food industry, plastics, steel, marble, building materials and warehousing, with an interest in expansion close to Muscat and Rusayl Industrial Estate.

Roughly 15% of the basic infrastructure work at Sumail was finalised by April 2016, according to Nasser Al Mabsali, director of the PEIE’s projects department. Infrastructure facilities for the 548-ha phase one are scheduled for completion by the first quarter of 2017, at an estimated cost of more than OR39m ($101.3m).

Al Mazunah Free Zone (AMFZ), also run by the PEIE, is attracting strong investment interest from companies looking to take advantage of the Gulf gateway for transit trade to Yemen and East Africa. As many as 21 companies signed contracts with AMFZ in the first quarter of 2016, increasing the total number of multinationals currently setting up operations in AMFZ to more than 75, according to Hilal bin Hamad Al Hasani, CEO of PEIE and chairman of the AMFZ Committee.

DUQM

The Duqm SEZ recently underwent an expansion from 1750 sq km to 2000 sq km, with a special focus on a crude oil storage initiative. The government has already spent $1.2bn and will spend billions more to develop the area around Duqm into a sprawling business zone, including a ship repair yard and port, an oil refinery, a petrochemicals complex, manufacturing operations, and warehousing and logistics facilities. The objective is to attract companies that will create tens of thousands of jobs in downstream industries before the country’s limited oil reserves run out. Bader Al Nadabi, executive director of Al Hael Ceramic, told OBG, “Oman is lucky enough to have substantial mineralogical wealth that has yet to be exploited. This, combined with a strategic location outside of the Gulf and access to cheap labour, makes it a natural location for downstream mining industries, such as ceramics.”

Underscoring the challenges facing the government’s investment strategy, Hassan M J Ali Abduwani, CEO of Voltamp, which makes power transformers, told OBG, “Manufacturing and exports hold significant potential, but considering intense regional and global competition, Oman will have to work to make the country as attractive as possible for foreign investors.”

Companies from around the region have responded to the opportunity by expressing intent to invest up to $2.15bn in Duqm, with Iranian companies – keen to expand after the easing of economic sanctions in January 2016 – representing the second-biggest source of investment after Omani firms. The zone was to be connected to a 2100-km GCC-wide railway to be built by 2018, but strained public finances across the bloc have delayed that project indefinitely, and Oman may instead focus on building a domestic rail network.

Noting the importance of continued government investment in support of industrial infrastructure, Al Mashekhi told OBG, “Oman certainly learned some lessons from the economic downturn in 2009, which is why we have seen significant investment in infrastructure and efforts to create an enabling environment in the country. However, we still have not done enough to diversify away from oil. Heavy investment is still needed in industrial areas and the country’s transport network to further support the industrial base.”

Feedstock Tariffs

The impact of the availability and cost of natural gas on heavy industry and manufacturing firms is considerable. Industries most affected by price changes and resource availability include petrochemicals, fertilisers, iron, steel and aluminium, cement and ceramics. While still among the lowest in the GCC region, domestic natural gas tariffs in Oman were doubled from $1.50 per million British thermal units (Btu) to $3 per million Btu, effective January 1, 2015, with a provision for annual increases of 3%.

The move was partly intended to reflect the rising economic and opportunity costs associated with natural gas feedstock, as well as to encourage industries to rationalise consumption. One year on from the tax hike, cement and ceramics companies, which use gas as fuel for kiln firing, reported steep drops in pre-tax profits of 12-18% compared with the previous year.

Employment Issues

Staffing remains among the top challenges faced by industry in Oman, from restrictive visa and labour laws to difficulties sourcing specialised Omani personnel to meet employment quotas. “The country needs to reform its visa regulations with an eye towards countries that are becoming increasingly important export destinations for Oman,” Gopalan told OBG. “The Middle East and Africa offer great potential for Omani manufacturers, and visa rules need to be relaxed so that clients can come to conduct site visits and negotiations in-country.”

The consensus among industry and manufacturing players surveyed by OBG is that the policy of Omanisation, aimed at increasing local participation in both the public and private workforce, is well intentioned but difficult to implement, adding significant personnel costs that affect regional competitiveness.

Whereas the UAE, for example, has a quota for local employment of 4%, industry and manufacturing in Oman has a 35% Omanisation quota. Local personnel are protected by rigid labour laws that guarantee a 3% per annum raise in pay that increases wage bills to unsustainable levels in some cases. Some companies see this internal wage inflation as a significant drag on competitiveness vis-à-vis GCC neighbours against whom they suggest they should be measured.

At the same time, obtaining work visas for willing expatriates is challenging for many companies operating in Oman, with the Ministry of Manpower acting as the ultimate arbiter on the number of expatriates authorised to work for a particular company.

Underscoring the compounding effect of labour costs on rising costs of operations, Gopalan told OBG, “We do not have labour flexibility, and the state does not allow expatriate labour so easily, which means we do not get clearances. Coupled with the rise in energy costs, this has resulted in the entire cost of operations in Oman going up significantly.”

Another issue affecting the competitiveness of the labour force in Oman is the difficulty reported by many companies in sourcing Omanis with the technical skills required for certain roles, a problem attributed to a lack of technical education and training. To improve the quality of available local human resources in support of the government’s Omanisation objectives, the government and the private sector have focused on making internship programmes and training courses available to any interested Omani (see Education chapter). In addition, local companies like Vanguard have launched in-house internship initiatives, which have established relationships with universities to bridge the knowledge gap between academic and practical experience.

Outlook

The Omani non-petroleum industrial sector faced increased pressure in 2015-16 from reduced government spending and an ongoing economic downturn. This introduced a period of austerity, with a significant decline in government spending that rippled through the economy. Given the importance of continued development to employment generation and economic growth, the government is expected to design innovative approaches to bridge its revenue gap and finance major infrastructure schemes.

Clarity that the government is moving forward in the way of regulatory reform, while infrastructure development is expected to attract investor interest, though greater transparency in the process is still required.