Productive enterprise: Manufacturing continues to attract investment, but securing natural gas supplies remains a challenge

Industrial policy in the Kingdom has always been forward-thinking. Even before Bahrain’s independence in 1971, the state decided to move its economy away from a heavy reliance on oil, which was first discovered in the 1930s, and use its hydrocarbons wealth to develop an industrial base. The aluminium smelter and its downstream associated businesses was one of the first of the heavy industries to be developed along with the petrochemicals sector, both of which use the Kingdom’s natural gas supplies as a source of feedstock and power.

Now, further diversification is under way with a view to developing an array of light, high-tech manufacturing and food processing industries. But in the future, rather than using finite natural resources, these niches will rely on developing the skillsets of the national workforce and also making use of the Kingdom’s geographical position midway between developed markets in the US and Europe and the quickly expanding economies of Asia.

GROWING IN IMPORTANCE: According to a 2010 report by the Economic Development Board (EDB), the state agency responsible for attracting foreign direct investment (FDI) to the Kingdom, manufacturing output increased by 80% between 2003 and 2008. The most recent projection from the EDB is for manufacturing to account for 20% of GDP over the next 10 years. In 2009 the sector contributed 16%, according to the Central Informatics Organisation, the state statistical organisation.

Significant manufacturing industries include plastics, steel, shipbuilding and repair, chemicals, fibreglass, food processing and textiles, but aluminium and petroleum products still top the list in terms of importance. Combined, these two commodities contributed BD2.5bn ($6.4bn) to nominal GDP in 2010, and half of the country’s foreign currency earnings come from the export of these two products.

ATTRACTIVE DESTINATION: Much of the diversification and development of the manufacturing base can be attributed to the Kingdom’s ability to sell itself as a Gulf destination of choice to international firms seeking a base of operations to exploit potential markets elsewhere in the GCC.

Despite the unrest during 2011, the country attracted an estimated $780.9m in FDI, according to the Central Bank of Bahrain, and the bulk of this was for new manufacturing plants. German chemical giant BASF plans to build a 16,000-tonnes-per-annum (tpa) additives plant, and oil and gas services firm RMA, also based in Germany, will set up a BD4.5m ($11.88m), 10,000-sq-metre plant that will employ 100 people and export 95% of its future output.

“The main advantages of setting up an office or business in Bahrain is that there is relatively little bureaucracy compared to some other Gulf states,” Michael Kellner, the CEO of Siemens Bahrain, told OBG. “Then of course there are the practical advantages: the central location in the Gulf, the causeway link to Saudi Arabia and the upcoming connection to Qatar. Our international staff find it easier to fly in and out of the country, as it is usually simpler to get visas at short notice. So it is easier to use an office in Bahrain as a base for meetings with GCC clients and to target the larger Saudi market.”

Siemens set up a manufacturing and service facility in the Bahrain International Investment Park (BIIP) in October 2011. The service centre is responsible for manufacturing and repair of parts, including cooling panels for steel-making furnaces, guides for rolling mills and gear boxes. The facility will increase component lifetime and reduce the need to import spare parts from Europe and South Asia.

INFRASTRUCTURE: Like other Gulf states, Bahrain has invested heavily over the years in building up its infrastructure in terms of industrial parks with good maritime, air and road connections, as well as drawing up a regulatory legal and tax framework with a view to attracting international and regional firms and investors. Indeed, specially designed industrial parks and logistics zones are at the heart of the government’s Economic Vision 2030, the long-term development policy driving further diversification. In January 2010 the government opened the Salman Industrial City (SIC) project, which is officially the cornerstone of its industrial policy. SIC includes three main parks located in the Al Hidd area: the BIIP, the Bahrain Investment Wharf (BIW) and the Hidd Industrial Area (HIA). The industrial city has good transport links and is located near to the newly completed Khalifa Bin Salman Port, the Bahrain International Airport on the island of Muharraq and the King Fahd Causeway linking the Kingdom to Saudi Arabia.

INVESTMENT PARKS: Covering 2.5m sq metres, the BIIP was developed by the Ministry of Industry and Commerce (MoIC). As of January 2012, 75 companies had located in the park, of which 33 were already in operation. “We are aiming to fill the park by 2014,” Bader Al Saad, the park chief of BIIP, told OBG. “Currently 75% of the space available to lease in the park is already committed. We have brought in manufacturing companies in food processing, fibreglass, chemicals and printing, and the geographical spread has included the US, Germany, France, the UK, as well as regional and local firms.”

The challenge for the BIIP and other parks is that Bahrain is one of several states with investment parks in the Gulf competing to attract international firms. In Bahrain 0% corporate tax is available and this is guaranteed for 10 years in the BIIP. In addition, the Kingdom also offers exemption from import duties on raw materials and equipment. Duty-free access to all GCC and Greater Arab Free Trade Area markets are also included, unlike free zones in the region. Furthermore, the Bahrain-US Free Trade Agreement was the first such treaty signed between the US and a member of the GCC. There are no minimum capital requirements, 100% repatriation of capital is permitted and there are no restrictions on recruitment, although government employment agencies like Tamkeen work with investors on apprenticeship schemes to boost the number of Bahraini nationals working at these companies. However, according to Al Saad, the main differentiating feature of mixed-use business parks in Bahrain compared to those in other GCC countries is the freedom to have 100% foreign ownership. Unlike business parks in other countries, investors do not have to form joint venture partnerships with local firms.

NEED FOR LAND: Looking ahead, the main challenge that is facing the future development of Bahraini industrial parks is a shortage of land. Indeed, the MoIC is currently in the process of studying the feasibility of reclaiming land to build a new Economic City by 2040, a large-scale, long-term project that aims to attract additional foreign investment in the industrial sector. “The ministry is in the process of studying the feasibility of a fully integrated development that would cover 93.32 sq km on a phased basis,” Hassan Fakhro, the minister of industry and commerce, told OBG. “Under this plan, all of the land will be reclaimed at an estimated cost of BD5.4bn ($14.2bn),” he further said.

“Land scarcity has always been an issue,” Fakhro added. “Under the government’s 2012-13 budget, we have requested funds to expand the existing industrial area in Sitra and to improve the infrastructure such as water treatment and sewage treatment plants and new road networks. Elsewhere in the BIIP we have focused on expanding and retaining the firms that have set up manufacturing facilities.”

ALUMINIUM: For several decades, aluminium and oil have been in many senses the lifeblood of the economy, and both play a vital role in terms of exports and contribution to GDP. Established in 1968, Aluminium Bahrain (Alba) remains a central cog in the Kingdom’s industrial machine, owning the world’s fourth-largest aluminium smelter. The firm produced 881,310 tonnes of aluminium in 2011, a 3.6% increase on 850,700 tonnes in 2010. A sixth production line, aimed at adding 400,000 tonnes of extra capacity, is due to be completed by early 2015. A technical feasibility study is already under way, with financial consultants due to be appointed by 2013.

The political disturbances in 2011 did not have any impact on Alba. Instead, the firm continued to operate at full capacity. Indeed, net income for the full year was $564m, up 53% as compared to the $368m earned the previous year. However, one issue that does represent a longer-term challenge for the company is that of energy costs.

According to data from the National Oil & Gas Authority (NOGA), Alba is one of the biggest industrial users of energy in the Kingdom, consuming 130.4bn cu ft of natural gas in 2009, or 24% of the country’s entire output that year. At its smelter in Askar, the company has its own dedicated 2265-MW power plant whose main fuel is natural gas.

Alba benefitted from subsidised gas prices from the government, which was a practice prevalent across the Gulf states. When subsidies were first introduced gas was associated, meaning it was a byproduct of the oil extraction process, and thus less expensive to produce.

GAS PRICES: In the past, Alba paid $1.50 per million British thermal units (MBTUs) for gas. With the new directive issued by NOGA, the price of natural gas supplied to Alba and other companies increased to $2.25 per MBTU, effective January 2012. In response to the planned price increase, the company released a public statement in September 2011, stating that “if the notified price increase takes effect, Alba expects that it would result in an increase of approximately $85m in Alba’s cost of sales for the year 2012 based on its expected production level.”

The aluminium industry will remain reliant on affordable supplies of natural gas for the long term to maintain its competitiveness in the global market. At present, the government has in place an ongoing gas upstream development programme, which, if successful, could ensure sufficient supplies and a fall in gas prices. In addition, the government is currently seeking to secure long-term liquefied natural gas (LNG) supplies from Russia, Qatar, Iran or Turkmenistan (see Energy chapter).

Meanwhile, demand in Asia for Alba’s products, which include rolling slabs, ingots, T-ingots, primary liquid metal and extrusion billets, is already exceeding production and is expected to increase steadily over the next decade. According to the Gulf Aluminium Council, world production of aluminium is estimated at approximately 41m tpa.

GCC smelters account for around 8.5% of this global production and their share is expected to rise to 10% in the near future. To remain competitive, Alba needs to secure a regular supply of gas at a competitive price to meet its power requirements. NOGA has begun a comprehensive study of long-term gas supply and demand in the Kingdom, including in the industrial sector, with a long-term view towards a new overall gas pricing structure.

DOWNSTREAM PRODUCTS: Having taken the initiative among other Gulf states on aluminium production back in the 1970s, the Kingdom has also been able to develop a significant aluminium downstream sector. Basing their manufacturing facilities near the smelter, these firms were able to dramatically reduce their transport costs for primary aluminium and focus on the global export market.

Companies such as Midal Cables, Bahrain Aluminium Extrusion Company (BALEXCO), Gulf Aluminium Rolling Mill Company (GARMCO) and Bahrain Alloys Manufacturing Company (BAMCO) are all well-established brands in the downstream sector.

Established in 1977, Midal Cables manufactures aluminium wire rods, wires and conductors. The company is a 50:50 joint venture (JV) with Jeddah-based Saudi Cable Company, with offices and manufacturing plants in the UK, Australia, Malaysia, Kenya and Canada. In 2011 the firm consumed 230,000 tonnes of primary aluminium – about 25% of Alba’s overall production – and produced 190,000 tonnes of rods and 90,000 conductors. Its main export destinations currently include Australia and countries in Asia, the Middle East and South America.

Incorporated in the same year as Midal, Balexco’s extrusion products are mainly aluminium doors and window frames sold to construction firms in the Gulf and wider Middle East region. The firm is currently replacing its anodising plant and will soon commission a fourth extrusion line, which will add 8000 tpa, boosting annual capacity to 33,000 tonnes.

GARMCO has operated the largest aluminium rolling mill in the Gulf since 1981 and is a JV between Bahrain (37.29%), the Saudi Basic Industries Corporation (SABIC, 30.4%), the Industrial Bank of Kuwait (16.98%), the Gulf Investment Corporation (5.9%), Iraq (4.71%), Oman (2.36%) and Qatar (2.36%).

In 2011 the company produced 155,000 tonnes of aluminium cold-rolled coil, sheets and circles and is targeting 173,000 tonnes by 2015. As part of a $30m revamp, GARMCO plans to add 100,000 tonnes to its existing capacity of 78,000 tpa at its re-melting facility. With 23 global subsidiaries, the firm exports 30% of its products to the Middle East, 30% to Asia, 15% to Europe and 17% to the US market.

Finally BAMCO, which first started operations in 1996, produced 24,000 tonnes of aluminium-based alloy products in 2011, which were supplied to the automotive sector and global die-cast industries. “Indonesia and Malaysia account for 80% of our business,” Graham Banister, the general manager at BAMCO, told OBG. “Over the last few years we’ve found the Asia Pacific region to be the main growth area, particularly in countries such as Japan, Korea and Australia. South Africa is also a growing market for us.”

RISING COSTS: Once again access to competitively priced and readily available gas supplies is the major challenge for downstream businesses. If Alba pays more for its gas, it is more than likely to raise its metal prices for its industrial customers to cover some of this. Many downstream businesses are currently renegotiating their existing contracts with the aluminium maker but feel that with a captive market in the Kingdom, it is in Alba’s current interests not to raise their prices.

“About 45% of Alba’s sales market is here in Bahrain,” Banister of BAMCO told OBG. “We are guaranteed to take their metal anyway. They are a good supplier and we see the relationship as a partnership. There is increasing competition in the Gulf aluminium smelter market. Oman and Abu Dhabi have copied the Bahrain model of locating businesses near a smelter to reduce transport costs, so they also have a ready-made market to sell to.”

It is a point echoed by others operating in the sector. “Gas price rises on Alba have a knock-on effect for downstream businesses,” A S Mohammed Nizar, the chief financial officer at BALEXCO, told OBG. “Whenever Alba raises its prices, we have to recover the cost from customers. There is growing competition in the GCC market. Although much has been done, the government could help support downstream businesses more by offering concessions on land leases and provide subsidised rates for power and water. If there is no support, Alba’s metal production is simply going to be exported away.”

Yet despite the challenges, all agree that if a supportive national strategy is agreed upon, the Kingdom is well-placed to take advantage of growth in the global aluminium market. “A long-term strategy is needed for downstream,” Adel Hamad A Rahman Hamad, the CEO of GARMCO, told OBG. “We need to be positioned to take advantage of the opportunities. The global flat-roll products market is expanding. Compared to iron and steel, many industries are converting to aluminium products. There is also significant potential in recycling, and we need to work on this in Bahrain. In countries like Brazil, up to 98% of aluminium products are recycled”

Given the advantages in terms of proximity to Alba’s smelter and the Kingdom’s location midway between the developed economies of the US and Europe and the new booming Asian markets, it is clear why there is now significant focus on the sector, which has the capacity to benefit employment as well as the development of high-tech engineering skills among Bahraini workers.

“In the past economic policymakers in the Kingdom have been guilty of focusing on selling a commodity rather than selling a product,” Khalid Rashid Al Zayani, the chairman of Al Zayani Investments and Midal Cables, told OBG.

He continued, “You can buy primary aluminium from anywhere in the world and you will pay the same London Metals Exchange price. So there is no added value for Bahrain. If you consider an airplane or an automobile, the value of the manufactured product is worth more than the commodities used to put them together. In the past the government talked about downstream development, but in the 1990s they continued to sell primary aluminium. Since then they have clarified their policy and we are starting to see a change of attitude.”

Indeed, the Ministry of Finance is seeking to boost downstream businesses with the imminent launch of a new BD100m ($264m) Aluminium Fund aimed at providing technical and financial support for the growth of the downstream sector. If the new fund is successful, it could provide the answer to closing high-tech skills gaps in the Kingdom and providing jobs to its growing numbers of graduates.

PETROCHEMICALS: After aluminium, the petrochemicals sector is the second-largest heavy industry in the Kingdom and an important contributor to the country’s industrial production. Gulf Petrochemical Industries Company (GPIC), established 1979 as a joint venture between the investment and development arm of NOGA (33.3%), Kuwait’s Petrochemical Industries Company (33.3%) and SABIC (33.3%), is the main player in the market.

In 2011, GPIC produced 1.58m tonnes of ammonia, methanol and urea. At present, the company is moving ahead with an estimated $1.5bn-2bn expansion plan to boost its capacity of ammonia to 3400 tonnes per day, while it aims to increase urea capacity to 5300 tonnes per day (see analysis). The company continues to rely on natural gas for feedstock and is currently negotiating with the government over the amount of gas that it will require as part of its expansion strategy up to 2020.

The expansion of its urea and ammonia plants is part of the company’s strategy to focus on the growing global markets for fertilisers. World demand for fertilisers is expected to rise to 181m tonnes over 2011-12, according to data from the International Fertiliser Industry Association.

In 2011, GPIC exported 71,536 tonnes of ammonia, 435,286 tonnes of methanol and 662,624 tonnes of urea. The main ammonia export markets for the company during 2011 were South Korea (53%) and India (47%). In terms of urea, the US was the main export market, accounting for 53% of the exports followed by Australia and Pakistan with 13% each, India 11% and Thailand, South Africa and Vietnam taking 3% each of the remaining share.

STEEL: While nowhere near as large as the aluminium industry, the steel sector in Bahrain is developing rapidly. At present there is one 200,000-tpa steel reinforcing bar (rebar) rolling mill for the domestic market, operated since 2009 by Universal Rolling (UNIROL), which is owned by local and Saudi investors and Bahrain-based International Investment Bank.

In January 2013 a new steelworks complex will begin to take shape in Al Hidd in the north-east of the Kingdom. Bahrain-based United Steel Company (SULB), which is a JV between Kuwait’s Gulf United Steel Holding Company (51%) and Japan-based Yamato Kogyo (49%), is the developer. The complex will target export opportunities in the Saudi Arabian and GCC construction markets, as well as the domestic construction sector. The $1.2bn Al Hidd facility will have a 1.5m-tpa direct reduced iron plant, a melt shop with an annual capacity of 1m tonnes, and a 600, 000-tpa heavy sections mill to produce medium-to-large H-beams. Under a planned second phase, a steel rebar mill will also be built.

With the government’s spending drive on infrastructure projects well under way, UNIROL’s facility and the new complex run by SULB should have a ready-made market for their product. In addition there is the financial support towards infrastructure building from the Gulf Development Programme, which will provide $10bn over 10 years. Much of UNIROL’s steel in the past was used in bridges, highways and power plant construction. Projects like the new causeway between Qatar and Bahrain are expected to produce a steady stream of future orders.

PLASTICS & FIBREGLASS: Two segments that have seen consistent development in recent years are fibreglass and plastics manufacturing. Fibreglass was first manufactured locally in 1975 by the Bahrain Fibreglass Company. More recent entrants include Abahsain Fibreglass, a JV between Saudi-based S&A Abahsain Group and US firm Glass Strand. The firm produces strand mat, assembled roving, single-end roving and fabrics, with about 40% of the plant’s output purchased by European firms. At present, the company’s $64m plant has annual capacity of 30,000 tonnes, but Abahsain is in discussions with another group to build a further fibreglass facility that would have the capacity to generate 1000 jobs. Lauscha Fibre International, a high-precision fibre manufacturer, has developed a $20m facility since 2009, which will employ 90 people at full production.

SHIPBUILDING & REPAIR: Arab Shipbuilding & Repair Yard Company (ASRY) is the oldest of its kind operating in the Gulf since 1977. Another firm operating in this sector is the Bahrain Ship Repairing & Engineering Company (BASREC), whose operations are located near to Mina Salman Port. ASRY’s facilities are based further to the north-east on Al Hidd, near the Khalifa Bin Salman Port.

In the wake of the global financial crisis and the downturn in the global maritime industry, both firms have had to diversify into other areas to maintain a steady supply of revenue. A developing area is the offshore oilfield services sector, where demand for the repair of jack-up rigs for oil and gas drilling is high. ASRY and BASREC look set to benefit from the renewal in offshore exploration activity in the Kingdom and the growing requirements of oil service firms seeking a reliable, cost-effective repair yard.

OUTLOOK: Seeking to further diversify its economy, the government has identified the manufacturing market and internationally traded services as key growth areas. Attracting international firms to set up operations in its multi-use business parks around Al Hidd is the goal. Tax-free benefits and incentives often seen elsewhere in the Gulf apply, but the Kingdom’s advantage is that it allows firms 100% foreign ownership.

Less energy intensive and more focused on exports, the plastics, fibreglass, chemicals and food processing sectors are attractive options for a government seeking to adjust its trade balance in favour of non-oil exports. The steel sector will see a rise in activity due to a long-term infrastructure spending drive that the government has undertaken. Similarly, upstream offshore oil and gas investment in Bahrain and among Gulf states is providing ship and rig repair firms ASRY and BASREC with other revenue streams to tap into among oilfield services firms.

The Kingdom’s established heavy industries will continue to play an important role in the economy and more development of the downstream aluminium sector is expected once the Aluminium Fund is implemented. But strategists and investors alike are well aware that these industries remain reliant on natural gas, for which the country may well need to find new sources in the near future. However, the Kingdom has a history of success in diversification, and shifting toward high-tech manufacturing and other new areas will help the industrial base develop further and reduce reliance on heavy industry.