Industrial diversification insulates Qatar's economy from effects of blockade

The potential for the industrial sector to play a major role in Qatar’s economic growth was officially recognised in 2008 with the publication of the country’s plan for long-term development, Qatar National Vision 2030 (QNV 2030). Since then Qatar has taken a number of steps to increase the incentives available to foreign investors interested in supporting the country’s industry. Boosted by a new project to build a large petrochemicals complex, and in response to concerns about food supply and security in the wake of the 2017 blockade, non-hydrocarbons industries look poised to play a more prominent economic role.

However, challenges remain for state planners and investors to resolve. Qatar’s abundant natural gas reserves have enabled it to diversify vertically into petrochemicals and energy-intensive segments, such as steel and aluminium, but those petrochemical, chemical and metal commodities have often been subjects to price fluctuations on global trading markets that mirror the volatility characteristic of petroleum prices. The blockade imposed on Qatar by Gulf neighbours and traditional trading partners in Saudi Arabia, Bahrain and the UAE have pushed the country to adapt, survive and thrive by re-engineering import and export routes, while also kick-starting growth in the agriculture and food manufacturing industries. It has, however, also left current and prospective investors facing significant challenges in developing products that can serve alternative export markets beyond Qatar’s 2.7m residents.

Structure & Oversight

Across the Qatari industry sector and along the hydrocarbons value chain, many key companies are either wholly or partially owned by the government or one of its enterprises, such as Qatar Petroleum (QP). Key government ministers and members of the ruling family sit on the boards of many of these strategically important firms. Strategic joint ventures have been created with international companies, and shares in some of these companies have been made available for public trading on the Qatar Stock Exchange (QSE). This has allowed citizen investors to participate in initial public offerings (IPOs) so that Qataris can share in the wealth generated by oil and gas and by industries using the resulting feedstock in the manufacturing processes.

Public Policy

In November 2018 the Amir of Qatar, Sheikh Tamim bin Hamad bin Khalifa Al Thani, announced the first reshuffle of the government since 2016, and in the process appointed the thenCEO of Qatar National Bank (QNB), Ali bin Ahmed Al Kuwari, to a new portfolio as minister of commerce and industry. Al Kuwari served as QNB’s CEO for four years, having first joined its staff in 1988. Abdulla Mubarak Al Khalifa was appointed as acting CEO of QNB, in November 2018. Prior to the Cabinet reshuffle the portfolios of energy affairs and industry were the responsibility of the Ministry of State for Energy Affairs. The ministry’s role has been to help realise the goals of sustainable economic diversification and prudent management of hydrocarbons reserves. The ministry also encourages greater participation of Qatari and international private businesses in spurring economic development and diversification by investing in manufacturing.

To this end, the ministry has sought to further the privatisation of industry. The ministry markets opportunities to multinational companies and administers commercial licensing and business registration permission to every firm operating within the country.

Qatar Chamber, the country’s chamber of commerce and industry, plays a key role in championing privatisation and promoting the country’s businesses at home and abroad. In December 2018 the chamber organised a “Made in Qatar” exhibition in Oman in cooperation with the MEI and Qatar Development Bank (QDB). The event was attended by 240 Qatari companies to promote their products and to forge closer links between the business communities of Qatar and Oman – one of the two GCC countries that has not participated in the blockade.

Recent Performance

In November 2018 the Bahrain-based investment bank SICO reported a 9.1% year-on-year median decline in global prices for a basket of petrochemicals products, with ethylene and low-density polyethylene (LDPE) prices down 24.9% and 15.6%, respectively, compared to the same month in 2017. These fluctuations have significant implications for Qatar’s industrial sector, much of which is built on downstream production.

Qatar Petrochemical Company (QAPCO) has the capacity to produce 840,000 tonnes per annum (tpa) of ethylene and 780,000 tpa of LDPE. In 2013 Qatar’s GDP at current prices was QR723.4bn ($198.7bn), with manufacturing worth QR73.8bn ($20.3bn), or 10.3% of total output, according to the Planning and Statistics Authority. When oil and gas prices fell between 2014 and 2016, so too did Qatar’s GDP, and the gross and proportional contributions of manufacturing activities.

In 2014 GDP reached QR750.7bn ($206.2bn), with the input of manufacturing standing at QR76.1bn ($20.9bn), or 10.1%. By 2016 GDP had fallen to QR552.3bn ($151.7bn) with manufacturing down to QR46.8bn ($12.9bn), or 8.5%. In 2017 there was an uptick in the contribution from manufacturing to 8.7%, or QR52.8bn ($14.5bn), from a national total of QR607.6bn ($166.9bn). The drop-off of oil and gas prices from 2014 to 2016, which occurred before a partial rally in 2017 and 2018, may also serve to remind policymakers that more horizontal diversification into industries not directly tied to the market for extractive resources may create broader economic stability in the longer term.

Emerging & Target Segments

Qatar is moving to implement a series of reforms that will give private investors more freedom to participate in industrial production. In mid-December 2018 shares in Qatar Aluminium Manufacturing Company (QAMCO), a subsidiary of QP, started trading on the QSE after its IPO. QAMCO owns 50% of the total issued capital of Qatar Aluminium (Qatalum), which was created as a joint venture between QP and the Norwegian aluminium manufacturer Hydro. QP has authorised the transfer of its entire stake in Qatalum to QAMCO, with the IPO stipulating that it retain 51% of shares while issuing 49% on the market.

Many QP subsidiaries and associate companies form the backbone of Qatar’s industrial sector, and a number of new businesses have been created as a part of the country’s recent growth and diversification strategy. In 2013 Mesaieed Petrochemical Holding Company was created in order to oversee QP’s investments in three projects: Qatar Chemical Company (Q-Chem) I; Q-Chem 2; and Qatar Vinyl Company. The two Q-Chem businesses were established in 1998 and 2005, respectively, as joint ventures with Chevron Phillips Chemical International Qatar Holdings. QP retains a 2% minority stake in Q-Chem.

In 2006 Gasol was formed as a joint venture with Paris-based Air Liquide, which holds 40% of the equity, while QP and Qatar Industrial Manufacturing Company (QIMC) hold 30.5% and 29.5%, respectively. Gasol provides industrial gases, including oxygen, nitrogen, hydrogen and argon to downstream oil, gas, steel and chemical industries in Qatar. QP company Qatargas, which merged with another QP gas business, RasGas, in 2018, produces 2bn cu feet of helium per annum at two plants in Ras Laffan. Air Liquide, Iwateni Corporation and Linde Gases purchase 50%, 30% and 20% of this output, respectively.

In 2003 the conglomerate Industries Qatar (IQ) was formed with a mandate to administer the downstream component of the country’s industrial sector and distribute revenues earned therein to Qatari citizens, predominantly through the flotation of shares on the QSE. QP retains 51% of IQ’s equity, and the company’s subsidiaries operate as multinational joint ventures. IQ owns 80% of QAPCO, while the French petroleum multinational Total holds a 20% share. The equities of Qatar Fuel Additives Company, in turn, are owned by IQ (50%); Overseas Private Investment Corporation Middle East (20%); International Octane (15%); and Middle East Corporation (15%). The company has the capacity to produce 305,000 tpa of the clean fuel additive methyl-tertiary butyl ether (MTBE) and 500,000 tpa of methanol. Of that output, 110,000 tpa of methanol is used as a feedstock for MTBE, with the remaining 390,000 tpa sold as feedstock to companies producing a range of solvents, including formaldehyde and acetic acid.

IQ holds 75% of the equity in Qatar Fertiliser Company (QAFCO), while the remaining stake is held by the Dutch fertiliser producer Yara. QAFCO also has two subsidiaries of its own: Gulf Formaldehyde Company and Qatar Melamine Company. The company produces 2.7m tpa of ammonia, of which it sells 306,000 tpa, while using the rest as feedstock for its other manufacturing activities. QAFCO produces 4.25m tpa of urea, 27,000 tpa of melamine and 32,000 tpa of urea formaldehyde, 28,000 tpa of which is used in the process of producing urea, while the remaining 4000 tpa is sold.

The final company operating under the IQ umbrella is Qatar Steel Company (QS), which was fully integrated as a subsidiary in 2003. Its steel mills are located on a 125,000-sq-metre site in Mesaieed Industrial City, 45 km south of the capital, Doha. However, the company’s footprint extends into neighbouring GCC countries: QS wholly owns two subsidiaries, Qatar Steel Investment Company and Qatar Steel Company FZE, which are respectively based in Qatar and Dubai’s Jebel Ali Free Zone.

QS owns a 31% stake in Solb Steel Group of Saudi Arabia and a 25% equity share in Bahrain’s Foulath Holdings, as well as shares ranging from 50% to 100% in nine subsidiaries of the Bahraini and Saudi associate businesses. It is perhaps not surprising that in its annual report for 2017, QS described the fallout from the blockade imposed by Saudi Arabia, Bahrain and the UAE as challenging. QS also has a 50% share in Qatar Metal Coating Company, which is working on corrosion solutions for the metal deployed in reinforced concrete. Its partner in the business, QIMC, was founded in 1990 to encourage the involvement of small and medium-sized enterprises in the private sector, with its equities split 20:80 between the government and private investors. In total, QS maintains interests in 13 business projects spread across several sectors, including petrochemicals, chemicals, construction materials and foodstuffs. New industrial development in Qatar is being spurred by the decision to expand output from its North Field natural gas endowment. QP is inviting international companies to bid for contracts to construct a new ethane cracker at Ras Laffan Industrial City that, when completed, is expected to have a capacity in excess of 1.6m tpa, making it among the largest production facilities in the Middle East. Operations are expected to commence by 2025 and supply new downstream facilities. While the blockade may have caused significant challenges for companies such as QS, which maintains operations in countries participating in the embargo, the gaps in supply left by the border closure have created new opportunities for businesses to invest in the domestic production of goods that had previously been imported.

Agriculture and food production been transformed accordingly. In 2018 Qatar flew in 3000 Holstein cows from the US to a dairy farm constructed by Baladna Farms with the purpose of maintaining the supply of milk and dairy products to the country’s shops and supermarkets. The increase in agri-business activity has been a boon for local company Al Remth Agriculture and Livestock, which imports farm machinery and feed from Turkey. “Since the blockade we have seen a 10-fold increase in enquiries, as existing farms upgrade and expand to meet demand,” Mehmet Ernin Tanrikulu, general manager of Al Remth Agricultural and Livestock, told OBG. The company reports that the re-routing of cargo following the blockade has reduced the shipping times by up to two weeks; prior to the blockade, cargoes were transported via Jebel Ali, where they were broken down for smaller vessels that were serving Doha.

Defence

In recent years defence manufacturing has emerged as a key industrial segment, with the government launching Barzan Holdings, a strategic investment arm of the Ministry of Defence, in March 2018. One of the central objectives of Barzan Holdings is to achieve self-sufficiency in defence. To do so, the state-owned entity is establishing joint ventures and partnerships with international firms, which is also assisting the transfer of knowledge in this area. For example, the Qatari government has purchased a 49.9% stake in Turkey’s vehicle manufacturer BMC, which produces military vehicles.

Investment Incentives

The government of Qatar made significant steps to help local and international entrepreneurs to meet the demands of the domestic market after the blockade was imposed in June 2017. In January 2018 the government’s energy and industry minister announced to local media that the number of new factories opened in Qatar in the six months following the blockade was double that inaugurated over the same period in 2016, with registrations for 730 industrial facilities representing a combined investment of QR260bn ($71.4bn). The ministry also said its “Own your Own Factory in 72 Hours” initiative, which was launched in 2017 with the aim of fast-tracking the establishment of new businesses, prompted more than 8000 applications from Qataris and 1000 from international investors in the first six months of the blockade.

FDI

In January 2019 the government issued Law No. 1 of 2019, building upon an earlier draft law in March 2018. The new law now allows up to 100% ownership of companies by foreign parties for all of Qatar’s economic sectors. The purpose of this change is three-fold: to stimulate economic diversification, in line with development strategy articulated by QNV 2030; to boost foreign direct investment; and to accelerate development across all sectors, particularly in non-hydrocarbons activities. The legislation replaces Law No. 13 of 2000 and enables foreign investors to own 49% of the shares of Qatari companies listed on the QSE, subject to ministry approval, and 100% of the equity in other Qatari firms. For the new legislation, a Cabinet decision would be required in order to approve acquisitions of banking and insurance businesses.

Qatar is also redoubling its efforts to encourage the expansion of home-grown small and medium-sized enterprises (SMEs). State-owned QDB announced it had disbursed QR1.5bn ($411.9m) in loans to SMEs in the first 10 months of 2018, surpassing its QR1.4bn ($384.5m) target for the whole of 2018. QDB noted particularly strong growth in the food and food processing sector, with additional financial support of undertakings in education, health care and tourism, among other sectors.

Exports

Qatar’s export profile remains characterised by a heavy dependence on revenue from hydrocarbons and their derivatives. In November 2018 petroleum gases accounted for approximately 63% of the country’s exports, while crude oil and noncrude comprised 17.8% and 8.2%, respectively. Qatar Chamber reported that, as of November 2018, the country had increased its non-oil exports by 13.3% over the course of the year, to QR2.24bn ($615.1m). As of July 2017 the most significant components of the country’s non-oil product profile, as measured by export value, were iron products at QR1.3bn ($357m); aluminium bars,at QR506m ($139m); helium gas, at QR131m ($36m); and fertilisers, at QR109m ($29.9m). According to Qatar Chamber, this growth of non-hydrocarbons exports is the result of state development initiatives in downstream industries.

Foreign Markets

In May 2017, prior to the imposition of the blockade, the UAE and Saudi Arabia collectively received 44% of Qatar’s non-oil exports, with 36.4% of the total, valued at QR543.2m ($149.2m), going to Emirati ports. Oman received 11.36% of Qatar’s non-oil exports that month, equal to QR168m ($46.1m). The imposition of the blockade in June 2017 resulted in a 46.8% decrease in the value of non-oil exports in June 2017 compared to May 2017. However, by July 2017 the picture had changed. The monthly value of non-oil exports climbed by 67%, to QR1.3bn ($357m) and for the second consecutive month Oman was Qatar’s top non-oil export destination, importing goods worth QR422m ($115.9m), equal to 31% of the total. The data for non-oil exports in the first six months of 2018 indicated that nonoil export value had grown by 33.7%, from QR8.6bn ($2.4bn) in 2017 to QR11.5bn ($3.2bn). Qatar Chamber reported that non-oil goods exported in the first nine months of 2018 were worth QR18.3bn ($5bn), up 36.5% from the corresponding period in 2017.

Outlook

The industrial sector has demonstrated ample ability to adapt to and overcome challenges posed by the economic boycott imposed by some of its traditional trading partners. While the loss of commercial links with other GCC members may reduce its appeal as a gateway to Gulf markets, Qatar is looking further afield and creating fast shipping lanes to connect it with other parts of Asia. In addition, key downstream industries are poised to receive a boost to the volumes of chemicals, plastics, petrochemicals and metal products they are able to manufacture with the planned expansion of the North Field. Qatar’s industries have an inherent advantage in that they do not have to worry about potential shortages in the gas to power plants or the feedstock to fuel crackers. There is optimism that those larger petrochemicals facilities, steel mills and aluminium smelters will develop specialised manufacturing verticals that will create new products for Qatar’s domestic market and new global trading partners.