Return on investment: Efforts to diversify the manufacturing base are paying off

In a bid to develop a sustainable and diversified economy, non-hydrocarbons industry is becoming increasingly important, and the government of Abu Dhabi has set ambitious growth targets for the industrial sector over the coming two decades. The emirate is developing the infrastructure to achieve these aims, with the objective of creating an attractive environment for industrial investment across a range of sectors. The emirate’s competitive cost base and good access to global markets is likely to continue to support new areas.

Manufacturing is becoming an increasingly important component of the emirate’s economy. In 2012, the manufacturing industry accounted for 5.9% of nominal GDP and 13.4% of non-oil nominal GDP, according to the “Abu Dhabi Statistical Yearbook 2013”. This has grown from 5.6% and 10.1%, respectively, in 2009. The value added of the manufacturing industry increased by 33.9% to Dh47.97bn ($13.1bn) in 2011. Chemicals, plastics and related products account for the largest share of this output, reaching Dh22.5bn ($6.1bn) in the same year. The chemicals sector also accounts for 81.7% of the Dh28.3bn ($7.7bn) of gross fixed capital formation across all manufacturing activities.

Industrial Zones

 While the petrochemicals industry remains the primary component of the industrial sector, the roll-out of enabling infrastructure should result in greater diversity in the coming years. Khalifa Industrial Zone Abu Dhabi (Kizad) will be crucial to the realisation of this. Situated at Taweela, 60 km from Abu Dhabi City and 45 km from Dubai’s free zone, the zone is owned and operated by Abu Dhabi Ports Company. The premise of the project, like much of the industrial growth in the emirate, is using competitively priced energy to stimulate diversification and development. Syed Basar Shueb, CEO of PAL Group, told OBG, “The establishment of Kizad is a prime example of the government’s commitment to infrastructure development and their efforts to diversify the economic base.”

Kizad will be home to several local and international players focusing on energy and non-energy intensive manufacturing facilities. It will also encourage other projects to take advantage of this output or the location and facilities on offer at the 418-sq-km site.

The zone houses a series of industry specific clusters, allowing development from primary industry downstream to finished products with additional value. The clusters that Kizad focuses on are aluminium, steel, engineered metal products, pharmaceuticals and health care equipment, food, paper print and packaging, trade and logistics, and mixed-use and other industries.

The zone has already had some success. By the end of May 2013, 34% of the 51-sq-km first phase of the project was leased, up from 27% at the end of 2012, and representing a total of 40 tenants. The project, which was only officially inaugurated in November 2010, expects to have leased 40% of space in Zone A by the end of 2013. One of Kizad’s most important tenants is Emirates Aluminium (EMAL), the anchor for the aluminium cluster in the industrial zone. “The development of this facility and using EMAL as an anchor tenant has afforded many opportunities for manufacturing and industrial investment,” Shueb added.

Zonescorp

The other important infrastructure for industrial development in the emirate is provided by the Higher Corporation for Specialised Economic Zones (known as ZonesCorp). The corporation currently operates five free zones: Industrial City of Abu Dhabi (ICAD) I, II and III, and Al Ain Industrial City I and II.

Covering 14 sq km, ICAD I is fully occupied and investments in the zone total more than Dh6bn ($1.63bn).

Stretching over 11 sq km and featuring investment of Dh11bn ($2.99bn), ICAD II was developed under the public-private partnership (PPP) model and most facilities are now either open or in the final stages. ICAD III is currently under development as a PPP over an area of 12 sq km and has already seen significant demand.

Al Ain Industrial City I and II, home to 300 plots over a total area of 10 sq km, have also been developed as PPPs and have a particular emphasis on small and medium-sized enterprises working in the light to medium manufacturing, engineering and processing industries. The zones are designed to expedite the process of establishing an industrial project in the emirate. ZonesCorp provides services for obtaining industrial licences and staffing. It also allows for duty-free access to the GCC and signatories to the Greater Arab Free Trade Agreement. The import of raw materials and equipment is duty-free, and the free repatriation of profits and capital is also allowed.

ZonesCorp has plans for ICAD IV and V, which will cater to technology and light industries and the automotive industry, respectively. The 24-sq-km ICAD IV will be located to the west of the Mussafah Industrial City and eventually be connected to the freight rail network, while the 11-sq-km ICAD V is designed to serve as a one-stop shop for all things automotive, products and services, and is intended to support the development of a local automotive assembly and manufacturing segment. A Construction and Building Materials Zone is in the works as well, on 34 sq km of land in Al Faya.

EMAL

EMAL, which recently merged with Dubai Aluminium to create Emirates Global Aluminium, completed the $5.7bn phase one of its smelter project in 2011. This gave the company a production capacity of 800,000 tonnes per year. The $4bn phase two of the project has further increased capacity to 1.3m tonnes per year and is expected to be complete by second-quarter 2014.

The project will give EMAL one of the largest single-site aluminium smelters in the world and make Emirates Global Aluminium the fifth-largest producer globally. The smelter comes with substantial additional infrastructure, including a 3000-MW power plant. While the vast majority of the UAE’s 2m tonnes of aluminium production is exported (88.2%), the plan is for Kizad to supply firms further downstream. To this end, EMAL has signed three memoranda of understanding for supply within the zone and is in negotiation for two more.

Vertical Integration

 This vertical integration is being pursued across all sectors. Kizad has signed a number of significant agreements in 2013. In May, agreement was reached for a $200m fluid catalytic cracking catalysts plant serving the oil refining industry. The first in the Middle East, the factory is a joint venture between Grace Catalysts Technologies of Maryland, US (70%) and the UAE-based Al Dahra Agriculture (30%). The factory, scheduled for completion in 2015, will make chemical compounds used for splitting crude oil into refined products, such as diesel and a range of polymers.

In September 2013, Kizad also signed an agreement with the Federal Foods Company, the local subsidiary of Brasil Foods, South America’s largest food processing firm. The Dh533m ($145.1m) investment will see the establishment of a food-processing plant in Kizad with a capacity of 80,000 tonnes per year for a range of products, including meat-based and bread-based foods in addition to various marinated processed foods. The plant is expected to be fully operational in 2014.

Benefits

Kizad is a hybrid zone, containing both free zone and non-free zone areas. However, it is clear that it offers a number of benefits across the board. One of the major draws for firms is the low operating costs, particularly with respect to energy. Utility costs in the zone are highly competitive. According to Kizad, electricity is priced at Dh0.15 ($0.04) per KWh in the zone, compared to a rate of Dh0.21 ($0.06) per KWh in Oman and Dh0.33 ($0.09) per KWh in Dubai (and just above the level of Dh0.12 [$0.03] per KWh in Saudi Arabia). The zone also offers the cheapest water rates in the region, standing at Dh0.01 ($0.003) per gallon, compared to Dh0.04 ($0.01) in Dubai, Dh0.02 ($0.006) in Oman and Dh0.05 ($0.01) in Saudi Arabia.

The other major advantage of Kizad is the transport and logistics infrastructure. The zone is situated adjacent to Khalifa Port, Abu Dhabi’s new deepwater port and the first and only semi-automated port in the Middle East. The port has a draught of 16 metres, allowing the largest container ships to access Kizad. Inaugurated in December 2012, the port currently has a handling capacity of 2.5m twenty-foot equivalent units (TEUs) of container traffic and 12m tonnes of general cargo per year. This is expected to increase to 15m TEUs of container traffic and 35m tonnes of general cargo by 2030. The capacity coupled with the zone’s associated infrastructure should improve access and speed in terms of both imports and exports for industry. In its first full year of operation, Khalifa Port increased productivity at the quayside by 35% and reduced trucks’ turnaround time by 64%. The port placed in the global top 10 for productivity in July 2013.

All of this improves the environment for industrial growth at Kizad, reducing costs for tenants and expanding their access to markets. Khalifa Port brings substantial cost benefits to large-scale industrial projects in the emirate. Indeed, petrochemicals firm Borouge, based in Ruwais in Al Gharbia, has been able to realise significant cost savings as a result of the port’s opening. The company ships products from Ruwais to Khalifa Port and transfers cargo to bigger ships, creating economies of scale that result in savings on shipping rates.

New Rail Links

 The company, like many others, will also benefit from the development of the Etihad Rail network. When its new plant is finished in 2014, Borouge will be shipping an average of 1100 containers per day. The ability to ship to Khalifa Port by rail should save time and money. It will also allow the firm to ship to potential new clients within the emirates looking to manufacture further downstream. A Dh40bn ($10.9bn) project, Etihad Rail will facilitate the movement of freight across the UAE and the whole of the GCC region. Stage one of the project initially links the sour gas fields in Habshan and Shah to the port of Ruwais in Al Gharbia, with train operations currently under testing and commissioning. Linking the sour gas field of Shah to the port of Ruwais will see the completion of the 264-km stage one project by the end of 2014.

This network will initially allow the transport of up to 22,000 tonnes of sulphur per day in two trains from Abu Dhabi National Oil Company’s sour gas projects at Habshan and Shah. Stage two of the project will take the rail line to the border with Saudi Arabia at Ghweifat and the border of Oman at Al Ain, as well as to the industrial zone at Mussafah and to Khalifa and Jebel Ali ports. Contracts for this phase, which is expected to be complete by 2017, should be awarded shortly.

The final stage, scheduled for completion in 2018, will extend the network to the Northern Emirates. The 1200-km network will carry freight at speeds of up to 120 km per hour and has the potential to dramatically improve access to markets for industry within Abu Dhabi. The domestic lines will also link up with the wider GCC rail system, giving firms access to a network that will stretch more than 5000 km.

“The railway will facilitate the diversification of economic activity by providing the non-oil industrial sector with a safe, secure, reliable and efficient means of transporting large volumes of goods to customers within the UAE, to and from the UAE’s ports, and to other GCC countries, thereby helping to reduce logistics costs and increasing the competitiveness on the world market of goods produced in the UAE,” Saeed Al Romaithi, CEO of Emirates Steel, told OBG.

Senaat

 Beyond the infrastructure, one of the key drivers of industrial growth and diversification is Senaat, formerly known as the General Holding Corporation. The government-owned company will play a crucial role in helping the emirate meet its goal, laid out in the Abu Dhabi Economic Vision 2030, of increasing the industrial sector’s share of GDP to 25% by 2030 (from the current figure of approximately 13%). Senaat has interests in a number of sectors and recorded net profit of Dh1.3bn ($353.9m) in 2012, with revenues of Dh12.3bn ($3.3bn) and total assets of Dh25.3bn ($6.9bn). Future plans include the expansion of the National Petroleum Construction Company, its oil and gas, engineering, procurement and construction business, into South-east Asia. While its total investments may not hit the Dh20bn ($5.4bn) mark, the company has a strong record of investment in the industrial sector over the past decade. It has invested Dh16bn ($4.4bn) since 2004, with Dh2.2bn ($598.8m) worth of investments in 2012 alone. The company’s portfolio also includes Agthia, a food and beverage group; Ducab, a cabling joint venture between the governments of Dubai and Abu Dhabi; and Arkan, a manufacturer of building materials and construction products.

Petrochemicals

Much of the current manufacturing output of the emirate comes from the petrochemicals industry. Given the abundant and competitively priced feedstock available from Abu Dhabi National Oil Company (ADNOC), the emirate has exploited its competitive advantage in this field. Currently, the sector is dominated by two ADNOC affiliates: Borouge, a joint venture between ADNOC and Austria’s Borealis, and Fertil, a joint venture between ADNOC and Total.

Fertil produces ammonia and urea fertilisers. The production capacity of the company’s facilities at Ruwais, following the completion of Fertil 2 in 2013, is 2000 tonnes per day (tpd) of ammonia and 3500 tpd of urea. Borouge was formed in 1998, and the firm currently has a capacity of 2m tonnes, producing a range of olefins and polyolefins including ethylene, polyethylene and polypropylene. This is set to increase to 4.5m tonnes in 2014 when the $4.5bn Borouge 3 plant comes on-stream. Once Borouge 3 is complete, the company will have the largest single polyolefins site in the world.

In the coming decade, the Abu Dhabi National Chemicals Company (ChemaWEyaat), a company jointly owned by the International Petroleum Investment Company (40%), the Abu Dhabi Investment Council (40%) and ADNOC (20%), will build up a chemical industry based on liquid feedstock and thus increase the mix of petrochemicals produced in the emirate. The government has allocated around 70 sq km in the emirate’s western region to the firm for the chemicals city, known as Madinat ChemaWEyaat Al Gharbia (MCAG), which will involve several chemical complexes, along with supporting infrastructure, such as a seaport and cooling water systems. MCAG will be located nearby the existing Ruwais Industrial Complex, from which ADNOC will be supplying the required feedstock. ChemaWEyaat has also recently announced it will partner with India’s Indorama Ventures, a Bangkok-based manufacturer, to build a plastics plant in MCAG.

In addition, the Tacaamol Aromatics Plant, which is a world-scale aromatics complex producing 1.4m tonnes per annum of paraxylene and 0.5m tonnes per annum of benzene, will be the first operating plant in MCAG and is scheduled for completion in 2018.

Capacity Concerns

 Abu Dhabi is, therefore, actively pursuing a major share in the global petrochemicals market. One of the key concerns moving forward, however, will be the potential for overcapacity of supply in the region. There are currently 65 new petrochemicals projects under way in the region with a combined investment of $150bn, according to Gulf Business. Saudi Arabia alone added another 6m tonnes of production in 2012. Abu Dhabi’s manufacturers will also have to consider the impact of substantial new capacity in other markets. For example, the US petrochemicals industry has 110 new projects worth $77bn under way.

Indeed, in terms of the global market, 2012 was a reasonably tough year for Abu Dhabi’s producers. Prices for urea fertiliser fell by 4.3% to $421 per tonne, while polyolefin prices were also under pressure. Polyethylene prices fell by 0.8% to $1475 per tonne and polypropylene fell by 5.8% to $1433 per tonne. The only product that saw price growth was ammonia, reaching $545 per tonne, an increase of 5.8% on 2011, according to the “Abu Dhabi Statistical Yearbook 2013”.

However, local players remain bullish about the prospects for the industry and their commercial viability. Borouge, for example, is confident that demand outside the GCC region will ensure that its capacity is absorbed. Abdulaziz Alhajri, the CEO of Abu Dhabi Polymers Company (Borouge), told OBG, “In addition to the Middle East, Asia is our key market. The incredible rates of urbanisation taking place will have a huge impact on plastics demand.”

The company is playing aggressively in these markets. In 2013, it opened a representative office in Tokyo and in the first quarter of 2014, it will open four new representative offices in Jakarta, Ho Chi Minh City, Bangkok and Delhi. Borouge is looking to establish stable contracts rather than selling its product in the commodities market, where revenue is volatile and the prospects for growth are currently limited. To achieve this aim, the firm is also looking to develop niche products rather than simple commodities. As such, an application centre has been opened in Shanghai to research the development of compound automotive applications for Borouge plastics for the Asian market.

Sales of petrochemicals within the emirate are also increasing. In 2012, 256,778 tonnes were sold domestically, an increase of 76.3% on 2011. Nonetheless, this was dwarfed by the 2.1m tonnes of petrochemicals that were exported in the same year. Indeed, exports accounted for 76.4% of production in 2012. Nonetheless, finished products are still mainly manufactured in export market such as China. As a means of bolstering export values, Abu Dhabi aims to convert plastics at home. One important component of developing the domestic manufacturing industry is the roll-out of the new transport network within the emirate, country and wider GCC. According to Alhajri, “All this infrastructure becomes important in terms of attracting investment to turn polymers into products.”

Borouge’s Innovation Centre, a research and development facility based in Abu Dhabi, will also play an important part in this process. The centre is working on developing pipe, film and moulding applications for Borouge. Once Borouge 3 is fully operational, the Innovation Centre will also look at wire and cable applications. With substantial demand for both packaging and construction applications within the GCC, the plastics conversion and processing industry should also grow strongly in the coming years. Located in ZonesCorp’s Industrial City, the Abu Dhabi Polymers Park will support the plastics conversion segment in the emirate.

Steel

Basic metals comprise the other major component of Abu Dhabi’s manufacturing base. The major producer in the steel segment is Emirates Steel, a Senaat portfolio company. In 2012, the company achieved an annual capacity of 3.5m tonnes. Nonetheless, with demand tracking spending in the region, giving an estimated growth in consumption of 5-6% per year, Emirates Steel is looking at expansion. The phase three expansion, which would increase capacity by about 2.1m tonnes, will take place in Kizad and make Emirates Steel the second anchor tenant in the zone after EMAL.

The environment for steel production in Abu Dhabi is strong. Local producers have a cost advantage in terms of gas and electricity. Labour costs are also highly competitive compared to a country like Turkey, a major competitor in the market. However, one of the biggest issues is the cost of importing iron-ore pellets for production. These are mainly sourced from Sweden or Brazil and thus incur substantial freight costs.

In addition, there is currently price pressure on the local steel industry. Figures from the “Abu Dhabi Statistical Yearbook 2013” show that basic metals accounted for 14.6% of total imports to the emirate in 2012, and local producers are finding it difficult to compete with imports. The retail price of steel stood at $620 per tonne in the fourth quarter of 2013, down from as much as $700 per tonne a year earlier.

The price pressure is predominantly coming from imports from the Black Sea region and Turkey in particular. There are concerns that Turkish exporters are dumping their product, making it difficult for local producers. In the US market, Nucor has asked the US Department of Commerce and the US International Trade Commission to investigate anti-dumping duties against Turkish producers. The complaint argues that subsidised Turkish producers are selling into the US at below market rates, putting pressure on prices and mill utilisation rates. Egypt, too, has recently begun investigating Turkish dumping on its domestic industry.

While similar trends are affecting producers across the UAE, they are also beneficial for local traders who bend steel for construction projects.

“It is important to note that with new capacity additions and existing mill capacity expansions, rebar demand in the region is expected to be met mostly by domestic producers, minimising the need for imports, which so far has been met by importing the balance market requirements of finished steel products from countries such as Turkey, India and China,” Saeed G Al Romaithi, CEO of Emirates Steel, told OBG.

Outlook

Abu Dhabi is well on track to fulfil its ambitions for the industrial sector. Using its hydrocarbons resources to diversify into energy-intensive industries, the emirate’s manufacturing base should continue to grow. The government has put the necessary infrastructure in place, in terms of industrial zones, transport investment and also regulations, to support this growth. Furthermore, large-scale anchor industries, such as the EMAL smelter, the Emirates Steel plants and the Borouge facilities, should also help to facilitate the development of downstream segments. Indeed, in the coming years, the emirate is likely to see increasing production of semi-finished and finished higher-value products, revolving around metals and chemicals in particular. As such, Abu Dhabi is well on its way to reaping the benefits of a more diversified industrial base.