Rising oil production is having knock-on effects for a number of industries

The economy of Kuwait stands on the threshold of entering a major new phase in its development. Up to now, it has been based largely on the export of raw hydrocarbons or ancillary products such as petrochemicals. Now, however, a large programme of public investment is re-energising the economy across the board, and industry is set to be a major beneficiary.

Regulators

The Ministry of Commerce and Industry (MoCI) is charged with deepening commercial relations with overseas markets, registering companies and overseeing corporate finance, and providing for the needs of national industry. A subsidiary body, the Kuwait Direct Investment Promotion Authority is charged with promoting foreign direct investment (FDI), while two other institutions, the Industrial Bank of Kuwait, founded in 1973, and the Public Authority for Industry (PAI), founded in 1997, are charged, respectively, with providing credit to industry and widening its base.

The Big Picture

In 2012, the latest year for which figures were available from the Central Statistical Bureau (CSB), Kuwait’s nominal GDP stood at KD51.3bn ($180.3bn), up from KD44.3bn ($155.8bn) in 2011, an increase of 15.7%. In real terms, according to the IMF, the Kuwait economy grew by 6.2% in 2012. Oil made up 65% of GDP, 95% of exports and more than 90% of government revenue in 2013. According to a September 2013 report from KIPCO Asset Management Company (KAMCO), non-oil GDP grew by 10% in 2012, and during the 2006-12 period, manufacturing made up an average of 6.4% of GDP a year, with a compound annual growth rate (CAGR) of 3.8%.

Hydrocarbon Production

Oil and gas are the main pillars of Kuwait’s economy. In 2013, the country produced 2.9m barrels per day (bpd) of crude oil and 12.5bn cu metres of gas, most of this being in the form of associated gas (i.e. gathered as a by-product of oil production). In 2010, Kuwait Oil Company, the state-owned national energy group, announced plans to raise production to about 3.5m bpd by 2015 and 4m bpd by 2020, committing to a $90bn investment programme. Company is investing KD4bn ($14.1bn) to upgrade its refineries, partly to meet the increasingly stringent environmental specifications being introduced in much of Asia, Kuwait’s principal export market for oil products. Dubbed the Clean Fuels Project, this entails shutting the 200,000-bpd refinery at the port of Shuaiba and upgrading capacity at the refineries of Mina Abdullah (currently 270,000 bpd) and Mina al Ahmadi ( currently 466,000 bpd), bringing combined capacity to about 800,000 bpd. Meanwhile, a new refinery complex is being built at Al Zour that, when it comes on-stream in 2017, will add another 615,000 bpd, raising total capacity from around 936,000 bpd to 1.4m.

Petrochemicals

One of the prime beneficiaries of the rise in oil production is likely to be the petrochemicals sector. Since this industry relies largely on associated gas for its feedstock, as crude production rises, so will the availability of raw inputs, allowing Kuwait to extract more added value and export more chemicals.

One notable petrochemicals group in Kuwait is Petrochemical Industries Corporation (PIC), a subsidiary of the Kuwait Petroleum Company (KPC), which through various subsidiaries and joint ventures produces a range of products such as ethylene, ethylene glycol and polypropylene. PIC plans to invest $7bn-10bn in a new production complex known as Olefins III, which is to begin operating in 2018 (see analysis). Other notable petrochemicals groups include Al Qurain Petrochemicals Company, Equate Petrochemicals Company and Boubyan Petrochemical Company.

Diversification

Higher oil and gas production will have other effects, such as a substantial increase to government revenue. Rising demand from Asia is a trend likely to stay, meaning that any extra oil should find a ready market. For these reasons, Kuwait looks set for ample surpluses over the coming years. Indeed, in recent years, it yielded record budget and trade surpluses: the fiscal surplus was 23% of GDP in fiscal year 2011/12 and 9% in 2012/13, according to KAMCO.

Such windfalls are not inevitable. The break-even price for all Gulf countries is rising steadily. Populations are growing fast and governments find that spending commitments must rise as well. A large portion of Kuwait’s population is under 15, thus too young to enter the labour market. Domestic energy consumption is soaring as larger populations boost demand, and energy subsidies give domestic consumers little incentive to conserve. “The government is responsible for educating the population on energy conservation,” Saedeldeen Akasha, chairman of the Kuwait Catalyst Company, told OBG. “This could in turn have a big impact on both the environment and oil consumption.”

The Ministry of Finance is taking extensive measures to boost the economy, including tackling one of the main systemic issues – the country’s high dependency on energy subsidies. However, many companies have expressed concerns that reducing or removing this benefit would negatively impact Kuwait’s comparative advantage in terms of manufacturing costs. Khalifa Hamada, under-secretary for the Ministry of Finance, told OBG, “The ministry is aware of the impact that energy subsidies have on the economy and the goal is to ensure that the private sector can stay competitive. Easing subsidies is what is best for Kuwait in the long term, while efforts will be made to ensure lower-income citizens are not negatively affected.”

Infrastructure

At present, infrastructure is one of the biggest challenges for industry, in three main ways. The first is land. It generally takes a long time to secure real estate for industrial purposes, and property is often expensive, especially compared to other Gulf countries – even fairly remote plots sometimes cost more than $1000 per sq metre. Under Laws 8 and 9 of 2008, private companies are restricted from buying residential property in Kuwait; meanwhile, 95% of land in Kuwait is controlled by the state, and there is a lack of industrial estates or dedicated industrial space. The PAI offers some industrial land at a rent of $0.88 per sq metre, and subsidises 86% of power costs, so that electricity for industrial users costs only $0.005/KWh. However, many industrial insiders say there is simply not enough land available. A resulting issue is that some firms have been known to acquire subsidised land then sublet it to smaller companies, eroding the benefits for the end user. To remedy this, the PAI plans to open two industrial estates in 2016: Al Shadadiyah Industrial Area, covering five sq km and divided into more than 1000 lots of 1000-10,000 sq metres; and Al Naayem Industrial Area, comprised of 1200 lots on eight sq km.

A second concern for industrialists is availability of electricity. Kuwait currently has a generating capacity of 12,500 MW, produced by five power stations. However, peak usage has at times stretched as high as 11,000 MW, leaving a dangerously slim margin of supply. According to government estimates, demand is set to grow by 7-10% a year to 2025, creating a peak load demand of 25,000 MW – double current capacity. In a step forward, a contract was awarded in January 2013 for the new Al Zour independent water and power plant. Phase one is to have a capacity of 1500 MW.

The third concern for industry is transport bottlenecks. Kuwait’s two ports – Shuaiba, geared to the hydrocarbons industry, and Shuwaikh, focused on commercial and general cargo – have become increasingly congested over the past 30 years, with a combined throughput of 128m tonnes in 2011, according to the CSB.

National Development Plan(NDP)

The NDP, launched in 2010, is the country’s key investment programme, encompassing projects in education, health care, housing and transport infrastructure. With a total planned investment of KD30.7bn ($108bn), the NDP is likely to give a strong fillip to Kuwait’s industrial sector, while also addressing existing infrastructure issues. The NDP includes plans to construct more than 100 new schools, upgrade nine hospitals and build two new ones, and develop 70,000 new housing units. Although some of these projects have been delayed by bureaucratic and parliamentary disputes, once they begin, they are likely to stimulate demand in the construction materials and chemicals industries.

Transport infrastructure projects are central to the NDP. Among these is a new KD345m ($1.2bn) port, Mubarak Al Kabeer, on the island of Boubyan, which will have an initial capacity of 2.5m twenty-foot equivalent units and should relieve congestion and facilitate exports once it comes on-line in 2016. Another key project is the expansion of the Kuwait International Airport (KIA), to raise its capacity from about 9m passengers a year currently to 25m a year by 2020. As part of the upgrade, KIA is developing a new 2m-sq-metre “Cargo City”. These developments should help Kuwait to emerge as a transport centre for the northern Gulf region, serving the markets of Iraq and Iran.

Vision 2035

All the same, the authorities realise that infrastructure improvements are by themselves insufficient to produce a diverse industrial base. Economic development in Kuwait is also informed by Vision 2035, the government strategy for diversifying the economy. This plan centres on the notion of Kuwait as a commercial hub for the region, using the country’s strategic location at the head of the Gulf to serve the large economies of Iraq and Iran, with populations of 32m and 76m people, respectively. Vision 2035 aims to leverage this position with targeted investments in infrastructure and human capacity. Among the industries proposed for development are petrochemicals, heavy industry and construction materials.

Food & Drink

One sector that is most likely to receive immediate benefits from the NDP and Kuwait’s growing population is the food and beverage industry. “One of the most significant challenges here in Kuwait is guaranteeing food security when the population has grown so much,” Mutlaq Al Zayed, CEO of Kuwait Flour Mills and Bakeries Company (KFMB), told OBG.

Although Kuwait’s desert climate hinders it from becoming a major agricultural producer, Kuwait has a fairly large food processing sector. KFMB was established in 1961 to limit the amount of imported flour, and the company is now Kuwait’s leading provider of bread, catering to all major restaurants and recently beginning to export products regionally.

Other key food processors include the Kuwait Danish Dairy Company (KDD) and the Kuwait Food Company, branded as Americana. KDD, a closed shareholding company founded in 1962, has interests in manufacturing ( juices, ice cream, tomato paste, etc) and packaging. Americana, founded in 1964 and traded on the Kuwait Stock Exchange, has operations in 13 countries, employs 55,000 people and, in 2013, reported profits of $179m on sales of $3.1bn. The company operates nine consumer brands in areas such as processed meat, biscuits and frozen food, and holds food and beverage franchises in the MENA region.

According to Alpen Capital, an investment bank, food consumption in Kuwait is projected to rise at a CAGR of 2.9% from 2012 to 2017, and, while cereals are to remain the principal item of consumption, meat and milk will see the highest growth.

Despite the challenging climactic conditions, the Public Authority of Agriculture and Fish Resources (PAAFR) is placing high importance on food security and investment in local farms. As part of these efforts, the authority provides loan guarantees for agricultural developments. “Kuwait has some excellent areas for farming, particularly in the north and south,” Tawfeeq Ebrahim Al Haddad, assistant under-secretary of PAAFR, told OBG. “If we can encourage farms to grow in these areas, it will help us achieve our goal of food security.”

Construction Materials

The building materials industry in Kuwait is also substantial, buoyed by the high rate of construction. A 2012 report by Capital Standards, a local ratings agency, estimated that construction materials firms made up 47% of the manufacturing sector. Kuwait’s largest private industrial firm is the Gulf Cable & Electrical Industries Company, which in 2013 registered assets of KD226m ($794.6bn) and net profits of KD10m ($35m). The second largest manufacturing company in Kuwait is the Kuwait Cement Company, which in 2013 reported assets of KD310.7m ($1.1bn) and net profits of KD17.1m ($60m). Directly and indirectly, the government holds just under 30% of the company, which produces Portland, sulphate-resistant and masonry cement.

Business Environment

In the World Bank’s 2014 “Doing Business” index, Kuwait ranked 104th out of 189 economies. The country scored above the MENA average for ease of paying taxes and obtaining electricity, and below the average for ease of starting a business, accessing credit and obtaining permits for construction. Many industrialists in Kuwait say that, although the government’s plans are generally well devised, implementation can be cumbersome. This has been partly due to political volatility over the past five years or so. Now, however, it appears that parliament is entering a period of greater stability, thus the environment could become more conducive to faster decisions. “The private sector is imperative for future growth in the country,” Al Haddad told OBG. “Kuwait stands to benefit with further investments and support to the sector.”

The MoCI has launched a number of initiatives aimed at attracting foreign investors and establishing Kuwait as a financial and business centre for the region. These include efforts to expedite license approval processes, the creation of free trade zones (FTZs) and ministry-wide training for employees. “Kuwait is surrounded by large markets such as Saudi Arabia, Iraq and Iran, and establishing FTZs will give us the ability to provide storage facilities in a safe and well-monitored environment,” Abdulaziz Khaleji, under-secretary of the MoCI, told OBG. The ministry also runs a 24-hour consumer protection hotline and operates over 15 quality inspection offices throughout Kuwait.

Investment

Kuwait is in the fortunate position that it does not need to rely on external countries or companies for investment funds. Still, FDI is far from unwelcome. In 2012, the World Bank put net FDI inflows at $1.9bn, up from $854m in 2011. Most of the country’s numerous large joint venture companies are in the petrochemicals sector. In 2009, parliament approved plans for the creation of FTZs in Kuwait, similar to those that have had success in attracting FDI to other Gulf countries. However, at the time of writing, no new zones had opened, and Kuwait’s only FTZ remained the one at Shuwaikh, which opened in 1999 offering 100% foreign ownership. Under Law 116 of 2013, which repealed Law 8 of 2001 regarding investment promotion, the Kuwait Foreign Investment Bureau was abolished and replaced by a new entity, the Kuwait Direct Investment Promotion Authority, which issues licences, promotes FDI and runs a one-stop shop for investors.

Finance

One complaint from industrialists is that margins on industrial loans in Kuwait tend to be wider than in many other Gulf countries, and that credit for industrial ventures is harder to obtain. The Kuwait International Bank (KIB) offers industrial loans at an interest rate of 3.5% and both Islamic and conventional credit. KIB industrial loans were worth KD158m ($556m) in 2012, down from KD171m ($601m) in 2011.

In February 2014, the Ministry of Finance announced the creation of a KD2bn ($7bn) National Fund for Development of Small and Medium-sized Enterprises, to be up and running by end-2014. The fund’s aim is to unleash entrepreneurial drive among young Kuwaitis by offering training (how to write a business plan, deal with banks and suppliers, market products, etc) and by providing loans on favourable terms.

Outlook

The development of industry in Kuwait faces a number of barriers, such as access to land and electricity. Parliamentary disputes have also led to delays in the country’s efforts toward diversification. All the same, the country has ample capital to develop the sector, especially through the NDP investment programme. While not all of the projects envisaged in the NDP have been implemented, the plan is still likely to stimulate manufacturing, especially in traditional segments like construction materials. As for hydrocarbons, on-going investments in raising oil production and refining capacity are likely to open new doors for petrochemicals in the medium term. Meanwhile, Kuwait’s affluent and growing population indicates a strong outlook for consumer industries such as retail and food processing.