Manufacturing key in drive towards Oman's diversification

Oman’s industrial sector is a key pillar of its long-term development strategy, as well as a major employer and a steadily growing source of wealth. It covers a wide range of fields, including mining, petrochemicals, aluminium and organic beverages.

The recent economic slowdown in both the country and the wider region still poses challenges. With much economic activity driven by government expenditure and investment, the sustained lows in oil and gas prices have strained margins in the private sector. Government policies related to employment and in-country value (ICV) are not uncontroversial.

Nonetheless, Oman continues to offer a strong value proposition for businesses, with a wide range of industrial estates and special economic zones (SEZs) adding to the attraction. Oman’s geostrategic location is also a considerable advantage, while ports and airports connect it to some of the world’s busiest trading routes and most dynamic markets.

Sturcture & Oversight

The main government body responsible for the sector is the Ministry of Commerce and Industry. This is currently headed by Ali bin Masoud bin Ali Al Sunaidy, who is also the deputy chairman of the Supreme Council for Planning (SCP). The SCP is a key body for the sector, as its Secretariat General has been tasked with developing and overseeing implementation of Oman’s economic strategy.

This is currently the ninth five-year development plan (2016-20), which covers the final years of the Vision 2020 programme. The latter targets increasing private sector engagement across the economy, while also pursuing a programme of economic diversification favouring industry, services and manufacturing over the oil and gas sector. Vision 2020 itself then forms the basis for the longer-term Vision 2040 strategy, which seeks to develop these goals further. “Despite the oil price drop, the government of Oman has pushed ahead with its diversification efforts and has continued to allocate funding to its diversification projects,” Yahya bin Said Abdullah Al Jabri, chairman of the SEZ Authority of Duqm, told OBG.

Overseeing the diversification strategy is another government initiative, the National Programme for Enhancing Economic Diversification, known as Tanfeedh. The aim of this programme is to link together development plans for the manufacturing, tourism, transport and logistics, mining and fisheries industries, based on a sustainable partnership between the private and public sectors.

Industrial Estates

The SCP is also responsible for the ongoing Oman National Spatial Strategy (ONSS), which is focused on building Oman’s future planning system and shaping its strategic direction. This entails looking at the value propositions of each governorate and attempting to integrate these into an overall plan for growth. Producing a number of regional strategies, the ONSS plays a fundamental role in enabling industrial development in particular, strategically placing industrial estates within transport and logistics networks, while also keeping potential future demographic patterns in mind.

Most of the estates fall within the Public Establishment for Industrial Estates (Madayn), a state body that currently has seven industrial estates, a free zone and an IT park in its portfolio, and more sites in the planning stage. These estates are located across the country and offer a range of incentives for the businesses located within them.

Alongside these are the SEZs, which are attached to some of the country’s ports and run by dedicated authorities. In the south, there is the Salalah Free Zone (SFZ), run by the SFZ Company (SFZCO); in the centre, the Duqm Special Economic Zone (DSEZ), operated by the Special Economic Zone Authority Duqm (SEZAD); and in the north, the Sohar Port and Free Zone, managed by the Sohar Industrial Port Company (SIPC). A fourth, the Al Mazunah Free Zone on the Yemeni border, is a Madayn-run establishment, as is the Knowledge Oasis Muscat, a special IT zone located in the capital. The SEZs also offer a range of incentives, and are structured to encourage businesses to locate themselves in regions with less industrial and manufacturing development.

When it comes to investment and export promotion, a central institution is Ithraa. Established in 1996, its mission is to attract sustainable investment to Oman – while also promoting the export of non-oil goods and services. Representing sector interests, meanwhile, is the Oman Chamber of Commerce and Industry, while each region also has its own local chambers.

Small and medium-sized enterprises (SMEs) are also supported by the SME Development Fund. This aims to give entrepreneurial orientation courses to some 500,000 students and aspiring businesspeople over the 2014-24 period, preparing some to grow successful enterprises. In addition, there is the Public Authority for SME Development, which runs mentorship, training, consultancy and business incubation centres, along with a one-stop shop for registration and access to government departments and agencies.

Facts & Figures

According to the National Centre for Statistics and Information (NCSI), non-oil exports surged in the first half of 2018. Between January and April, non-oil exports increased by 23% year-on-year (y-o-y), to OR1.32bn ($3.4bn), with re-exports also expanding by 23.3% to OR583.4m ($1.5bn).

Non-oil export growth in the first half of 2018 was similar to that of the first quarter at 24.2% y-o-y, hitting OR1.97bn ($5.1bn). This upswing was attributed to major increases in Omani exports to Qatar, which were up 164.2% y-o-y in the first six months of 2018, to OR202.1m ($542.9m), with the imposition of the blockade against Qatar by Saudi Arabia, the UAE, Bahrain and Egypt likely accounting for this. Oman did not join this blockade and has consequently become a significant conduit of goods to and from the Qatar area.

Breaking those exports down, a ranking emerges that is similar to the different contributions to GDP made by different industries. NCSI data shows that in 2017 oil and gas accounted for 58.2% of total export revenues, or OR12.65bn ($32.9bn). In terms of non-oil commodities, mineral products, chemicals and machinery were the top three. Including re-exports, the first – classified as mineral fuels, lubricants and related materials – accounted for 20.5% of the total; chemicals and related products, for 19.9%; and machinery and transport equipment for 18.6%.

In terms of share of GDP, at constant 2010 prices, industrial activities accounted for 19.4% of the total in 2017. This was similar to other recent years, with the sector contributing 19.6% and 19.2% in 2016 and 2015, respectively. Manufacturing took 9.5 percentage points of industry’s 2017 GDP total, with this breaking down into 4.6 points for chemicals and chemical product manufacturing, 0.3 points for refined petroleum product manufacture, and the rest for other activities.

Jobs for All

In terms of employment, in 2017 manufacturing supplied 244,463 jobs according to the NCSI, with 218,195 of these held by expatriates and 26,268 by Omani nationals. This illustrates one of the country’s continuing challenges, namely, Omanisation.

The sultanate had a population of around 4.56m in 2017, of which 2.5m were nationals and 2.05m expatriates. The rate of increase for the former group is around 3% per annum, and providing work for young Omanis is a clear challenge. One response by the government has been to give each industry a target percentage for Omani employees, obliging both public and private sector businesses to hire more locals. Companies that reach their targets are preferred when bidding for government projects – a significant incentive in a country given that government spending is a major driver of economic growth.

Omanisation does, however, pose some challenges for private sector manufacturing companies in particular. Traditionally, many locals have gone into the public sector and high-end managerial positions, with expatriates filling most of the lower-salary private sector jobs. This has helped private companies cut costs and boost margins, particularly in a country that has a relatively small domestic market and is therefore dependent on keeping its exports competitive relative to those of larger overseas manufacturers.

A skill gap also exists, as sometimes qualified and experienced workers from abroad are more readily available. The Omanisation ratios can also represent an issue if a company downsizes: key expatriate workers may be let go in favour of locals who are not necessarily as qualified as their counterparts.

Indeed, the most recent annual report of the government’s Implementation Support and Follow-up Unit suggested that Omanisation was proving challenging for the private sector. The report also stated that Omanisation stood at around 23% in manufacturing, as compared with 35.1% in tourism, and approximately 80% in oil and gas (see Energy chapter).

Nevertheless, many companies have risen to the challenge successfully, with the Omanisation programme also encouraging investment in local training and HR development. Tied to this is the drive to boost the ICV programme, a local content scheme under which companies bidding for contracts must allocate a certain percentage of their inputs to domestically produced goods and services. ICV has been particularly strong in the oil and gas sector, which is a major market for many equipment and machinery manufacturers in particular, as well as for steel and aluminium producers. For example, at the end of 2016 Petroleum Development Oman (PDO) signed a long-standing contract for steel pipes with the Gulf International Pipe Industry (TMK-GIPI). Part of the TMK group is based in the Sohar Industrial Estate, thereby boosting ICV. TMK-GIPI was also chosen partly because it has an above-average Omanisation rate of 45%.

Petrochemical Future

As a major oil and gas producer, Oman is naturally well situated for petrochemicals development. In recent times the increased emphasis on ICV has also benefitted this downstream industrial segment, as the sultanate tries to heighten value added from its diverse natural resources.

Key in this area are the Ministry of Oil and Gas (MoG), which supervises the hydrocarbon sector overall; PDO, which produces much of the sultanate’s oil and, until recently, all of its natural gas; and downstream player the Oman Refineries and Petroleum Industries Company (ORPIC). The latter runs the Sohar Refinery and petrochemicals complex, which is in turn connected to the Mina Al Fahal complex in Muscat by the Muscat-Sohar Product Pipeline.

Sohar was recently the beneficiary of the Sohar Refinery Improvement Project (SRIP), on which construction was completed in early 2017. The project has boosted ORPIC’s fuel production by 4.2m tonnes per year to 13m tonnes and added five new units to the plant: a crude distillation unit, a vacuum distillation unit, a delayed coker unit, a hydrocracker unit and a bitumen blowing unit. The new facilities boost production of fuels, naphtha and propylene by around 70% – necessary steps in the production of feedstock for ORPIC’s aromatics and polypropylene plants. These are located at Sohar, with the first producing benzene and paraxylene, which are key chemicals in plastics production. The aromatics plant has a capacity of 198,000 tonnes per year of benzene and 818,000 tonnes per year of paraxylene, while the polypropylene plant has the capacity to produce 350,000 tonnes of pellets a year. The latter ties into one of the biggest projects in the country: the $4.5bn Liwa Plastics Industries Complex (LPIC), which has six core components based around an 800,000-tonne-per-annum steam cracker unit located at ORPIC’s Sohar refinery.

The LPIC will be connected via a 300-km pipeline to a natural gas extraction plant at the Fahud oil field in the interior and will comprise a polypropylene plant, a high-density polyethylene unit and a linear low-density polyethylene unit, enabling Oman to produce these products for the first time. When the complex begins commercial operations in 2020, it will increase ORPIC’s plastics production by 1m tonnes per year, allowing for output of 1.4m tonnes of polyethylene and polypropylene. By then, work will also be advancing on another major new petrochemicals initiative at Duqm.

Refinery Complex

Duqm Refinery and Petrochemical Industries Company (DRPIC), a joint venture between ORPIC’s parent company Oman Oil Company (OOC) and Kuwait Petroleum International, is constructing a vast refinery complex that will form the cornerstone of the DSEZ. Around $15bn has been allocated for petrochemical and infrastructure investment in this zone over the next 15 years.

In April 2018 ground broke on the new refinery, which will have a production capacity of 230,000 barrels per day, and the design of the associated petrochemicals complex was finalised as the year progressed. It is expected that $8bn-9bn will be invested in this second phase, with seven to eight petrochemical plants on the site. By the time it begins commercial operations in 2024-25 it will be using naphtha and other products from the refinery’s butadiene, methyl tert-butyl ether and aromatics plants.

The location of the complex within the DSEZ shows the integrated approach being taken, along with the expectation that many of the industries locating in the zone will either have a petrochemical base, or use plastics in their manufacturing processes. Chemicals, packaging and a number of other trades can therefore hope to benefit from this major new development.

Duqm will also be the location of a major new acetic acid plant, a project led by BP. A feasibility study for the facility began at the end of 2017, following on from the signing of a memorandum of understanding between BP and OOC. Acetic acid can be used in the production of paints, adhesives and solvents, and is the main ingredient in polyester manufacture. In addition, as of mid-2018 Shell is planning to construct a gas-to-liquids plant at the DSEZ, with this also likely to produce petrochemicals that are useful for industry, such as naphtha and paraffins.

SEZAD also provides firms locating within the SEZ with a range of incentives, including a renewable, 30-year tax exemption from the start of business for non-financial or ICT sector companies. Businesses can be 100% foreign-owned, enjoy free repatriation of profits and import all types of products without experiencing any kind of retention restriction.

Similar incentives pertain to the Salalah, Sohar and Al Mazunah free zones, including the provision that goods manufactured in those zones count as locally produced, meaning that they only incur a 5% Customs charge when exported to other GCC states.

Fertilisers & Paints

Oman’s chemicals industry consists of four subsectors: fertilisers, paints, detergents and pharmaceuticals. Major players in fertiliser include ORPIC, the Oman India Fertilizer Company (OMIFCO), Suhail Bahwan Group, Oman Formaldehyde Chemical Company (OFCC), Oman Methanol Company (OMC) and Salalah Methanol Company (SMC).

Suhail Bahwan owns Sohar International Urea and Chemical Industries, based in the Sohar Industrial Port Area, and Suhail Chemical Industries, which is based in the Ruwi district of Muscat and produces technical- and battery-grade sulphuric acid. The group’s Sohar facility has a 2000-tonne-per-day ammonia plant, and a 3500-tonne-per-day urea plant.

OMIFCO is based at the Sur Industrial Estate, where it operates a two-train ammonia-urea fertiliser plant. Its ammonia plants each have a 1750 tonne per day anhydrous ammonia capacity, and its urea plants have a 2530 tonne per day granular urea capacity.

OFCC is Oman’s sole producer of aqueous formaldehyde (AF) and urea formaldehyde concentrate (UFC), both of which it produces at its Sohar Industrial Port Area complex. This can produce a combination of the above materials, with a maximum capacity of 125 tonnes per day of UFC or 203 tonnes per day of AF. Another of OFCC’s neighbours in Sohar is OMC, which produces around 3000 tonnes per day of refined methanol. SMC, meanwhile, is 90% owned by OOC and located in the Salalah free zone, and has a nameplate capacity of 3000 tonnes per day. Both SMC and OMC have long-term charters on two methanol carriers each, leveraging proximity to major port facilities in order to ship their cargoes overseas.

The fortunes of the second subsector, paints, are closely tied to the amount of construction work ongoing in the country. The industry has a multitude of important players, including Berger Paints, Sadolin Paints (Oman), Jotun Paints and Khimji Paints.

In 2015 Berger set up its second Omani plant at Sohar, with this being the largest in the country. It has a capacity of up to 30,000 kl per year, three times the capacity of Berger’s other plant at Ghala in the governorate of Muscat. Sadolin produces paints, adhesives and lacquers, with its main Omani factory at Rusayl in Muscat. Jotun, meanwhile, has an annual capacity of 50m litres of paint since opening a new plant at Rusayl in 2016. The company is the Omani branch of a joint venture between Norway’s Jotun and WJ Towell, which opened its first factory in 1986, the Middle East’s first ISO-accredited paint plant. Finally, Khimji Paints, also in Rusayl, is part of the Khimji Ramdas group, and it works in collaboration with the UK’s Crown Paints.

Duqm is also set to claim a stake in the paints sector, with Al Shomookh Mining Industries Company announcing in early November 2018 it was to build an integrated mining complex in the DSEZ, which will include a paint factory in its OR95m ($246.7m) second phase. This will use the company’s clinker and lime production plants, built in the first phase, and work alongside glass and aluminium factories and a waste container manufacturing plant.

Detergents & Pharmaceuticals

When it comes to the third subsector, detergents, the National Detergent Company has historically been the market leader. The firm produces fabric, dish, personal and home care products at five major plants: two of these are at the Sohar industrial estate (detergent powder and liquid units); two at the Rusayl Industrial Estate (soap and industrial and institutional liquids); and one at Ghala (a sulphonation unit). The company supplies industrial and institutional liquids to the oil and gas and construction sectors.

With regard to the fourth subsector, pharmaceuticals, Oman currently imports more than 93% of its medications, laboratory and surgical equipment, making the sector a major target for the development of many of its significant local players.

A crucial development in 2018 was the laying of a foundation stone for an OR140m ($363.6m) pharmaceutical plant at the Salalah Free Zone. Due for completion in 2020, the Felix Pharmaceutical plant will produce more than 100 types of drugs and feature a research and development establishment. Existing local companies include Oman Pharmaceutical Products, which is part of Al Bahja Group. This is also located at Salalah, with a facility that can produce up to 2.7bn tablets and capsules, 26m topical preparations and 19.5m oral liquid doses per year.

Metals

The sultanate’s iron and steel sector includes companies such as Jindal Shadeed Iron and Steel as well as Moon Iron and Steel Company (MISCO). Sohar is the venue for much of this heavy industry, with MISCO and Jindal Shadeed both based there. Jindal Shadeed has a 600-metre dedicated jetty with two berths at the port of Sohar. Its facility includes a direct reduced iron plant, with a production capacity of 1.5m tonnes per year of hot briquetted iron (HBI) and hot direct reduced iron (HDRI). The plant also has four briquetting machines for HBI production, with gravity feeding technology for transferring HDRI directly to the electric arc furnace melt shop. The facility has a 1.4m-tonne-per-year rolling mill. MISCO, meanwhile, a joint venture by the Oman Development Fund, Sultan’s Special Forces Pension Fund and the Gulf Investment Corporation, is currently building a mill with a capacity of 1.2m tonnes per year, 1.1m tonnes of which will be rebar. The complex is expected to cost around $300m and be completed in the last quarter of 2018.

Non-ferrous metals also constitute a major industry in Oman. One of the main players is Sohar Aluminium Company (SAC), which is a $2.5bn joint venture between OOC, the Abu Dhabi National Energy Company and Anglo-Australian multinational Rio Tinto. Its smelter currently has a 375,000-tonne-per-year capacity, and 60% of its production has been earmarked specifically for local consumption. In August 2018 it was announced that the company was going into partnership with Synergies Castings, an Indian alloy wheel manufacturer, to build a production facility next to the smelter on the Sohar Industrial Estate, a project forecast to cost $100m. Oman Aluminium Rolling Company (OARC) is on that estate as well, and operates a $385m plant with a multi-purpose aluminium capacity of 140,000 tonnes per year. OARC has a long-term contract with SAC for the provision of smelted aluminium, illustrating the continuing benefit and synergies provided by the industrial estate system.

Another major player in the aluminium sector is Oman Aluminium Processing Industries, which produces aluminium rods and overhead line conductors. This is a joint venture between Oman Cables Industries and Takamul Investments, and is also located at Sohar.

A Range of Manufacturers

Aside from the chemicals, petrochemical and metals sectors, Oman is home to a wide range of light-manufacturing companies. Some 35,596 SMEs were registered as of August 2018, contributing 15% of GDP. Many of these are within the construction sector (see Construction & Real Estate chapter), including businesses involved in marble and granite mining and processing, as well as glass, tile, block, cement and limestone production.

The high-tech end of manufacturing is represented by companies such as Glasspoint (see Energy chapter), which produces equipment that uses solar-powered steam injection for enhanced oil recovery, and the Advanced Manufacturing Research Centre. The latter is a new research and development facility in Sohar which partners Sohar University with the UK’s University of Sheffield. It will focus on boosting technology in SMEs and, in turn, increasing their contribution to ICV (see ICT chapter). However, other tech-based sectors remain underdeveloped. “E-commerce platforms such as Amazon and eBay have yet to gain traction in Oman, partially due to the lack of support available for these platforms. The future is pointed towards e-commerce, and Oman is working hard to develop the infrastructure required,” Ajay Ganti, CEO of Al Seeb Technical Establishment, told OBG.

Light manufacturers are also looking to new production methods. “2019 will be a year of reconciliation, control and manage costs; specially cost of energy, by adopting effective alternatives to traditional energy use, as well as increasing productivity and efficiency in manufacturing and production. We must adopt the global trend of automation and system driven to maximize efficiency and provide the end consumer with the deliverable values, best services and exceed product expectations,” Salem Bortmany, managing director of Areej Vegetable Oils and Derivatives, told OBG.

Outlook

For industry, in the years ahead much will depend on the fortunes of Oman’s overall economy, which is in turn still highly dependent on oil and gas pricing. As prices have recovered throughout 2018, austerity measures will likely ease in the short term, yet uncertainty remains over price levels going forward. At the same time, many businesses have suffered sustained periods of downturn, and complete recovery from this likely to take some time. “Increasing costs in power, transport and labour are all exerting significant downward pressure on the profitability of Omani manufacturers,” S Gopalan, CEO of Reem Batteries and Power Appliances, told OBG. Business leaders also have concerns over the Omanisation and ICV drives and the impacts these are having. Nevertheless, Oman’s industrial sector continues to enjoy a variety of advantages, from its geostrategic location to its stability in a region marked by ongoing turbulence.

The years ahead will see the emergence of a major new petrochemicals segment, along with a variety of significant associated industries in the SEZs. These are likely to act as major growth and employment nodes, benefitting from accelerating global trade as well as the long-term recovery of the domestic economy.