Kuwait’s new industrial zones and petrochemical products spark expansion

 

The non-hydrocarbons industrial sector has long played a secondary role to oil and gas in Kuwait. As the country pivots towards easing the dependence of its economy on hydrocarbons, manufacturing is one of the sectors the government is looking to further develop, with the Public Authority of Industry (PAI) taking the lead. Sector stakeholders are welcoming the increased availability of industrial land, as construction continues in the Al Shadadiya Industrial Zone and plans take shape for the ambitious multi-sector Silk City in the country’s north. At the intersection of hydrocarbons and industry, the petrochemicals segment has received considerable attention and investment, while technology manufacturers are winning a number of lucrative contracts to serve the government’s goals of adding increased efficiency to oil and gas production.

Structure & Oversight

The PAI is the main sector regulator and is responsible for developing, promoting and supervising the industry. Established in 1977, the authority has a mandate to encourage the ongoing development of industries that serve the national interest by manufacturing products of strategic benefit.

As of April 2019 the PAI was in the final stages of its first internal restructuring since its foundation, with 161 new staff hired in 2018. The restructuring and capacity-building initiatives were deemed a necessary step towards realising the Kuwait National Development Plan’s goal of developing “a prosperous and diversified economy”. The plan, branded New Kuwait 2035, was launched in January 2017 and comprises 164 strategic development programmes under seven pillars: global position, human capital, health care, living environment, infrastructure, economy and public administration. It also outlines five strategic directions for the country: enhanced citizen participation and respect for law; effective governance; economic prosperity; the creation of a nurturing nation; and to be a globally relevant player. Two programmes in the plan will directly impact Kuwait’s industrial sector, namely the construction and completion of the Al Shadadiya Industrial Area project, and the Silk City and Islands Development project. The first phase of the latter is scheduled to be completed in 2022. The industrial sector will benefit from a range of improvements to transport and logistics networks and infrastructure, including expanding and renovating road infrastructure, developing three ports and adding to existing warehouse facilities.

The government supports financing for the sector via a 49.1% stake in the Industrial Bank of Kuwait, a specialised bank established in 1973 with the aim of encouraging viable projects in manufacturing sector. Its products include long-term industrial loans with a fixed interest rate of 3.5% per year, and Islamic industrial financing, which uses Islamic-compliant products to finance industry-related projects approved by the PAI. In March 2019 the PAI was considering the closure of 14 industrial plants until the payment of full financial dues to the authority were made, reflecting the PAI’s strict policy on debt. In accordance with regulations, the first penalties for non-payment arise after 15 days and increase in severity after one month.

Employment

Employment in the sector is overseen by the Public Authority of Manpower (PAM). As part of the government’s Kuwaitisation policy, which looks to increase the proportion of Kuwaitis in the workforce using sector-specific quotas, companies in manufacturing and agriculture are required to have a workforce that is at least 3% Kuwaiti, while companies in the petrochemical and refining segments must have at least 30% Kuwaiti nationals.

PAM has been stepping up its Kuwaitisation efforts in recent years; for example, by issuing a decision that as of June 2019 an annual fee of KD300 ($988) will be required for every work permit issued to a non-Kuwaiti employee to incentivise hiring locally.

Private sector players are represented by the Kuwait Chamber of Commerce and Industry, which lobbies for the interests of industry; and the Kuwait Industries Union, a non-profit organisation representing around 300 industrial establishments operating in the country. Other key institutions include the Kuwait Direct Investment Promotion Authority (KDIPA), which manages free trade zones and promotes investment.

Lead Segments

The industrial sector in Kuwait is dominated by hydrocarbons, with coke and refined petroleum products leading the PAI’s list of the top industrial segments (see Energy chapter), followed by chemicals and chemical products, fabricated metal products, other non-metallic mineral products and furniture. Accordingly, World Trade Organisation data noted that in 2017 fuels and mining products accounted for 89.8% of exports, followed by manufactures, at 9.2%. That year, hydrocarbons products accounted for three of country’s top-five exports in terms of value, with petrochemical acrylic alcohols and automotive exports accounting for the remaining two. Nonetheless, the government is actively supporting the development of manufacturing and other non-hydrocarbons industrial segments as part of its New Kuwait 2035 initiative. Leather tanning, paper, prefabricated steel buildings, electrical cables and metal pipes are among the industries being targeted due to their export potential.

Performance & Size

While the contribution of the manufacturing sector to GDP dipped in both 2015 and 2016, it climbed 12%, from KD2.4bn ($7.8bn) in 2014 to KD2.7bn ($8.8bn) in 2018, according to the Central Statistical Bureau (CSB). Much of this gain was made in 2017, when the segment’s contribution to GDP rose from KD2.1bn ($7bn) to KD2.7bn ($8.9bn), an increase of 25%. The degree of this expansion largely negated the marginal decline experienced by the sector in 2018, when its contribution fell by approximately 0.3%.

According to a survey of 750 industrial companies issued by the PAI in 2018, investment in the sector grew from KD4.2bn ($13.8bn) in 2014 to KD5.2bn ($17.1bn) in 2017, an increase of 24% over the three years. Foreign direct investment (FDI) grew more consistently, albeit less dramatically, between 2013 and 2017. According to a survey released by the CSB in 2018, FDI in industry maintained steady growth, rising 2.9% from KD375.4m ($1.2bn) to KD386.2m ($1.3bn).

As of June 2018, according to CSB data, the private manufacturing sector in Kuwait employed a total of 230,305 people, of which 222,881 (97%) were non-Kuwaiti and 7434 (3%) were Kuwaiti. In the PAI’s 2017 survey of the industrial sector, the total number of Kuwaitis working in industry reached 11,000, representing an increase of 22% from the 2014 figure of 9000. The PAI told OBG that the agency is hoping to continue to increase the proportion of Kuwaitis working in the sector, but that one of the challenges of attracting nationals to private sector industrial work is the comparably long working hours. “The work week in the industrial sector typically lasts six days, while in the public sector it is a more traditional five days a week,” Hanouf Al Dhaferi, economic researcher at the PAI, told OBG. “There is also the perception that public sector work is safer, which further tilts preferences.”

Industrial Land

Historically, one of the major challenges for investors in manufacturing and stakeholders seeking expansion is the scarcity of industrial land. The government, which is in charge of the availability of appropriately zoned land for industrial activities, carefully controls the release of industrial land. In an interview with OBG in early 2018, Faisal Awwad Al Khaldi, deputy CEO of Kuwait Steel, said that the allocation and availability of land reserved for manufacturing was “the most challenging factor for industries in Kuwait”.

The year 2018 saw the Ministry of Commerce and Industry make several announcements that looked to address this issue by increasing the availability of industrial land stock. In January of that year the ministry announced that it would make 1036 industrial blocks available in the Al Shadadiya area by the end of 2018. The land would be allocated according to new standards, with industrial capital – namely the size of capital used in technology, machinery, equipment and operation – weighted at 20%; industrial priority of the quality of investment and products weighted at 30%; and expected value added to the national economy, including Kuwaitis employed and indirect economic value, weighted at roughly 50%.

In October 2018 Khaled Al Roudhan, the minister of commerce and industry, announced that the government would increase the total amount of industrial real estate by 50% via the addition of 700 specialised units in the Al Salmi and Al Shadadiya industrial cities. Conditions placed on the acquisition of the land included a stipulation that investors possess at least $825,000 in capital investment. Commenting on the government’s decision, an October 2018 article by the non-profit Arab Gulf States Institute in Washington, DC, noted that government management of the new supply will be key to ensuring investors engage in productive economic activities while discouraging harmful property speculation and buy-to-rent investments.

Zones

One of the brightest prospects for Kuwait’s industrial sector is the government-supported development of industrial zones. The zones are intended to respond to demand for industrial land and spur further non-hydrocarbons growth in the sector. In April 2019 Abdulkarim Taqi, director-general of the PAI, told local press he expected initial revenue in the proposed industrial cities to reach KD90m ($296.4m) per year.

One of the sites is located just 25 km south-west of Kuwait City. Al Shadadiya Industrial Zone is set to measure 5m sq metres, with a food zone, a mixed-use zone and a chemical zone. The master plan for the project was drawn up by Kuwait United Development, with Kuwaiti architectural and engineering consultancy SSH contracted by Mushrif Trading and Contracting Company to provide design, engineering and value engineering services. Infrastructure works for the project are valued at $300m. As of October 2018 construction was ongoing, with the project expected to be completed in late 2019 or early 2020.

An industrial zone is also planned to be part of the government’s proposed Silk City development. The first phase of the 250-sq-km project, which will be built with the cooperation of the Chinese government following the signing of a series of memoranda of understanding, is expected to cost $86bn and include an international airport and a rail network, as well as a logistics and industrial centre and a free-trade zone for Mubarak Al Kabeer Port. Both zones represent significant steps forward in increasing the private sector’s role in the economy, with the New Kuwait 2035 programme aiming to increase the private sector’s contribution to GDP from the 26.4% seen in 2013 to 41.9% by 2020.

Manufacturing

Kuwait has a number of manufacturing growth areas, including pharmaceuticals and secondary hydrocarbons technology. Along with health care, the government has designated the pharmaceutical industry a high-priority segment, and encouraged the use of the public-private partnership model to finance and manage new production facilities. In December 2016 the Ministry of Health granted 12 local pharmaceutical companies permits to construct manufacturing facilities. The expansion of local pharmaceuticals production is being largely underpinned by rising demand, with Fitch Solutions forecasting that sales of pharmaceutical products in Kuwait will grow at a compound annual growth rate of approximately 5.2% between 2017 and 2022.

The growing use of technology in the sector has led to increased focus on digitalisation and other tools that can be used to improve processes. “Digitalisation is one example of a tool that can be used to enhance the decision-making process, support plant changes and reflect changing market prices,” Abdulaziz Al Duaij, chairman of Kuwait Aromatics, told OBG.

In line with the goals of New Kuwait 2035 and Kuwait Petroleum Corporation Vision 2040, which both articulate the need to leverage technology to increase efficiency and maximise energy resources, February 2019 saw the opening of the country’s first manufacturing, integration and testing centre for advanced automation technology. Established by US multinational Honeywell, the plant will help drive digital transformation in the oil, gas and petrochemical industries. The facility will produce distributed control systems platforms and operator consoles for automation projects.

Costs

The aforementioned scarcity of available land means that it is the highest input cost facing prospective industrial investors in Kuwait. Considering the scarcity of industrial land in particular, prices are skyrocketing, which could lead to potential difficulties for investors when seeking out feasible projects.

In other aspects of the cost analysis, however, Kuwait presents a more favourable business environment. Despite increases in the cost of electricity and water in recent years, for example, utilities in Kuwait remain cheaper than in most other GCC countries. The PAI’s Al Dhaferi told OBG that prospective industrial investors further benefit from incentives, such as tariff exemptions on imported raw materials and subsidised rent in industrial zones. “If you import raw materials from abroad, the PAI facilitates tariff exemptions,” Al Dhaferi explained. “In certain designated areas there are also rental subsidies, which result in prices below 1KD ($3.29) per sq metre of industrial land.”

Although electricity subsidies in Kuwait are attractive from a cost perspective, this can result in fewer incentives for responsible use. “Only an updated regulatory framework will drive demand for energy efficiency in construction, whether for new or existing buildings,” Ziad Al Awadhi, general manager of Al-Hadi Glass Industries, told OBG. “For instance, there are studies that show how smart glass can reduce up to 30% of electricity consumption,” he said.

Petrochemicals

Kuwait is likely to continue to invest heavily in downstream petrochemicals via the Kuwait Integrated Petrochemical Industries Company (KIPIC), a subsidiary of the government-owned KPC. KDIPA expects petrochemicals output will reach approximately 10.5m tonnes in 2019, up from 7.6m tonnes in 2014. One of the highest-potential products is ethylene used in coolants, paints and resins. Kuwait is working to increase its output of ethylene and ethylene glycol to meet growing demand from India and China.

Petrochemicals play a key role in the KPC’s $10bn Al Zour Refinery project, which will combine a 615,000-barrel-per-day refinery with a petrochemical complex capable of producing approximately 1m tonnes a year of polyethylene, and between 400,000 to 600,000 tonnes a year of polypropylene, as well as petrol, diesel and low-sulfur fuel oil.

In April 2019 KIPIC awarded a technology contract to US-based engineering firm McDermott International for technological petrochemicals solutions at the plant. The firm will build a unit that uses refinery by-product streams to produce 330,000 tonnes of polygrade propylene per year. Al Zour is expected to launch in 2020. The company is also considering a fourth petrochemicals complex, named Olefins-4, to produce plastics.

“Most of the large capital projects in the Kuwaiti oil and gas sector are reaching completion,” Marzouq Issa Buarki, general manager of TechnoGas, told OBG. “While new ones have been announced, they have not been implemented, so industrial gas players are supplying mostly medium-sized projects,” he said.

Cement

Driven by government infrastructure projects, domestic cement demand is forecast to grow by 2% per annum between 2017 and 2021. This is up from a 1.2% decrease in demand in 2016, but still well below the compound annual growth rate of 18% seen between 2010 and 2016. The uptick in demand is reflected in a number of new developments from local cement companies. Kuwait Cement Company (KCC) began producing oil well cement at its plant in the Shuaiba area in the east of the country in early 2019, with its first delivery going to the National Petroleum Services Company in March. That month also saw process optimisation specialist Maggoteaux begin the modernisation of three KCC cement mills, with the aim of increasing production, quality and energy efficiency. KCC is Kuwait’s biggest cement producer, producing over 5m tonnes of clinker and 5m tonnes of cement each year. Elsewhere in the segment, Kuwait’s ACICO Cement awarded the contract for the supply of its second cement-grinding station to Spain’s Cemengal in January 2019. The projected grinding capacity of the facility is 1m tonnes per year, and the plant is expected to come on-line in 2020.

Outlook

The restructuring of the PAI, commitments to increase the availability of industrial land, and the establishment of a number of dedicated zones at Al Shadadiya and Silk City all bode well for growth in Kuwait’s industrial sector going forward.

The petrochemicals segment is attracting a significant level of investment, while manufacturers building hydrocarbons-affiliated technology are also winning large-scale contracts. In order for the government to fully realise its goal of increasing industry’s overall contribution to non-hydrocarbons GDP, following through on promises to increase the stock of industrial land and providing incentives to investors to offset some associated costs should be considered top policy priorities.

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The Report: Kuwait 2019

Industry chapter from The Report: Kuwait 2019

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