Industrial diversification to enhance Qatar's competitiveness and self-sufficiency

 

Qatar’s industrial sector has the potential to play a pivotal role in economic diversification, with both heavy and light manufacturing in a position to benefit from major milestones ahead. These include the 2022 FIFA World Cup; the opening of the Middle East’s largest petrochemicals complex, which is expected to come on-line in 2025; and the planned expansion of the North Field – the site of the world’s largest natural gas endowment shared with Iran that lies within Qatar’s maritime boundaries – which is expected to increase the production of liquefied natural gas (LNG) by 64% by 2027.

Industry and the economy overall have developed resilience and a level of self-sufficiency since the June 2017 blockade imposed by several Arab countries. An abundance of natural gas reserves has allowed the country to develop value-added and energy-intensive segments, especially as the country shifts towards cleaner and renewable sources of energy. These products include petrochemicals such as ethylene, which is used to create polyethylene – one of the most important plastics (see analysis). As the authorities seek to cushion the economy from the impact of cyclical hydrocarbons and related commodity prices they are working to identify new industries that could be the engines for diversification in the future.

Structure & Oversight

The Ministry of Commerce and Industry (MoCI) – led by Ali bin Ahmed Al Kuwari – is the government entity responsible for implementing policies aimed at supporting the development of the local industrial and commercial sectors. The ministry provides public services to businesses, regulates trade professions and supervises markets under its area of competence.

The licensing and regulation of commercial enterprises, consumer protection, investment promotion and reform of the business climate also falls under the MoCI’s purview. A key part of reform efforts was a 2019 law that eased restrictions on foreign investment. The new legislation permitted 100% foreign ownership in most businesses, with the exception of sectors such as banking, insurance and commercial agencies. The purpose of this change was to stimulate economic diversification, boost foreign direct investment (FDI) and accelerate development, particularly in non-hydrocarbons-related activities.

Qatar Chamber, the national chamber of commerce and industry, plays a leading role in championing privatisation efforts and promoting the business community’s interests both at home and abroad. Qatar Chamber is one of the oldest of its kind in the GCC, established in 1963. The chamber issues certificates of origin for exported and re-exported goods, authenticates information from both individuals and companies, and publishes data on trade, industry and agriculture.

Qatar’s aspirations envisage a greater role for the private sector – especially small and medium-sized enterprises – in the economy overall and the industrial sector in particular. Historically, many industries have been wholly or partially owned by the government as a result of the dramatic impact of oil and gas wealth. By-products of oil and gas extraction and the availability of cheap feedstock have spawned downstream petrochemicals and base-metal industries, with start-up capital provided by the state. As these projects developed, family businesses evolved into diverse conglomerates capable of serving a growing economy, often through strategic agreements with multinational corporations. Some of these family-owned businesses have since floated on the Qatar Stock Exchange (QSE) alongside stateowned enterprises such as telecoms provider Ooredoo and financial services institutions.

Strategies

The MoCI aims to encourage economic diversification and promote the streamlined business environment laid out by Qatar National Vision 2030, the country’s plan for long-term development. The MoCI is working to execute the industry-related initiatives of the National Development Strategy 2018-22, a five-year plan that aims to improve the country’s economic competitiveness through a more thorough implementation of the Competition and Investment laws; the liberalisation of the investment management process to encourage FDI; the improvement of Qatar’s standing in the World Bank’s “Doing Business” report; and further moves to liberalise service trade activities.

Performance & Size

Efforts to diversify the economy have paid off, with 380 industrial facilities established in the country between 2015 and 2019, according to a 2019 study by Qatar Chamber, attracting $3.5bn of industrial investment. The study also found that local market shares of manufacturing industries satisfied local demand, bringing the country close to self-sufficiency. The food segment experienced the biggest increase in the number of new facilities, with 74 new plants coming on-line. This marked an increase of 103% – outpacing even the expansion of oil and gas-related industries. Meanwhile, the number of machinery and equipment manufacturing plants grew 82%.

More recently, in November 2019 the MoCI announced that 120 new factories had been established since the June 2017 blockade, with 60 additional facilities nearing completion as of late 2019. “In the last two years the manufacturing sector in Qatar has witnessed unprecedented growth and change,” Nishad Azeem, CEO of integrated engineering specialist firm Coastal Qatar, told OBG. “There has been an increased emphasis on automation and process improvements that has boosted efficiency and productivity. While the sector is not as mature as its regional competitors and the manufacturing ecosystem is largely in its early stages, Qatar is on the way to being a market leader.”

Manufacturing contributed QR64.1bn ($17.6bn) to GDP in 2018 at current prices, up 21.4% from QR52.8bn ($14.5bn) in 2017, according to the Planning and Statistics Authority (PSA). Manufacturing’s share of total GDP ticked up over this period, from 8.7% to 9.2%. Both the value and proportion of the contribution to GDP made by manufacturing, however, was higher before the mid-2014 collapse of international oil prices. In 2013 manufacturing generated QR73.8bn ($20.2bn) and accounted for 10.2% of GDP, while in 2018 these figures were QR76.1bn ($20.9bn) and 10% of GDP.

Data from the first quarter of 2019 showed manufacturing’s contribution to GDP decreased year-on-year (y-o-y), down 4.6% from QR14.4bn ($4bn) to QR13.8bn ($3.8bn) in current prices. Manufacturing’s contribution compared to the previous quarter had a more precipitous fall, down 16.3% from QR16.4bn ($4.5bn). The diminished performance in early 2019 may have reflected a reduction in petrochemicals prices worldwide, a trend that spiked in early 2020 amid the Covid-19 pandemic. In 2019 the average spot prices for the 12 commodities indexed by market intelligence firm Independent Commodity Intelligence Services fell by 17%. According to the firm, prices reacted to diminished demand growth and strengthened supply lengths.

Gross output at producer prices rose from QR95bn ($26.1bn) in 2016 to QR107.1bn ($29.4bn) in 2017, the most recent year for which figures are available. Volumes of the main commodities manufactured received a boost between 2015 and 2018, according to the PSA. Production of inorganic chemicals increased from 299m to 322m tonnes over that period; organic chemicals grew from 2m to 2.6m tonnes; plaster, lime and cement from 21.8m to 21.9m tonnes; pesticides and fertilisers from 9.2m to 9.4m tonnes; and primary plastics from 2.5m to 2.7m tonnes. The increase in output of all other commodities from 2015 to 2018 was 1.8m tonnes.

Price Index

The industrial sector’s producer price index (PPI) showed a pick-up of 3.1% in December 2019 when compared to the previous month, but saw a decline of 6.6% when compared y-o-y. For the purposes of PSA’s PPI assessment, industry is comprised of mining, with a weight of 72.7%; manufacturing, with a weight of 26.8%; and electricity and water, weighted 0.5%. For manufacturing specifically, the PPI decreased by 4.7% y-o-y in December 2019, with falls in the prices of basic metals (12.5%), refined petroleum products (3%), and cement and other non-metallic products (2.6%) contributing to the change. Some product prices rose, namely paper and paper products (3.6%), juices (3.2%), beverages (1.8%), and rubber and plastics (1.6%). Grain mill and other products saw no change over the year.

Employment

In addition to being a main contributor to the economy, manufacturing is an important employer. In 2018 almost 152,000 individuals were economically active and over 121,000 employed in manufacturing, according to the PSA’s “Annual Statistical Abstract 2018”. The vast majority of those employed in the sector were non-Qatari nationals, while 2393 were Qataris. Of those, 1470 worked in the chemicals industry. There were 1455 firms operating in the sector with 10 or more employees, while 1744 companies had fewer than 10 workers.

Industrial Cities

The state-owned energy company Qatar Petroleum (QP) was established in 1974 and is at the centre of industrial development, supported by joint ventures, subsidiaries and spin-offs. Many QP subsidiaries and associate companies form the backbone of Qatar’s industry. The firm operates two industrial cities, where many of the country’s industrial complexes are based. The first, Ras Laffan Industrial City, opened in 1996 and is the heart of QP’s onshore operations. The city, which is located around 80 km north of Doha, features the world’s largest LNG export facility and is home to Ras Laffan Olefins Company – a producer of ethylene for the petrochemicals industry – and Ras Laffan Helium, the world’s largest producer of helium.

The second of QP’s zones, Mesaieed Industrial City, is 40 km south of the capital and handles petrochemicals, fertilisers, oil refining, metallurgy and primary building material industries. Companies that operate in the city include Qatar Petrochemical Company (QAPCO), which produces ethylene and low-density polyethylene; Qatar Fertiliser Company (QAFCO), the world’s largest single-site producer of ammonia and urea; Qatar Chemical Company (Q-Chem), which manufactures products including polyethylene; and Qatar Steel Company (QS). Also based in Mesaieed are Qatar Aluminium; Qatar Vinyl Company (QVC); and Qatar Fuel Additives Company (QAFAC), which produces methanol.

Free Zones

To complement the industrial cities, Qatar is working to develop a series of free zones (FZs) to drive FDI and industrial diversification. In October 2018 Qatar announced it would invest $3bn in new zones and industrial clusters around key logistics centres. The first of these facilities, the Umm Al Houl Free Zone, opened in early 2019 near the Hamad International Port. A second FZ adjacent to Hamad International Airport called Ras Bufontas also began operations in 2019.

Both are being developed by the Qatar Free Zones Authority (QFZA) and are designed to leverage their proximity to expanding air and sea ports. Businesses located in the FZs and their employees could be granted 20-year, renewable exemptions from income and corporate tax. The two sites will cater to companies with different logistics and cargo needs, but the authorities hope that both will enable commerce in sectors such as chemicals and plastics. According to the QFZA, as of January 2020 over 50 companies, including Thales, Volkswagen, China Harbour Engineering Company and advanced battery system manufacturer Inventus Power, were in discussions to establish operations in the FZs.

Heavy Industry Network

The government is an active participant in several key heavy industries, either directly through QP or through holding companies. Three of these firms are among the 10 industry-related companies listed on the QSE as of March 2020: Qatar Industrial Manufacturing Company (QIMC), in which the government has a 20% stake; Industries Qatar (IQ), in which QP has a 51% stake; and Mesaieed Petrochemical Holding Company (MPHC), in which QP holds a 74% stake.

In turn, these holding companies share stakes in other major companies. QIMC holds 29.5% of shares of Gasal, a company that provides industrial gases such as hydrogen, nitrogen, oxygen and argon to downstream industries. IQ owns 80% of QAPCO’s equity, with Total owning the remaining 20%. Shares in QVC are divided between MPHC (55.2%), QAPCO (31.9%) and QP (12.9%). Shares in QATOFIN – a producer of linear low-density polyethylene for use in plastic bags, pipes, sheets and stretch wrap – are divided between QAPCO (63%), Total (36%) and QP (1%). MHPC also owns 49% of shares in Q-Chem and Q-Chem II, both joint ventures with QP (with a 2% stake) and Chevron Phillips Chemical International Qatar Holdings (with a 49% stake) that produce ethylene, as well as high-density and medium-density polyethylene and other products. IQ also owns 50% of QAFAC and 75% of QAFCO shares, with Yara Netherland (15%) and Fertilizer Holdings (10%) owning the remaining shares. The final company under IQ’s umbrella is QS, which it owns outright. The steel company was integrated as a subsidiary in 2003 and its steel mills are located on a 125,000-sq-metre site in Mesaieed Industrial City.

Company Performance

Financial statements for 2019 show that IQ, QIMC and MPHC saw declining revenues and profits when compared to the previous year. IQ ended 2019 with revenue of QR5.1bn ($1.4bn), down from QR5.8bn ($1.6bn) at the close of 2018. The company’s year-end profits were nearly halved, from QR5bn ($1.4bn) to QR2.6bn ($713.6m). In the case of QIMC, net profit for the year measured in at QR120.1m ($33m), falling from QR200.9m ($55.1m) in 2018, while revenue dropped from QR344.6m ($94.6m) to QR338.5 ($62.7m). At the end of 2019 MPHC had net profit of QR1.2bn ($329.4m), down from QR1.4bn ($384.3m) at the end of the previous year. The company posted revenue of QR5.9bn ($1.6bn), with QR2.2bn ($603.8m) coming from Q-Chem, QR2.6bn ($713.6m) from Q-Chem II and QR1.2bn ($329.4m) from QVC.

New Facility

While the blockade may have posed significant difficulties with foreign trade, it opened up new opportunities for businesses to invest in the domestic production of goods that had been previously imported. In June 2019 QP announced it had struck a deal with Chevron Phillips Chemical, a joint venture between Chevron and diversified energy manufacturing and logistics company Phillips 66, to build what will be the Middle East’s largest ethane cracker. The new petrochemical plant will be constructed in Ras Laffan Industrial City with an expected capacity of over 1.6m tonnes per year. After completion in 2025, the plant will supply downstream facilities and increase Qatar’s polyethylene production capacity by an expected 82%, from around 2300 tonnes to 4300 tonnes per year. QP will own 70% of the cracker, with Chevron Phillips Chemical owning the remaining 30% stake.

Light Industry

Mega-projects and developments such as the Ras Laffan petrochemicals plant, boosted output from the North Field, and the raft of infrastructure projects slated in preparation for the 2022 FIFA World Cup have had ripple effects across the lighter manufacturing segment. In the run-up to the tournament, Qatar has announced an airport extension, constructed an underground metro system, and built new hotels and roads. For instance, in October 2019 Hamad International Airport announced it would undergo a two-phased expansion, with construction on phase one scheduled to begin in 2020 and the second targeted for completion by 2022. The first phase will increase capacity from 29m to 53m passengers a year, and at the conclusion of the second phase capacity will measure at over 60m annually.

As construction ramps up, local light industry firms stand to gain. “There are a number of light industry segments that can benefit from infrastructure projects such as the airport extension,” Imran Chughtai, CFO of diversified industry firm Aamal Company, told OBG. “For instance, our firm makes low- and high-voltage industrial cables, industrial pipes, and paving blocks and stones. Aamal Company is one of the top ready-mix concrete manufacturers. There is significant opportunity for growth due to our diversified operations as the country strengthens its infrastructural base.”

Light manufacturers expect the improved prospects brought on by preparations for the 2022 FIFA World Cup to extend even after the tournament wraps up. “There is potential beyond the World Cup for technologies such as cybersecurity, CCTV, command and control centres, artificial intelligence and audio-visual applications,” AbdulSalam Abu-Issa, chairman and CEO of Qatar-based conglomerate Salam International, told OBG.

Outlook

Industry in Qatar has proven to be agile and capable of adapting to and overcoming challenges imposed by the economic blockade. An emphasis on self-sufficiency has opened up new avenues for diversification and growth, with local firms expanding their size and offerings as the availability of exported goods became constrained. Looking to the future, downstream segments like chemicals, plastics and petrochemicals are expected to receive a boost with the expansion of the North Field, though the effects of Covid-19 on long-term prospects remain to be seen. The 2022 FIFA World Cup offers the country the chance to showcase to both spectators and potential investors its infrastructure- and manufacturing-related strengths.

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