Jordanian industries leverage their location to look for new overseas markets

Producing a diverse range of industrial goods, from phosphates to processed food and packaging to steel billets, Jordan’s industrial sector is a mainstay of the nation’s economy. The country’s location, supported by myriad free trade agreements (FTAs) offering access to 1.5bn consumers, enables the kingdom to be a strategic trade route to many of its neighbouring countries and regions, and businesses based in Jordan also benefit from an educated workforce and a stable political environment. However, industry is not without its challenges. The region is going through a period of turmoil, with important repercussions for trade, while domestic costs continue to be relatively high. Yet the ingenuity of Jordanian industrial outfits remains high, too, along with the quality of the kingdom’s workforce and entrepreneurs.

Key Contributor

The latest, preliminary, figures from the Central Bank of Jordan (CBJ) show that for 2014, the country’s estimated nominal GDP was JD25.4bn ($35.7bn). Within this, manufacturing contributed JD4.25bn ($6bn), while mining and quarrying added a further JD676.8m ($952.3m). Nominal GDP the previous year reached JD23.8bn ($33.5bn), with manufacturing contributing JD4.07bn ($5.7bn), and mining and quarrying JD563.9m ($793.5m). In terms of growth, while nominal GDP increased 6.7% yearon-year (y-o-y), manufacturing expanded by 4.4% and mining and quarrying was up about 20%.

These growth figures reflect the effects of a range of external factors. In mining and quarrying, which in Jordan is dominated by phosphate and potash production (see analysis), heightened global competition, alongside global population and economic growth, meant a bumper sales year for producers as both products are used in fertiliser and thus for food. The Arab Potash Company (APC), Jordan’s national producer, reported 26% sales growth in 2014, while the Jordan Phosphate Mines Company (JPMC) reported that the production of phosphate ore was up 31.5%.

In manufacturing, however, growth has been slower, as regional turmoil has affected the economy, especially as key trade routes and markets have been lost. With the exception of Saudi Arabia, every country that Jordan shares a border with experienced conflict in 2014. Trade with Jordan’s neighbours was thus severely affected, placing a cap on growth. This affected phosphates and mining much less, as their business is largely with India, China, and African and Western countries. As a result of the conflicts, the number of registered firms in the industrial sector fell in 2014 by 84 on the 2263 recorded in 2013, while the capital of companies in the sector contracted significantly, from $230.3m in 2013 to $82.1m in 2014, according to Bank Audi. Credit facilities extended to industry constituted 13.1% of the total in 2014.

Over & Above

Despite the odds, CBJ figures show that the manufacturing sector still achieved remarkable export growth in 2014. Broken down by product line, preliminary data indicates chemical exports were up from JD1.25bn ($1.76bn) in 2013 to JD1.31bn ($1.85bn), while exports of manufactured goods classified by material (such as paper, cardboard, yarn, cement and stone) went up from JD479m ($674m) to JD488m ($686.7m). Exports of miscellaneous goods (including clothes, footwear, printed and plastic products) rose from JD1.07bn ($1.5bn) to JD1.22bn ($1.7bn). The only product line that saw a decline was machinery and transport equipment, where exports fell from JD262m ($368.7m) to JD245m ($344.7m).

CBJ figures also show that many of these product lines have experienced continuous growth in exports over the last few years. Chemicals exports stood at JD1.096bn ($1.542bn) in 2010, rose to JD1.099bn ($1.546bn) the following year, then JD1.145bn ($1.62bn) in 2012. Miscellaneous manufactured goods also grew from JD823.6m ($1.2bn) in 2010 to JD911.5m ($1.3bn), then JD979.5m ($1.4bn) in 2012, with clothes the star performer, boosting exports by nearly a third over the 2010-14 period, from JD622.8m ($876.3m) to JD908.2m ($1.3bn).

The latest consolidated figures from the Department of Statistics, meanwhile, show that in 2012, gross value added (GVA) from the industrial sector stood at JD4.3bn ($6.1bn). Breaking this down by activity shows that mining and quarrying (excluding gas and oil extraction) was the largest contributor to this, accounting for JD892.4m ($1.3bn), with manufacture of food products the second-largest contributor, with JD546.5m ($769m). Other contributors to GVA were the manufacture of tobacco products at JD466.3m ($656.1m), the manufacture of chemicals and chemical products at JD424.8m ($597.7m), and the manufacture of pharmaceuticals, medicinal, chemical and botanical products, totalling JD410.9m ($578.2m). The manufacture of other non-metallic mineral products – which includes commodities such as cement and other building materials – stood at JD389.2m ($547.6m), while the manufacturing of apparel stood at JD308.6m ($434.2m).

The sector was also a major contributor to the Jordanian exchequer’s revenues. Industry paid some JD636.9m ($896.1m) in taxes on production in 2012, with tobacco products being the biggest payer – contributing JD417m ($586.7m) to that total. Strong investment bodes well for GDP growth; the Jordanian economy is expected to expand by 3.5% in 2015 and 3.9% in 2016, according to the World Bank.

Actors & Agencies

A number of government ministries are relevant to the industrial sector, with the Ministry of Industry and Trade (MoIT) responsible for regulation and monitoring, as well as policy development and implementation. This remit extends to both domestic and foreign trade, and also covers areas such as intellectual property. Other ministries relevant to the sector include the Ministry of Planning and International Cooperation, the Ministry of Public Works and Housing, the Ministry of Labour, and the Ministry of Energy and Mineral Resources (MEMR). The Prime Ministry is also home to the Greater Amman Municipality, the Executive Privatisation Commission, the Petra Region Commission and the Aqaba Special Economic Zones Authority (ASEZA), which in turn oversees the Aqaba Port Corporation.

Under the MoIT’s auspices, there are a number of departments and agencies with key roles that have been integrated into one entity, the Jordan Investment Commission (JIC). These include the Jordan Export Development and Commercial Centres Corporation, the Jordan Industrial Estates Corporation (JIEC), the Jordan Investment Promotion Corporation and the Companies Control Department (which is responsible for registration of companies and their monitoring). Under the MEMR comes the Energy and Mineral Regulatory Commission, which is an autonomous body with regulatory and monitoring powers within the energy and mining sector. Other key autonomous bodies include the Jordan Food and Drug Administration and Jordan Customs.

In the non-government sector, the Jordan Chamber of Industry (JCI), the Amman Chamber of Industry (ACI) and Amman Chamber of Commerce are key bodies for the sector, with other major cities, such as Zara, also having similar chambers. On the labour side, the General Federation of Jordanian Trade Unions is the main national group, recognised by the International Labour Organisation (ILO).

International Links

Jordan has a long history of international trade, with recent years seeing several FTAs signed with global and regional countries and groups. These have all helped local industry branch out to wider export markets, whilst also developing a more internationally competitive outlook.

One of the most important FTAs was that signed with the US in 2000. With the exception of a few reserved sectors, the Jordanian-US FTA (JUSFTA) fully liberalised trade between the two countries. A number of other FTAs followed, notably with the European Free Trade Area in 2002, the same year Jordan’s Association Agreement with the EU entered into force. An FTA was signed with Singapore in 2004, and an FTA with Canada has been in force since 2012. Jordan is also a founding member of the Greater Arab Free Trade Area and a signatory of the Agadir Agreement, which further aims to integrate Arab and EU economies. In recent years Jordan has also been in discussions with multiple countries on new FTAs, including Mexico, Pakistan and Association of South-East Asian Nations members. The myriad of FTAs make Jordan today the most open economy in the region.

JUSFTA added to a previous system of Jordanian-US trade known as the Qualifying Industrial Zones (QIZs). QIZs were established on the border between Jordan and Israel and became important industrial centres after the first was founded in 1998 in Ibid. As the US had an FTA with neighbouring Israel, goods produced in the QIZs were allowed to ship through this route to the US and avoid paying duty, while also not being subject to any import quotas. The caveat was that the goods manufactured in the QIZs had to have a certain percentage of inputs from the US, Israel, the Palestinian Authority and Egypt – another participant in the QIZ scheme. The FTA signed with the US has yielded strong results. Between 2002 and 2008, industrial exports increased more than 22-fold, from $12.6m to about $280m, according to the JCI. The QIZs have also been remarkably successful in facilitating industrial exports – the amount of these coming from QIZs rose from just $2m in 1998 to $1.02bn in 2006.

Aimed at building peace between these Middle Eastern nations, the QIZs dramatically ramped up Jordanian exports to the US. As of early 2015, according to the US Congressional Research Service, there were 13 QIZs in operation in Jordan, employing 43,000 people, although 74% of these are foreign labourers. Textiles and apparel dominate the manufacturing activity in the zones. US Department of Commerce figures put total US imports from the QIZs at $30.2m in 2014, down from $61.17m in 2013. The tailing off is largely to do with the fact that the JUSFTA removes many trade barriers to non-QIZ trade, while at the same time, the Jordanian government, through JIEC and ASEZA, is offering robust incentives to setup in a range of industrial parks and zones elsewhere.

Estate Sales

Indeed, according to the JIEC, there are six industrial estates currently operating nationwide, with three more in the pipeline. In addition, the ACI registers four public and 10 private free zones, with three more under establishment. There are also a number of industrial cities and parks, also coming under the same incentives scheme as the estates. The incentives package includes 100% exemptions for two years on different taxes for industrial projects within JIEC-mandated areas; total exemption from buildings and land taxes; an exemption or reduction from paying most municipal fees; and an entitlement under the Investment Promotion Law of 1995, which gives 100% exemption from taxes and fees on fixed assets – either for establishment or expansion of the industrial project – and on spare parts. Specific reductions in taxes and fees are also available for projects locating in three specific estates.

The first of these estates is also the oldest – the Abdullah II ibn Al Hussein Industrial Estate (AIE) at Sahib, 12 km south of Amman. Set up in 1984, it is the biggest estate in Jordan and home to 358 medium and small-scale industries, with over JD1bn ($1.4bn) of investment and jobs for 13,042 workers. Under the incentives scheme, a 25% tax and fee exemption applies to companies located in Zone A of the project.

The second estate is the Al Hassan Industrial Estate, which is a QIZ located in the Irbid governorate. Set up in 1991, it became Jordan’s first QIZ in 1998 and is still the largest. It has a total area of 117.8 ha and over 101 firms are located there, with more than JD222.5m ($313m) in capital invested. Under the incentive scheme, industrial outfits locating in its Zone B are entitled to a 50% reduction in taxes and fees.

The third of the three estates – this time receiving a 75% tax and fee reduction in its Zone C, is the Al Hussein bin Abdullah II Industrial Estate (HUIE), at Al Karak, 118 km south of Amman. Also a QIZ, HUIE has 14 companies located there, with around JD33.6m ($47.2) in capital invested on its 186.6-ha site.

Other Estates

The JIEC also lists the Maan Industrial Estate, located 7 km from the centre of that southern city and 100 km north of the port of Aqaba. Then there is the Al Muwaqar Industrial Estate, located on the highway to Iraq some 24 km south-east of the AIE. A multi-phase development on a 118.7-ha site, the estate offers companies a 50% income and social services tax exemption for a period of 10 years.

The sixth estate listed is the Aqaba International Industrial Estate (AIIE), which is privately run, and is both located within and regulated by the Aqaba Special Economic Zone (ASEZ). Thus companies locating on the 275-ha site receive multiple advantages. The ASEZ offers a duty-free zone while charging a flat 5% tax on profits, and allows up to 70% foreign labour. Some 38 firms are listed as present in the AIIE, with some JD150m ($211.1m) in capital invested. The zone is close to the port of Aqaba, while also being just 700 metres east of Aqaba International Airport. First phase development was facilitated by a US Agency for International Development grant, with Aqaba’s location on the border between Jordan, Israel and Egypt making it an ideal QIZ prospect. Roads also link the estate to these two neighbours. Sheldon Fink, CEO of the AIIE’s managing company PBI Aqaba International, told OBG, “Although significant progress has been made over the past decade, Aqaba has much more to achieve. The city has reached only a fraction of its long-term potential.”

The JIEC has plans for the construction of three additional estates: an extension to the AIIE, plus two more estates, at Madaba and Zarqa. Elsewhere, the free zones target the export and transit trade, with goods that are deposited within them for shipping on, or for use by manufacturers in the zones, treated as being outside Jordan still – and thus not subject to Customs tax, with duty-free imports.

Steel & Chemical Zones

The Arabian International Company for Steel Structures recognises four public free zones, all established under the auspices of the Jordan Free Zones Corporation, which is chaired by the minister of finance. They are the Zara Free Zone, 35 km north-east of Amman; the Sahab Free Zone, established to serve the AIE; the Airport Free Zone at the Queen Alia International Airport; and the Al Karak Free Zone, located on the HUIE.

In addition, the private sector has also been given permission to operate a number of free zones. Several of these are in the agricultural and IT sectors, while others have a more direct industrial component. The latter group includes zones run by the Indo-Jordan Chemicals Company (IJCC) – a joint venture with the Jordan Phosphate Mining Company (JPMC) and India’s SPIC; the Jordan Bromine Company (JBC); several other zones at the airports; and the Jordan Management Company, a part of APC. Other private free zones are being established at Al Muwaqar; at Hashemite University, where the International Investments Company is partnering with a US land investor to create a light industrial estate; and on land designated by Gasman Khair and Partners Company.

Boosting Smes

The zones and estates are home to a variety of industries, but they have a preference for small and medium-sized enterprises (SMEs). These make up a vital part of the kingdom’s industrial businesses. A 2014 OECD report on SMEs in the Middle East and North Africa (MENA) region stated that SMEs account for 40% of total nominal GDP in Jordan and employ around 31% of the total workforce. Indeed, when micro-businesses are added to the total, the MSME sector may account for 71% of all employment, according to the World Bank. The government is thus working hard to improve SME export potential via a new National Export Strategy for 2014-19. Specifically, the Jordanian government has initiated a variety of programmes to promote SME growth, including the National Fund for Enterprise Support (a joint venture with the Japanese government), the Jordan Enterprise Development Corporation, and the Business and Export Development Project for Jordanian Enterprises. The National Entrepreneurship and SME Growth Strategy 2014-18 also started in 2015.

JIC is likely to be central in the roll out of this strategy, which will seek to improve the current regulatory framework, while also looking at SME financing. Many SMEs are effectively outside the banking system as they cannot meet collateral requirements or provide the kind of financial records banks are looking for. Work is being done on establishing private credit bureaus to ease financing, while international agencies and local chambers have called for reform of the bankruptcy law. The new strategy also looks to boost entrepreneurial skills development, particularly among women. In April 2015 the World Bank also announced a $50m assistance package for Jordan, the five-year MSME Development for Inclusive Growth Project, which aims to bolster the sector further.

Heavy Hitters

In terms of larger enterprises, the potash and phosphate segments are the most active (see analysis), with mining in these areas also giving rise over the years to major chemicals, pharmaceuticals and fertiliser industries. Key companies in this sector include IJCC, which makes sulphuric and phosphoric acid, and the Nippon Jordan Fertiliser Company, both of which are JPMC subsidiaries; Jordan Dead Sea Industries, a subsidiary of JBC that manufactures speciality chemicals, such as industrial salts; Arab Fertilisers and Chemicals Industries (KEMAPCO), which produces a wide variety of fertilisers, including potassium nitrate and water-soluble nitrogen-phosphorus-potash fertiliser mixture; Jordan Al Abyad Fertilisers and Chemicals, which produces a range of acids, calcium chloride and other chemicals; Jordan Modern Advanced Chemical Industries Company, part of the Manaseer Group; and Jordan Sulpho-Chemicals which focuses on products used in chemical detergents, such as soaps, cosmetics and shampoos. There are also a number of companies specialising in the marketing of these products, such as Jordan Chemicals, part of the Hammoudeh Group; and the Jordanian Swiss Company for Manufacturing and Marketing Construction Chemicals.

Much of these companies’ output is exported, totalling JD922.5m ($1.3bn) in 2014. The chemicals and cosmetics segment is the second-largest contributor to the kingdom’s industrial exports, at 18.4%, after textiles and ready-made garments, at 20.5%. Between 2013 and 2014, chemical and cosmetic exports expanded by 6.4%, making it the fourth-fastest-growing exports industry. Although relatively small, exports from the plastic and rubber segment had the most robust growth, at 26.6%. This jump helped total industrial exports to grow by 1.3%, even as exports from some industries contracted, such as engineering, electrical and IT, which sank by 6.9%. “Many export markets for fertiliser companies in Jordan are outside the Middle East and North Africa, which for some companies has provided a degree of insulation from regional conflict,” Bassam Al Zoumot, general manager of KEMAPCO, told OBG.

Polishing and cleaning preparations and perfume materials were the third-largest export, with JD115.3m ($162.2m). Other export lines included JD90.3m ($127m) of plastics and plastic articles; JD76.3m ($107.4m) of phosphoric acid; and JD42.8m ($60.2m) of dyeing, tanning and colouring materials.

Key Segments

The minerals sector also provides the basis for a healthy building materials industry. The kingdom has huge supplies of limestone, sands and aggregates for cement production, while also possessing a good regional reputation for metalworking. With the boom in construction in the GCC, where many Jordanian companies have long had strong links, these industries have seen exports jump. In 2013, CBJ figures show worked monumental and building stone exports stood at JD14.9m ($21m), which more than doubled in 2014 to JD35.4m ($50m). These exports also have a promising future as rebuilding of the region starts to take place once the conflicts abate.

Jordan’s steel sector, however, has been going through some uncertain times. The leading player is the Jordan Steel Group (JSG), which produces rebar, wire mesh, billets and merchant bars. JSG has been hit badly by shortages of scrap in the domestic market, alongside hikes in electricity prices and labour disputes. JSG has four subsidiaries – Modern Wire Mesh, Jordan Steel Engineering Industries, The Consolidated Jordanian Company for the Steel Industry and Ammoun Steel Trading. All but the last reported losses in 2014. However, the group was hopeful that the recent challenges it has been facing will be temporary and that it will move back into the black soon.

Sector Challenges

When it comes to the domestic market, Jordan is highly cost sensitive, with per capita GDP at $5357, according to the IMF. In this environment, some small businesses have been badly affected by the influx of Syrian refugees, as some of these new arrivals have established small businesses of their own, producing basic products in an unregulated fashion at lower prices than established players.

Regional turmoil has also affected exporters, with the Syrian market essentially closed and Iraq largely cut-off from direct land access since the 2014 offensive by regional terrorist group, the so-called Islamic State. Egypt, too, has been a cause for security concerns, particularly in the Sinai region, which is also the main land route from Jordan to Cairo and to other important Egyptian destinations. As a result, Jordanian industries have been looking for alternative routes, with some trade with Iraq now going via Kuwait. This is a much lengthier and more expensive route, raising costs and reducing margins.

Another major concern is energy costs. In 2012 the government announced plans to phase out subsidies on energy to cut losses at the National Electric Power Company (NEPCO) and meet IMF loan criteria. This has resulted in a sequence of price hikes, due to continue until 2017, when NEPCO should be back in balance. These price increases have come at a time when oil and gas prices have been falling, which has led to cost reductions among some of Jordan’s competitors.

“Increases in energy prices have had varying effects on the industrial sector, as some types of firms are more energy-intensive than others,” Haidar Zubaidi, managing director of Nutridar, a manufacturer of infant and baby food products, told OBG. “Therefore, it is hard to generalise the impact of energy price fluctuations on the sector.”

Down The Line

The energy price increases have also affected prices for consumers – some 30% of household budgets go toward fuel, according to the Jordanian Gas Station Owners Association – and the Syrian refugee crisis has pushed up rents in many areas. This has translated into demands for higher wages from Jordanian workers, further impacting industry’s cost competitiveness. Yet Jordanian industrial entrepreneurs are also used to operating in what can be a volatile region. Indeed, the security concerns of the kingdom’s neighbours stand in marked contrast to the stability of Jordan itself – with this being one of the country’s main selling points as an investment destination. The cuts in energy subsidies are also being made in an effort to secure longer-term financial stability, with benefits for industry and consumers. At the same time, a new liquefied natural gas terminal being constructed at Aqaba should see cheaper energy inputs for NEPCO in the years ahead.

Jordan also has a wage bargaining structure and established unions, and was the first country in the Arab region to sign a Decent Work Country Programme with the ILO in 2006, with this subsequently updated with a 2012-15 version. This has helped create a clear structure for labour relations.

Outlook

Despite strong fundamentals, the 2015-16 period will remain both regionally and globally challenging for markets. Much depends on an unpredictable regional security situation, and while Jordanian businesses are very experienced at working in this environment and in cushioning against future challenges, they will have to be particularly dynamic in a slowing global economy. The government is working hard on trying to ease the kingdom’s regulatory frameworks, with its long and medium-term development plans targeting SMEs and industrial growth. More is called for, particularly in areas such as easing access to credit at a time of high caution among financial intermediaries, as well as in easing the impact of more costly inputs such as energy and labour.

With positive economic forecasts for 2015 from the IMF, which predicts 3.8% nominal GDP growth for the year, and ratings agencies such as S&P’s affirming stable outlooks, the macroeconomic environment for Jordan looks promising. There is also grounds for industry’s cautious optimism, as the domestic market continues to grow. Meanwhile, the kingdom’s industries will be looking harder for new overseas markets in order to compensate for losses in Syria and Iraq. In this way, Jordan will be able to leverage one of its many natural and strategic advantages: its location.

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The Report: Jordan 2015

Industry & Retail chapter from The Report: Jordan 2015

The Report: Jordan 2015

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