Oman's diversification drive supports industrial growth

 

Growth in Oman’s industrial and retail sectors has been affected by reduced global oil prices and weaker consumer sentiment, denting spending and forcing some companies in heavy industry to defer growth and investment programmes. However, the impact of the costs borne by the sultanate’s manufacturers was offset somewhat in 2017 by the rise in exports to Qatar following the blockade of that country’s trade with the Saudi-led bloc of the GCC.

The government is also investing heavily in breaking a cycle of hydrocarbons dependency and facilitating the development of a more diversified economic base. Manufacturing has been prioritised as one of the pillars of this strategy under the Tanfeedh programme for national economic diversification.

NEW DEVELOPMENTS: Buoyed by strong government support for new foreign direct investment initiatives and sustained investment in infrastructure, industrial contributions to GDP will benefit from projects such as the new city being developed in the Special Economic Zone (SEZ) at Duqm.

The China-Oman Industrial Park is among the most ambitious of the new projects being developed by Chinese firms under the framework of the Belt and Road initiative. The industrial park is being developed and built by Oman Wanfang, a Chinese consortium made up of six private companies.

The investment will create thousands of jobs for Omanis and local companies in a wide range of industries, helping to transform an underutilised seaport into a major business zone and trans-shipment hub with a vibrant industrial base. The zone is managed by the Duqm Special Economic Zone Authority (SEZAD). “Given its regulatory independence, SEZAD acts as a laboratory for testing new regulations that could later be applied in the rest of Oman,” Yahya Said Abdullah Al Jabri, chairman of SEZAD, told OBG (see analysis).

Recovery is also expected in retail, where long-term fundamentals remain strong, driven by population growth, a projected increase in disposable income and a rise in international tourist arrivals. These factors should more than offset current weak consumer sentiment due to the oil price downturn, INDUSTRIAL GROWTH TRENDS: Non-oil activities grew by 0.6% in 2016, contributing OR19.3bn ($50.1bn) to GDP. Manufacturing contracted by 17% that year, adding OR2.2bn ($5.7bn) to GDP, according to the National Centre for Statistics and Information (NCSI). The trend persisted into 2017, with many private sector companies in industry and manufacturing reporting low earnings over the first six months of the year, and industrial sector output growing just 0.1% year-on-year (y-o-y) to OR2.53bn ($6.6bn).

Reduced oil prices continue to fuel negative economic sentiment in Oman, with consumers making more deliberate spending choices and delaying the replacement of non-durable goods, such as auto parts. In heavy industry, shareholders are deferring investment programmes for equipment upgrades and the procurement of new technologies that were not already authorised before oil prices fell.

Energy-intensive industries in the sultanate are also bearing the cost of the withdrawn power-tariff subsidies, raising energy prices by up to 75% for some companies from January 2017. Compounded by reduced profits, these higher costs represent a major challenge for the industrial sector.

“Increasing costs in power, transport and labour are all exerting significant downward pressure on the profitability of Omani manufacturers,” S Gopalan, CEO at Reem Batteries & Power Appliances, told OBG.

According to stakeholders, a higher tax burden could also present a challenge for companies. “I am concerned about the outlook for the industrial sector given that the increase in the corporate tax rate will have a negative impact on local business sentiment and that it is now more difficult to access credit,” Saeed Khawar, chairman of Bin Hayl Group, told OBG.

Balancing the impact of new costs in 2017, domestic industries including food production, steel, manufacturing and construction aggregates benefitted from the diversion of trade between Qatar and the GCC. New shipping lines have opened between Oman and Qatar’s recently inaugurated Hamad Port, and Omani businesses have picked up regional market share from competitors in the UAE and Saudi Arabia, including, for example, up to 40% of Abu Dhabi’s export market for vegetable oil previously destined for Qatar.

GOVERNMENT OBJECTIVES: Despite the more challenging operating environment resulting from the downturn in oil prices, the market remains relatively upbeat, buoyed by sustained government investment in infrastructure. To mitigate the impact of lower oil prices on the pace of public sector investment, the government is seeking to relieve the pressure of financing major development projects by engaging the private sector in public-private partnerships and build-operate-transfer initiatives to share the burden.

The government is also seeking to break the cycle of oil-and-gas dependency by cutting the share of hydrocarbons-derived GDP in half by 2020 and substituting a more diversified economic base. To that end, the country plans to boost the GDP contribution of heavy industry from 19.8% in 2017 to 29% by 2020, and has earmarked $106bn to invest in non-oil sectors, including industry and manufacturing.

Indeed, manufacturing is at the heart of Oman’s diversification strategy, representing 9.3% of GDP and employing more than 38,000 people in 2017. The sector has emerged over the past two decades as a significant development area for non-oil economic activities, growing by 661.9% between 1998 and 2015, according to a study conducted by the NCSI.

Today the country produces and exports a wide variety of items, ranging from car batteries to air conditioning units, footwear, vegetable oil and marble kitchen tops to 135 countries.

However, imports continue to dominate some product segments that have the potential to support domestic manufacturing if developed.

“All of the resources that are spent on importing products could be used to develop local and regional manufacturing capacity, which would translate into local jobs,” M V Suresh, the CEO of National Pharmaceutical Industries, told OBG.

RESEARCH & DEVELOPMENT: Several initiatives under way aim to support downstream development in the manufacturing sector. In September 2017 the University of Sheffield’s Advanced Manufacturing Research Centre announced plans to launch a local franchise out of Sohar University to drive industrial innovation and support the adoption of new technologies in advanced manufacturing. Known as Intaj-Suhar, the scheme will be the first manufacturing research centre of its kind in the GCC when it opens in 2018.

The technological advances supported by such programmes – particularly in IT-enabled design, digital modelling and fabrication – are changing the face of Omani manufacturing by creating opportunities for compact, micro-manufacturing facilities tailored to small, flexible production runs. Small firms run by artists, crafters, knitters, seamstresses, builders, programmers, engineers and graphic designers are taking advantage of lower-priced machinery and easy-to-use cloud-based software to order, stock and produce goods, as well as to finance projects in a way that would have been impossible five years ago.

Industrial players of all sizes are benefitting from technological advances. “Better connecting businesses with suppliers through digital procurement platforms has the potential of stimulating foreign direct investment,” Hemant Murkoth, CEO of Business Gateways International, which provides this service, told OBG. “Providing information about the quality of suppliers would also facilitate investment decisions.”

FORUMS & INDUSTRY ASSOCIATIONS: Underscoring its importance to realising the sultanate’s vision of economic diversification, manufacturing is one of the pillars of government strategy under the Tanfeedh programme, which was launched in 2016 under the ninth five-year development plan (2016-20). Since its launch, Tanfeedh has played an important role addressing a variety of challenges in the manufacturing sector, bringing public and private stakeholders together in a formal setting to discuss the future of the economy.

To further amplify the voice of companies in the decision-making process on issues affecting manufacturers – including labour laws, fiscal policies and land use rights – private industry is also taking independent action and organising a lobby group for the roughly 1000 manufacturing companies active in Oman. In late 2017 the manufacturing sector initiated the formation of the Omani Manufacturers Association, with articles of association approved in October 2017 and an initial seven-member board elected. The papers have been filed with the Ministry of Social Affairs and are awaiting approval, after which the association is expected to commence formal work in 2018. Regardless, the forum has already proven beneficial for manufacturers, providing a venue to relay concerns to the government that resulted in the suspension of a 1% import duty applied to raw manufacturing materials in early 2017.

INDUSTRIAL ESTATES: As part of the state’s efforts to develop the industrial sector and diversify sources of national income, the Public Establishment for Industrial Estates (PEIE) manages planning and development of the Rusayl, Sohar, Raysut, Nizwa, Sur, Bureimi and Samail industrial estates, in addition to Knowledge Oasis Muscat – an IT park – and Al Mazunah Free Zone. Growth in the estates remains strong, with the PEIE reporting roughly 600 applications for land by the end of the third quarter of 2017, an increase of over 50% on the previous year, according to PEIE’s CEO, Hilal Hamad Al Ahsani.

Oman’s latest industrial estate at Thumrait, in the south of the country, is expected to open in 2018 with a queue of potential investors. The number of projects committed to the 753-ha Sumail Industrial Estate, completed in 2017 at a cost of OR39m ($101.3m), reached roughly 200 by the end of the year, drawing investors that benefit from proximity to the capital Muscat and Rusayl Industrial Estate.

In nearby Sohar most of the available land is in use, and the PEIE is planning to expand to Shinas to develop industry along the Al Batinah coastline. A new master plan is also in development for the country’s largest industrial estate at Sur, with a feasibility study for a new commercial port managed by the private sector currently in its final stages. Investors have reportedly been lined up for the project, and the PEIE hopes to commence work in 2018.

The benefits of free zones accrue to the economy as well as to investors. “Successfully diversifying Oman’s economy will depend on the continued support and strengthening of the industrial sector. Ports and free zones play an essential role in this regard,” Reggy Vermeulen, CEO at Port of Duqm, told OBG.

PETROCHEMICALS: Petrochemicals are expected to play a key role in diversifying Oman’s economy and accelerating non-oil economic growth. The segment was the highest contributor to GDP in the manufacturing sector in 2016, supplying 51% of value added in manufacturing, for growth of 47% compared to 2015, according to a 2017 report from the Gulf Petrochemicals and Chemicals Association.

The sultanate’s largest ongoing petrochemicals project is the $5.2bn Liwa Plastics Industries Complex (LPIC) being built by Oman Oil Refineries and Petroleum Industries Company in the Sohar Industrial Port Area. Upon commissioning in 2020, LPIC will support the development of a downstream plastics industry in Oman and enable the country to produce polyethylene for the first time.

Other significant developments in 2017 include an investment agreement signed between Dalian Mingyuan Holdings Group and SEZAD to build a $2.8bn project to manufacture 1.8m tonnes of olefin with methanol annually. The year also saw the launch of commercial operations at Sebacic Oman’s $62m, 30,000-tonnes-per-annum facility in Duqm, paving the way for the first exports of sebacic acid in early 2018. The manufacturing facility is the first in the MENA region and the only dedicated sebacic acid plant outside China, benefitting from proximity to Indian castor oil as the main raw material, as well as closeness to target markets in Europe and the Americas, and lower energy costs than China.

Fertiliser production capacity is also regarded as a big contributor to growth in Oman’s non-oil exports. Gulf Potassium Mining, a subsidiary of Gulf Mining Group – which is one of the largest privately owned mining corporations in Oman – has announced plans to invest between $300m and $500m in the development of a sulphate of potash project that will use potassium chloride deposits discovered in Umm Al Samim as an alternative to the more commonly available muriate of potash-type fertiliser in world markets, according to a report in the Oman Daily Observer.

ALUMINIUM: In line with government diversification efforts, the aluminium smelter and downstream sector has been going through disciplined productivity improvement and cost-cutting initiatives supporting the manufacture of value-added products.

Sohar Aluminium is one of the top five producers in the Gulf. Jointly owned by Oman Oil Company, Abu Dhabi National Energy Company and Rio Tinto Alcan, the $2.5bn joint venture produces 375,000 tonnes of aluminium annually, exporting 40% to shareholder Rio Tinto. In October 2017 Sohar Aluminium announced the aim of increasing its smelting capacity and downstream capabilities by adding a second pot line. The capital-intensive project, still in early planning, is intended to boost the downstream sector and align the company’s priorities with the Tanfeedh programme, but requires billions of dollars of investment, and is predicated on appetite to invest.

TEXTILES: Seeking to benefit from strong government support, competitive land and energy rates, and connectivity to global markets through Sohar Port, ShriVallabh Pittie Industries Group – a diversified yarn manufacturing company based in India – signed a project agreement in September 2017 to launch a $300m plant in Sohar Freezone. The first major cotton yarn plant in the region, it is expected to import 100,000 tonnes of cotton fibre for production from the US, India and Australia, and will export more than 70,000 tonnes per year of finished yarn to international markets including Bangladesh, Pakistan, Vietnam, Portugal, Turkey and China.

Commercial operations are scheduled to begin in late 2019, with downstream investments in knitting, weaving, spinning and fabric manufacturing that support the sultanate’s economy, and contribute to its growth and diversification by creating a thriving textiles cluster to provide jobs for locals MANPOWER: Many companies in niche manufacturing segments face challenges hiring skilled manpower. A strict Omanisation policy is currently in place, but few Omanis possessing the necessary experience and skills for senior technical positions. Though the government has invested substantial resources in training centres, such as the Institute of Technical Training Services, a cultural aversion to factory work makes it difficult to find Omanis who are willing to take on production and maintenance roles in industry. Even in more senior positions, Omani engineers typically gravitate towards work in government or with the oil and gas sector.

Once hired, locals are often paid up to five times more than expatriates, and are entitled by law to a 3% annual salary raise regardless of a company’s financial performance. It is also difficult to remove Omanis from their positions once employed, raising challenges with motivation and skills improvement.

Compounding the human capital issue in industry, the Ministry of Manpower has significantly tightened policy on labour clearances for expatriates in recent years to encourage companies to draw instead from the pool of young national graduates.

“I understand and support mandating the hiring of Omanis at an entry level, but to impose a blanket ban on the hiring of expatriates for senior, experienced positions introduces significant challenges for manufacturers,” said Hassan Abdwani, CEO of Voltamp, a producer of power transformers. “My feeling is that government ... is experimenting with labour regulation without appreciating the consequences to industry. They suspend expatriate labour clearances because they want more graduates to be hired, but that’s not the solution. They are only solving their problem by creating another problem.”

The collective impact of these regulations and the current labour laws presents a challenge for economic diversification, restricting access to vital labour and deterring contractors from taking on new projects to avoid excess labour costs during times of lower demand. “We need a lot of highly skilled people and every company needs something different,” said Murtaza Jariwala, executive director of engineering and oilfield services provider Vanguard. “For us it is machine operators – if we hire an Omani, we have to bring our price up. Then if we don’t get any orders, we cannot stay in business. You have to choose how to balance that and it’s very challenging. The Chinese are also competing in the market, so we need orders and we need to keep costs low.”

Reforms to labour regulation are currently under development, with initiatives to support the manufacturing segment spearheaded by Tanfeedh. The position of the private sector is clear: a more flexible and liberalised labour pool is necessary for the generation of economic activity and to create more jobs for Omanis. “Local companies are willing to abide by Omanisation,” Said bin Saif Al Maskery, general manager at Composite Pipes Industry, told OBG. “However, there is a need for improvement in government policy that grants companies the freedom to manage employees and enforce employment contracts.”

RETAIL: Growth in Oman’s wholesale and retail trade sector has slowed since 2014, a result of the oil price downturn and weaker consumer sentiment. Annual growth in the retail sector fell by 18.2% in 2016 to $4.9bn, down from $6bn in 2015 – a recent peak – and $5.1bn in 2012, according to investment banking advisory firm Alpen Capital. The current retail operating environment in Oman, however, does not dampen the longer-term fundamentals for the sector, which is expected to recover in 2018 and grow steadily up to 2021 driven by the stabilisation of oil prices, an expanding consumer base, international tourist arrivals and growth in per capita income, according to a 2017 Alpen Capital report on the GCC retail industry.

Short-term performance will largely depend on the price of oil. If it remains above $50 per barrel, luxury products may do well, particularly among consumers making major purchases ahead of the implementation of a 5% value-added tax, now expected in 2019.

GROWTH DRIVERS: The population saw a compound annual growth rate of 5.7% between 2011 and 2016, and is expected to grow at a rate of 3.1% between 2016 and 2021, the fastest in the GCC, according to the IMF. An expanding consumer base comprising a high number of young nationals, expatriates and lower-income consumers is contributing to a shift in consumer preferences towards international foods, Western products and organised retail stores. This is supported by a rise in household spending power resulting from economic diversification and government-mandated pay hikes for nationals, and is projected by the IMF to grow GDP per capita at an annual average rate of 1.5% between 2016 and 2021. “Thanks to the population growth rate, the outlook is positive for Oman’s fast-moving consumer goods segment, which is a key contributor to the local manufacturing sector,” Vaidyanathan Sundaresan, CEO at the National Detergent Company, told OBG.

The retail sector also benefits from the 16.8% increase in international tourist arrivals between 2011 and 2015. The National Strategy for Tourism 2040 target of a near-doubling of visitor numbers to 5m annually over the next 20 years is expected have a significant knock-on effect on retail growth.

Large grocery stores and hypermarkets attracted by Oman’s strong pipeline of retail projects and expanding consumer base are also expected to drive growth in food retail sales by 15%, from $3.4bn in 2016 to $3.9bn in 2018, according to food and agriculture research firm Farrelly & Mitchell. Hypermarkets will remain the primary driver of food sales in the country, delivering around 70% of total grocery store receipts, according to Alpen Capital research.

ORGANISED MALL SPACE: Traditionally concentrated among standalone outlets, Oman’s retail sector has been shifting towards multi-brand commercial centres and large leisure shopping complexes that combine retail with entertainment. Alpen Capital statistics suggest that the supply of retail space in the sultanate has risen substantially over the last two years. The addition of large shopping centres such as Avenues Mall (gross leasable area of 80,000 sq metres), Oasis Mall (35,600 sq metres) and Panorama Mall (21,000 sq metres) brought total leased mall space in Muscat to 345,000 sq metres in 2017. Oman Airports Management Company also announced the opening of over 18,000 sq metres of retail space at the new Muscat International Airport in January 2017.

The sultanate is preparing for a major rollout of organised mall space in the coming years, including Al Araimi Boulevard, Mall of Oman, and the rebranded Mall of Muscat (formerly known as Palm Mall). The luxury 149,000-sq-metre Al Araimi Boulevard is being built by Omani entrepreneur Fahad Abdullah Al Araimi in the coastal suburb of Al Khoud, a few kilometres from Muscat. It is envisioned as a social centre, offering a combination of entertainment and educational facilities alongside the biggest food court in Oman and 70,500 sq metres of leasable space. Construction is expected to be completed by September 2018.

Another retail destination due in 2018 is Mall of Muscat. The OR150m ($389.5m) complex will be located in Mabellah, between the Muscat Expressway and Highway 1, within a project area of more than 200,000 sq metres. In keeping with the trend of combining retail and entertainment, the mall will house an 8000-sq-metre aquarium, a 5600-sq-metre snow park, 200 retail outlets, and the largest Lulu Hypermarket in Oman, at a total of 22,000 sq metres.

The largest shopping destination under development is set to open in 2020 at Madinat Al Ifran, near Muscat International Airport. Designed by UAE-based mall pioneer Majid Al Futtaim, the super-regional Mall of Oman will host an estimated 350 outlets in a 137,000-sq-metre retail space, according to the Oman Daily Observer. The project is part of the $1.3bn investment that Majid Al Futtaim Group plans to make on retail developments in Oman by 2020. Mega malls and the international brands they bring will be key to securing a portion of the Omani retail spend currently being lost to the UAE, with many Omanis travelling to Dubai to buy goods such as clothing and electronics.

E-RETAIL: Beyond bricks and mortar, Oman’s fledgling e-retail industry is poised for a breakout contribution to growth. While internet spending in the broader Middle East is booming, with GCC countries expected to hit $41.5bn in e-commerce by 2020, web sales in Oman amount to only $800m-$1bn annually due to the lack of a unified postal address system.

In 2017 the NCSI submitted the National Infrastructure for Geographic Information Project to Muscat Municipality, addressing in detail a four-stage plan to introduce a unified address system in time for the 2020 census (see ICT chapter). Once in place, the new system is expected to resolve logistics issues with home delivery, and drive growth in online spending and e-commerce. Mall of Oman, which is scheduled to open in 2020, has already announced plans to capitalise on the anticipated improvements by launching a mobile app that can deliver purchased items to a residential address, a service for which the introduction of a unified postal system is crucial. Similar systems have been successful in Saudi Arabia and several other countries, improving the efficiency of e-commerce deliveries and supporting retail growth. The regional footprint of experienced delivery platforms such as DHL, Aramex, fetchr and Souq – alongside express and payment gateways such as Paypal, Payfort and Telr – will help with the emergence of new e-retailers and revamping of online portals by traditional ones.

OUTLOOK: Industrial growth projections in Oman depend on a number of variables, including the global price of oil (which could result in fewer or delayed heavy industry contracts) and the impact of rising transport and energy prices on the regional competitiveness of Omani manufactured goods. Changes in public policy from budget pressures may also affect prospects, as was the case in 2017 when promised tax exemptions for certain types of aluminium machinery were cancelled in light of the economic environment.

Many companies in niche manufacturing segments also face challenges hiring skilled manpower. A more flexible and liberalised labour pool may be necessary to generate economic activity and create more jobs for Omanis. Despite these challenges, new investment – as measured by expansion in free zones and industrial estates – remains strong, pointing to continued confidence in the sector’s long-term potential. “The industrial sector benefits from a globally competitive tax environment, and high-quality suppliers and service providers,” Ghassan Musabbeh, managing partner at Muscat Steel Industries, told OBG.

In retail, unknowns include the impact of the anticipated spike in uptake of online retail and use of technology over the next several years. The sultanate is currently preparing for the rollout of a large area of organised mall space in a period of dampened spending, the completion of which may contribute to an overhang of retail supply, and in turn to an increase in vacancy rates and a subsequent drop in rents.

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