A growth market: Increasing export levels and new free trade deals boost the sector in spite of difficult global conditions

In the face of rising energy costs and limited access to financing for smaller businesses, many Jordanian manufacturers can nonetheless feel optimistic in 2012. Despite the political unrest which overtook much of the Middle East in 2011, Jordanian exports proved surprisingly resilient, both within the region and further afield, and are being encouraged by free trade agreements (FTAs). Some sectors have seen a drop in exports, but most have seen a rise, with prospects looking especially strong for the potash and phosphate industries.

SECTOR PERFORMANCE: Jordanian manufacturers continue to make a significant contribution to the country’s GDP. According to the Central Bank of Jordan, the manufacturing sector made up 20.4% of GDP at the end of 2011, after expanding in real terms by 4% for the year as a whole. This was a significant increase from the real 1.6% year-on-year (y-o-y) growth seen in the first three quarters of 2010.

Annual production and export figures for manufacturing were more subdued, albeit still robust. The production of manufactured goods was slightly down in 2011, with the Average Manufacturing Production Index dropping by 2.24 points y-o-y. However, manufacturing exports increased 31%, from JD2.72bn ($3.82bn) in 2010 to JD3.57bn ($5.01bn) in 2011. The most important manufacturing industries are clothes, medical and pharmaceutical products, fertilisers and other chemical products, as well as paper and cardboard.

MINING GROWTH: Mining for potash and phosphates experienced rapid growth in 2011. Figures from the Jordan Chamber of Industry show potash and phosphates production grew 16.7% in 2011. In comparison to the manufacturing sector, these industries make a much smaller contribution to Jordan’s GDP, at 2.1% for the year, albeit increasing from 1.8% in 2010. Yet it was their excellent performance that was the primary driver in expanding industrial exports by 13.2% in 2011.

The potash and phosphate industries are managed by the Arab Potash Company (APC) and the Jordan Phosphates Mines Company (JPMC) respectively, both of which have exclusive rights to their activities under government concessions. APC has witnessed an 84% growth in profits, from JD162.7m ($228.6m) in 2010 to JD299m ($420.15m) in 2011, spurred on by growing export markets in India, Indonesia and China. This comes in the wake of reduced exports and profits in 2009, when demand fell due to the global downturn.

Having completed a five-year expansion project on its facilities at the end of 2010, APC now has an increased production capacity of up to 2.45m tonnes per year. The new factory is still in the commissioning phase, but production is set to gradually grow to the expanded capacity over the coming years. While there are some worries that weak growth in the eurozone could result in lower potash sales, the supply-demand fundamentals remain promising (see analysis).

JPMC’s year has also been strong, with phosphate exports jumping 68.8% from JD265m ($372.4m) in 2010 to JD447m ($628.1m) in 2011, according to the central bank. Local media reported that the company’s profits increased by 78% from JD80.2m ($112.7m) in 2010 to JD141m ($198.1m) in 2011. Profits are being driven by rapidly increasing phosphate prices, which grew by some 37% in 2011 compared to 2010, according to the Department of Statistics.

PHOSPHATES ON THE RISE: As with potash, the global phosphates market for 2012 looks strong: phosphate fertiliser consumption is expected to grow by 3% in the year and prices are to remain well above historical averages, according to the 2011 annual report by Canada’s PotashCorp (PCS). Long-term prospects are supported by the discovery of 200m tonnes of phosphate reserves – equivalent to around $30bn at current prices – in the north-east, which was announced by the Jordan Geologists Association in December 2011.

In addition, Jordan plans to tap potential gold and copper resources, releasing tenders for mining ore in 2011. “This is the first time Jordan has opened up copper and gold mining to the international investor community,” Mousa Alzyoud, the director-general of the Natural Resources Authority, told OBG in January 2012. He added that mining companies from China, Russia, Mexico, Australia and the UK have shown interest in establishing operations in Jordan, and that many areas in the country still need to be explored for mineral deposits.

PRIVATISATION: The partial privatisation of both APC (in which Canadian PCS has a 27.96% stake) and JPMC (37% owned by Kamil Holdings) became the subject of some controversy in the Jordanian parliament in late 2011 and early 2012. At the end of 2011 60 MPs requested that committees be formed to investigate the privatisation of the potash, phosphate and cement companies, and in January 2012 former Prime Minister Awn Khasawneh declared that the legality of these privatisations would be reviewed.

The former prime minister also stressed that the privatisations are sanctioned by Jordanian law, guaranteeing the rights of foreign investors, and emphasised that privatisation does not itself equate to corruption, as some MPs had claimed. Parliament has indeed seemed increasingly hostile to the principle of privatisation in recent months: in March 2012, a majority of MPs voted to cancel JPMC’s privatisation agreement on the basis of “unconstitutionality and illegality”.

While promising to investigate these claims, the government has said that the privatisations were carried out legally, that foreign investors’ rights are guaranteed, and that the injection of foreign capital has resulted in significant gains. “From 2002-06, before JPMC’s privatisation, the treasury’s phosphate revenues stood at JD208m ($292.3m), whereas in 2006-10 they reached JD364m ($511.5m),” Sami Gammoh, the minister of Industry and Trade, told parliament in December 2011.

APC too holds firm to the belief that it has brought increased benefits to the local economy. Contributions come not only in the form of annual potash revenues – which in 2011 reached nearly JD135m ($189.7m) – but also through the creation of local employment. A total of 2960 direct and indirect jobs had been created as of early 2012. While APC’s expansion works means that the company mainly relies on foreign contractors, it endeavours to engage and contribute to the Jordanian economy wherever possible. As of early 2012, it employed 2360 Jordanians and created more than 600 indirect jobs through subsidiaries and joint ventures.

The mining sector has certainly contributed to the growth of the industrial sector in the kingdom. According to Yousef Batshon, the CEO of United Jordanian Contractors, “One of our member companies had a heavy workload from Jordanian phosphates operations and is now expanding into the Saudi Arabian market.”

FERTILISERS: As global demand for fertiliser grows apace, the future looks promising for the industry in Jordan, following the announcement of new financing sources and investment projects in 2011. In June the European Investment Bank and the International Finance Corporation (IFC) finalised a $335m loan agreement for the Jordan-India Fertiliser Company, a joint venture between the India Farmers Fertiliser Cooperative and JPMC. The private sector also chipped in with a $10m loan from Cordiant Capital. The factory will produce phosphoric and sulphuric acid upon completion, which is now expected to occur in 2013. It will provide 750 jobs in the construction phase, in addition to 400 permanent jobs following the end of construction in Jordan’s second-poorest region, Ma’an.

Further investment plans were revealed in October, when Saudi Arabia’s Al Hamdi Group declared that construction would begin in early 2012 on the first phase of a $1.4bn phosphoric acid complex. While the relatively energy-intensive nature of fertiliser production reduces Jordan’s competitiveness as a base for the industry, it is an advantage that many of the raw materials – phosphate and potash – are readily available.

Indeed, the sector has previously attracted foreign participation. According to Bassam Al Zoumot, the general manager of Arab Fertilisers and Chemicals Industries (KEMAPCO), which is owned by APC, “Over the last decade foreign investors have transferred significant technology and expertise to Jordan. KEMAPCO, which is now fully operated by Jordanians, and which is now highly profitable, is a good example of this.”

The news of new investment comes, however, in a year of reduced production and exports, due in large part to unrest in the region. According to the Department of Statistics, the manufacturing of basic chemicals was down by 10.8% on 2010, while that of fertilisers was 6.1% lower than in 2010. Exports of fertilisers also dropped by 10.2% in 2011. “We lost 50% of our export revenue due to the unrest in Syria,” Nabil Ismail, the general manager of Target Chemicals, told OBG. “However, we have been compensating in part for the regional slowdown by exporting to East Africa. This market is naturally suited to Aqaba’s shipping lines and has excellent potential,” he said.

MANUFACTURING EXPORTS: Given the predominantly export-orientated nature of Jordanian manufacturers, much of their solid performance is due to healthy demand in key markets. In this regard, Jordan’s new and existing free trade agreements (FTAs) have proved a real boon to the industry.

Since the full implementation of Jordan’s FTA with the US at the start of 2010, Jordanian clothes – the most economically significant national export – now have unconditional and tax-free access to their primary US market. This goes a long way to explain why the kingdom’s garment exports have increased by 13.8% in 2011 y-o-y, up from 5.7% in 2010 (see analysis).

An FTA with Turkey came into effect in March 2011. While some fear that Turkey’s robust manufacturers could challenge the competitiveness of their Jordanian counterparts, it is also hoped that Jordan can be used as gateway by Turkish investors for gaining tax-free access to the US market.

An FTA with Canada, which is currently pending confirmation by the Canadian parliament, could also open up a promising outlet for Jordanian manufacturers of garments and other goods. With regard to Europe – which imported 43.6% more Jordanian goods in 2011 than in 2010 – Jordan is benefitting from advanced status under the European Neighbourhood Programme, despite the fact that the continent’s rules of origin prevent it from importing most Jordanian clothes.

RESILIENCE TO UNREST: Despite worries that widespread political unrest in the Middle East during 2011 would reduce Jordanian exports, the statistics tell a more encouraging story. Exports to Arab countries increased by a respectable 6.4% in 2011 year-on-year, albeit at a slower rate than the 15.2% growth recorded in 2010. “Exports kept growing, even to countries facing instability such as Syria and Tunisia,” Gammoh told OBG. Even in spite of the continued unrest in Syria, for example, exports from Jordan to Syria increased by an average of 7.1% over 2010.

Further proof of such resilience in the face of Syria’s internal unrest can be seen in the spike in exports which pass via Syria to Lebanon. These jumped from JD138m ($193.9m) in 2010 to JD209m ($293.7m) in 2011, and have grown by a remarkable 200% since 2007. “Our distribution activities have not been badly affected by events in Syria, and we are continuing to import from Lebanon,” said Kamil Nader, the managing director of Nader Group, in an interview with OBG.

Some industrialists, however, have undoubtedly been affected negatively by the unrest in Syria. “One major issue is the depreciation of the Syrian pound, which has lost nearly half of its value in the last year. This makes it very difficult for Syrian businesses to import materials from Jordan,” Ismail of Target Chemicals, told OBG.

It was reported in February 2012 that the trade volume at the Mafraq Development Zone on the Jordanian-Syrian border had dropped by 20%. The same month, the Jordan Customs Department (JCD) revealed that overall truck cargo with Syria had also fallen by 20% since March 2011, and that the Syrian border checks were delaying the transportation of Jordanian exports to Turkey and Europe, although the JCD added that month-on-month figures had improved.

In spite of these concerns, in the near term there is optimism toward Jordan’s export potential, particularly given advancements in the country’s transport infrastructure. “Operations at Aqaba Port have improved immensely over the past few years in terms of handling capacity, transfer speeds and overall efficiency,” said KEMAPCO’s Al Zoumot. This is good news for exporters looking to access new markets.

What is more, with the kingdom hoping to become a member of the Gulf Cooperation Council (GCC), there is the additional possibility that the Gulf countries will soon boost their investment in Jordanian industry in order to take advantage of the country’s FTA with the US. Some exporters have also stressed that the potential growth in local demand should not be neglected.

PRODUCTION COSTS: While manufacturers are spurred on by strong export links, they may well be weighed down by increasing production costs at home. New real estate regulations under the Lords and Tenants Law will affect some manufacturers, but of particular concern are rising energy costs. As a country that imports the vast majority of its energy needs, Jordan is at natural disadvantage in this regard. “Industries in Jordan are at a competitive disadvantage because oil-rich countries in the region sell fuel to their domestic firms at subsidised, non-market prices," said Salim Karadsheh, the CEO of Nuqul Group, an Amman-based industrial conglomerate. With the interruptions in the supply of natural gas exacerbating an already-stressed national energy bill, the government raised the cost of electricity and heavy fuel in 2011. A further tariff hike went into effect in late May 2012.

With a few exceptions – such as in electronics – the manufacturing sector is energy-intensive and likely to feel the brunt of such increases. Although the government attempted to raise electricity rates again in January 2012, it subsequently backed down, following an outcry from traders and manufacturers.

The increasing cost of employee wages has also been a cause for concern in the sector, perhaps especially among garments manufacturers. Although the Jordan Garments, Accessories and Textiles Exporters’ Association managed to secure a partial exemption from the minimum wage increase in 2011 (from JD150 [$210] to JD190 [$267] per month), the sector will have to absorb the full increase by 2013. That said, labour rates have – until recently at least – been much lower than those in many competing clothing exporters, including Mexico, Honduras, the Dominican Republic, Turkey, Morocco and Tunisia, according to the World Bank.

CEMENT & STEEL: Rising energy costs, combined with an oversupplied market, have taken a heavy toll on Jordan’s cement industry. The country’s largest producer, Lafarge Jordan Cement, posted a net operating loss of JD4m ($5.6m) in 2011, down from net operating profits of JD17.7m ($24.9m) in 2010. Competition intensified with the entry in March 2011 of the Saudi-based Qatrana Cement Company, while a further factory, owned by Al Manaseer, is due to come on-line in 2012.

New supply has arrived at a time when demand has fallen. “Back in 2008 the demand in the Jordanian market was around 4.5m tonnes per year, but this has decreased to around 3.8m tonnes in 2011,” said Basem Zabian, the general manager at the Northern Cement Company, adding that recent entries had not expected the drop in demand when they signed up a few years ago. Even so, Zabian added that there is still strong demand for packaged cement, which is used for smaller-scale work and repairs. “We’ve had profits of around JD11m ($15.5m) in both 2010 and 2011,” he said.

The steel industry is also suffering from oversupply in the market and high energy prices, which reportedly comprise 80% of the production cost. The manufacture of basic iron and steel increased by 16% in 2011, and in July 2011 officials announced that local demand stood at an annual average of 700,000 tonnes per year, compared to local supply of 1m tonnes. Congestion is worsened by the fact that countries with cheap energy, like Saudi Arabia, import steel into Jordan. The country received 70,000 tonnes of steel imports in 2010.

However, the government’s recent decision to allow some cement companies to burn imported coal has stabilised operating costs somewhat, while its announcement in April 2011 that new entries into the cement market will only be allowed to export out of Jordan will serve to decrease congestion. “Companies may still export competitively to neighbouring countries,” said Zabian. Although cement exports to Syria have diminished, Iraq remains a promising potential market.

As for the local market, a strong demand in the housing sector, combined with new movement in touristic and other megaprojects, could soak up excess supply. In August 2011 the Ministry of Industry and Trade announced that fees on scrap metal exports would increase steel factories’ supply of cheap raw material.

PHARMACEUTICALS PRODUCER: Jordan is considered the region’s leading producer and exporter of pharmaceuticals and medical products. Its main competitive advantages, according to Gammoh, include its more than $1bn output capacity, up-to-date technology, the ample availability of human resources – with 1130 pharmacists expected to graduate every year – and the sector’s international penetration.

“Our products are being marketed in more than 60 countries in Asia, Africa, Europe and North America,” Gammoh told OBG. The country’s largest player, Hikma Pharmaceuticals has a wide reach and is expanding rapidly. In 2011 it had a 15% share of the market for injectibles in the US; more recently it entered Morocco, and is looking to enter the Turkish market.

Despite the turbulence in the region, pharmaceutical exports remained steady between 2010 and 2011, reaching JD448.78m ($630.63m) in the latter, according to the Jordan Chamber of Industry. However, concerns persist with regard to the protection of intellectual property rights and the presence of counterfeit drugs in the country, although the FDA says that counterfeit medicine makes up less than 1% of the market.

SMES: One of the significant challenges facing the manufacturing sector is its substantial dependence on small and medium-sized enterprises (SMEs), which make up around 97% of all companies in the country. Yet industrial SMEs continue to face a number of obstacles, the greatest of which is limited access to finance.

“Proof of the problem can be seen in a study which we conducted in 2011,” Maher Al Mahrouq, the general manager of the Jordan Chamber of Industry, told OBG. “We found that of the $14.2bn in credit facilities extended by banks in 2010 only 13% was directed at the industrial sector. Of that, 9% went to the 50 biggest firms, leaving only 4% of the total for everyone else.”

FINANCING: In these economically unsettled times, the situation could get worse. With the rating agency Moody’s warning Jordanian banks of a challenging environment and reduced profit margins, the banks are already even less willing to extend credit to smaller operations which may be at greater risk of default.

Yet the past year has also seen a host of additional initiatives that are set to offer new financing opportunities to smaller industrial firms and other SMEs. Foremost amongst these is a public-private loan guarantee programme, whereby credit windows for SMEs are made available at private banks. The facility, which is receiving funding from the EU as well as from the US-based Overseas Private Investment Corporation, was launched in January 2012 by the Jordan Enterprise Development Corporation (JEDCO).

The Cairo Amman Bank and Arab Bank joined the scheme in late 2011, followed by the Housing Bank for Trade and Finance and the Ahli Bank in March 2012. With momentum gathering, others are expected to join. The facility encourages lending by providing a guarantee to the bank against the risk of default of up to around 75% of a loan’s value.

The end of 2011 also saw the launch of Jordan’s first venture capital fund aimed specifically at SMEs, the $50m Jordan Growth Capital Fund. This JEDCO project is another beneficiary of EU funds, in this case via the European Investment Bank, although Dubai-based Abraj Capital has also injected $20m into the scheme. The fund will provide financial support to 15 SMEs with high potential for fast growth. Doubts remain, however, over the capacity of such schemes to be as efficacious as an industrial development bank. In June 2011 Musa Saket, a board member of the Jordan Chamber of Industry, said commercial banks were likely to continue to prefer short-term loans at higher interest rates.

OUTLOOK: The Jordanian industrial sector and its exports have proven surprisingly resilient in a year of regional turbulence. The phosphate and potash industries, as well as fertiliser manufacturers, look set to continue on a path of strong growth: their major export markets to the East have essentially remained unaffected by the unrest closer to home. Jordanian manufacturers have many strengths, and they too should enjoy improved export prospects, due to new FTAs. “The industrial authorities in Jordan need to formulate a long-term development strategy that identifies, defines and promotes our competitive strengths in the global economy,” Nuqul Group’s Karadsheh said.

Yet production costs – especially the tariffs on energy – are rising fast at home, and small-to-medium-sized manufacturers still struggle to access financing from risk-averse banks, despite several new significant government initiatives. Foreign investment may continue to be deterred by regional uncertainty, although the first two months of 2012 saw a notable increase in investor interest, according to the Jordan Investment Board. But the longer Jordan demonstrates itself to be a stable jurisdiction that respects investor rights, the more likely that its investment potential will be realised.

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The Report: Jordan 2012

Industry and Retail chapter from The Report: Jordan 2012