New frontiers: Sector development has focused on non-oil segments with the creation of industrial zones

The government is investing in a series of large industrial developments as it endeavours to diversify the economy beyond hydrocarbons, a key aim of its Economic Vision 2030, a master development strategy that is to reshape the emirate’s economy over the next two decades. In the coming five years, growth in the sector is likely to be driven primarily by expanded upstream activity in the steel, aluminium and petrochemicals segments. But in addition to this, the emirate ultimately hopes to retain as much of the value chain as possible, and is therefore looking to develop midstream and downstream operations as well. Manufacturers working in sectors such as metals, chemicals, food processing, printing and pharmaceuticals are among those that look set to benefit.

DEVELOPING NON-OIL SECTORS: If all goes according to plan, this more sophisticated and sustainable offering will play a central role in boosting the non-oil sector’s share of GDP from a little over 50% in 2010 to 64% by 2030, according to the Statistics Centre – Abu Dhabi (SCAD). Manufacturing accounted for 5.5% of GDP in 2011, but the government wants to raise this number to 25% by 2030.

This is an ambitious target and there could well be bumps on the road ahead. For instance, much of the emirate’s industrial activity still depends on the health of the oil and gas sector, and export-oriented operations could be vulnerable to further global economic shocks. Manufacturing industries shrank by 22% in 2009 during the global financial crisis, although they rebounded, growing 10.8% in 2010, according to SCAD.

Yet Abu Dhabi’s non-oil sector as a whole has displayed resilience in recent years: it grew by 1.3% in 2009, reaching up to 5.3% in 2011. Non-oil exports, too, have been making a marginally greater contribution to total GDP, growing from 0.8% in 2008 to 1.4% in 2011. Non-oil exports dropped by 74% in third-quarter 2011, but then rose by 58% in December 2011, and by more than 100% in January and March 2012, driven by increases in chemicals and manufactured goods. Prospects for 2012 look relatively encouraging, with the IMF projecting continued growth for the non-oil economy in the UAE as a whole.

PUBLIC-PRIVATE PARTNERSHIPS (PPPS): Growth is being driven by state-owned enterprises, often in partnership with foreign investors. Foremost among these is the General Holding Corporation (SENAAT), which has investments in metals, construction materials, and food and beverage. In 2009-11 SENAAT has seen assets grow by 30% and net profits by 32%. Examples of SENAAT’s growth in 2011 and 2012 include the commissioning of a new high-voltage plant by Ducab, a manufacturer of cables in which it has a 50% stake; the addition of new capacity to Emirates Steel, fully owned by SENAAT; and the acquisition of a Turkish spring water plant by Agthia, the food and beverage group in which SENAAT has a 51% stake.

CLUSTERING: Abu Dhabi is placing a strong emphasis on the creation of industrial clusters, which will link upstream with mid- and downstream activities. A typical cluster would focus on a primary industry – a steel factory, for example – with further processing and manufacturing facilities located nearby.

It goes without saying that the emergence of such clusters is in keeping with the goals of the Economic Vision 2030, as a greater share of the value chain is to be kept within Abu Dhabi. The midstream and downstream segments are currently less developed than their upstream anchors, but this could begin to change somewhat in the coming decade.

While Abu Dhabi is currently home to a range of industries, few have yet materialised into integrated clusters. Nor does the government expect that all industrial activity will be easily slotted into a vertically integrated cluster. Investors with long-standing operations in the older industrial zone at Musaffah may be unlikely to move, but in many cases such a system will probably be vastly more efficient – and thus a significant draw for new foreign investment.

ALUMINIUM: An aluminium cluster has already begun to take shape. Emirates Aluminium (EMAL), a $5.7bn joint venture between state-owned Mubadala Development Company and the Dubai Aluminium Company (DUBAL), was formed in 2007 as the anchor tenant for the aluminium cluster in Kizad. EMAL is now to be joined by the Taweelah Aluminium Extrusion Company (TALEX), which is setting up shop nearby to make extrusion products primarily for the automobile market. A $200m joint venture between SENAAT and Gulf Extrusion of Al Ghurair Group, TALEX was established in December 2011 and is looking to begin its commercial operations at some point in 2013.

One of the most striking features of this linkage will be the “hot metal road”, which will allow TALEX to receive EMAL’s aluminium in molten form. This efficient transport system means saving time and money on re-melting the aluminium at the midstream and downstream stages, saving the involved parties not only vast quantities of energy (and thus money) but also reducing the environmental impact of the process.

The year 2012 has seen the announcement of a further addition to the aluminium cluster. In May Dubai-based Al Braik Investments was confirmed as the fifth of Kizad’s tenants, with the company agreeing to invest around $173m in a silicon smelter.

Silicon is being increasingly used as an alloying agent for aluminium production, so the company will hope to cash in on the GCC region’s currently buoyant aluminium sector. More immediately, it will be able to work closely with EMAL, the anchor tenant in the aluminium cluster at Kizad.

The cluster has yet to secure itself downstream tenants that complement these upstream and midstream activities, but talks were under way in mid-2012 between the government and manufacturers of automotive parts, for which there is currently a strong demand in the region. Aluminium is, in this way, one of the fastest emerging pillars of growth that has been outlined in the Economic Vision 2030. And as the world’s aluminium producers are facing a supply glut which saw prices reach two-year lows in July 2012, they could well find Abu Dhabi’s competitive energy prices – which account for around a third of input costs for aluminium – to be a very attractive way of lowering their production expenses.

Aluminium prices are indeed low, but some in the industry believe strong demand is still there: according to Alcoa, an aluminium giant currently engaged in a $10.8bn joint venture in Saudi Arabia, demand should grow worldwide by 6% in 2012, driven by recovering growth in the aerospace industry. Still, competition between Gulf countries is likely to remain intense, given that production capacity in the region is due to increase by nearly 40%, from 3.6m tonnes in 2011 to 5m tonnes in 2015, according to data provided by the Gulf Aluminium Council.

A large chunk of that projected regional increase is to be contributed by EMAL. The first phase of the plant has been running at its full capacity of 750,000 tonnes per year since the beginning of 2011, and in 2012 it was given the GCC “Industrial Project of the Year” award at the Middle East Economic Digest Quality Awards. EMAL has since released a statement saying that it is now undergoing $4.5bn in expansion works, which should nearly double that capacity to 1.3m tonnes upon completion in 2014.

EMAL’s existing facility is sending its exports far and wide, with major purchasers in the likes of the US and Europe. Asian economies are now soaking up a sizeable share as well: of EMAL and DUBAL’s total combined production of 1.87m tonnes per year, 50% was shipped in 2011 to customers in greater Asia, excluding China, compared to the 16% shipped to the US. It is likely that Asian markets will occupy a greater share still when EMAL’s new production capacity finally comes fully on-line in two years.

STEEL: Unlike aluminium, Abu Dhabi’s steel industry targets more of a regional than a global market. Emirates Steel (ES), which was established in 2001 as a subsidiary of SENAAT, is currently in the midst of multi-scale expansion work which is hoped to make the plant a rival to Saudi Arabia’s Hadeed, currently the region’s largest steel producer. The UAE is home to 31% of the operating mills in the GCC region, second only to the 49% in Saudi Arabia.

The $816m first phase of the expansion was completed in 2009, making ES a fully integrated steel manufacturer. Early 2012 saw the completion of the second phase, valued at $1.5bn, in which the company ramped up its production capacity from 2m to 3m tonnes per year, and also added a heavy- and jumbo-sections rolling mill – the first such mill in the Middle East and North Africa region, according to SENAAT. This mill should be able to cater for sections required in the energy sector and large infrastructure projects, for which there is a strong demand in the region.

Work on the third phase, which is valued at around $817m, is due to be awarded by the end of 2012 and is set to be completed by the end of 2014. This will add a further 2m tonnes of capacity each year and will establish a facility for the production of flat steel products, as opposed to steel rebar, according to Construction Week. A final phase, still in the planning stage, would see production eventually rise to between 6m and 6.5m tonnes per year, The National reported.

Saudi Arabia and the local market in the UAE account for most of the demand for Abu Dhabi’s steel. That being the case, the time seems ripe for expansion: a 2011 report by Steel Business Briefing found that the GCC region’s demand of 20m tonnes of steel per year far outstripped its current supply capacity of 12m tonnes per year, according to Gulf News. As for downstream activity, it is hoped that steel products manufactured locally with low-cost inputs will be able to compete with the importers currently active in the region, including China and South Korea. “The steel industry would benefit from investments in developing downstream industries and other value-added steel products,” Saeed Al Romaithi, the CEO of ES, told OBG. “The emirate has all the right ingredients to attract investments in downstream manufacturing using products from ES as feedstock.”

PETROCHEMICALS: The emirate’s petrochemicals sector is surging at present, with billions of dollars of investment pouring into two plastics complexes based in the western city of Ruwais, as well as a large-scale expansion of the country’s main fertiliser producer. With the three projects due to come on-line between 2013 and 2015, the emirate can soon expect a significant contribution to its non-oil GDP.

Continuing uncertainty in the world’s economy could impact negatively on the global petrochemicals market, while rapid expansion in the GCC’s petrochemicals output capacity over the next five years could lead to low utilisation rates and lower profit margins for less competitive companies. However, demand picked up in 2011 and is forecast to increase further in 2012. With relatively cheap feedstock, Middle Eastern exporters such as Abu Dhabi can look forward to increasing their share of the global market.

INDUSTRIAL ZONES: New industrial investments are being funnelled as far as possible into zones, most of which are tailored for specific industries. The most significant of these is Kizad, which hopes to be the region’s largest industrial zone upon completion in 2030. In the process, Kizad officials have said the project will create 150,000 jobs.

If all goes to plan, the economic activity in Kizad alone will contribute up to 15% of the emirate’s non-oil GDP by 2030, and will be spread over eight main clusters, in areas such as engineered metals, mixed use petrochemicals, pharmaceuticals and food processing, and trade and logistics. Still under construction, the zone was reported to be 78% complete at the end of 2011; at that stage it had already drawn commitments from 30 industrial projects with a total value of $5bn.

Connected directly with the Khalifa Port, Kizad will be most attractive to export-oriented industries in need of deepwater loading facilities. Between 60% and 80% of its output is expected to leave via this port for export around the world, and the first containers are set to be shipped in late 2012. In addition to attracting foreign investors, the port makes economic sense for a country whose imports still far surpass its exports.

The road, rail and air connections at Kizad are also likely to go down well with industrialists who have been calling for increased infrastructure support. “The government is focusing heavily on the emirate's industrialisation; significant investments are being made to enhance the industrial and logistic infrastructure to support this future growth,” Al Romaithi told OBG. Etihad Railway – a rail project that will connect Abu Dhabi with the other emirates and ultimately to other countries in the Gulf – has been integrated with Kizad so as to bring the rail line right up to the port.

Although Kizad is currently receiving the most attention, other zones currently play host to the majority of the emirate’s industrial activity. Since 2004 a government body called the Higher Corporation for Specialised Economic Zones, better known as ZonesCorp, has developed the three phases of the Industrial City of Abu Dhabi (ICAD), as well as two industrial zones in Al Ain. As of early 2012 occupancy rates in all of the zones managed by ZonesCorp stood at 73% and applications continued to flow in. ICAD 2 saw the opening of two new factories in March 2012, each of them focusing on the production of equipment for the oil-and-gas industry.

In the existing three ICADs are light, medium and heavy manufacturing facilities, with industries grouped in their own areas. Plans for ICAD 4 are still not fixed, but it currently appears that the zone will comprise marine industries, building materials, services and logistics. ICAD 5 will be dedicated to the automobiles assembly and manufacturing sector. ZonesCorp announced in February 2012 that two smaller zones were also being planned in the Western cities of Ruwais and Madinat Zayed. The former will cater to petrochemicals, oil and gas, construction materials and logistics, while the latter will focus on oil and gas, logistics and food processing.

REGULATION: In a region where governments must fiercely compete for industrial investment, the UAE – and specifically Abu Dhabi within it – is trying to keep well ahead of the pack. The UAE ranked above all the other countries in the Middle East and North Africa, barring Saudi Arabia, in the World Bank’s 2012 “Doing Business” report, a sign the strategy so far is working.

Investment laws and regulations are expected to become more conducive to foreign investment, according to the 2012 “Investment Climate Statement” from the US State Department, pointing to the UAE federal cabinet’s approval in December 2011 of a draft version of the Companies Law.

The law could permit foreign ownership of companies to increase from its current limit of 49%, but the classes of affected industries are yet to be defined by a cabinet resolution. Free zones in Abu Dhabi, including a large chunk of Kizad, already permit 100% foreign ownership, however.

Government agencies nonetheless remain aware of the need to continue cutting red tape. “Only a couple of years ago, submitting an application used to take more than six months to process, but we have cut this down to two months,” Samer Al Haira, the vice-president of ZonesCorp, told OBG, adding that it is now seeking a further reduction to one month.

SMES: While Abu Dhabi may have a reputation for attracting large international corporations, the role of small and medium-sized enterprises (SMEs) is considerable. They account for 46% of national GDP and 86% of employment in the UAE, according to SME Advisor. What is more, they have high growth potential: a 2012 study by the Global Entrepreneurship Monitor found that there are more SMEs in the UAE with high-growth expectations than there are in any other country in the world that was surveyed.

While the business environment for industrial SMEs in the emirates may still be challenging, they noted that opportunities are open in a range of sectors. “I could cite cases of SMEs in the steel, printing and food-processing industries, for example. Some factories here have not needed more than $1m-$2m to be successful,” said Al Haira. Satyajeet Roy, the head of commercial banking for Citibank in the UAE, told The National, a UAE-based newspaper, that there is room for SMEs to grow in areas including the production of industrial goods, chemicals and foodstuffs, along with environmental and IT-focused businesses.

Financing continues to present one of the largest challenges faced by SMEs in the emirate, with a limited number of banks providing facilities to start-ups. The government is taking steps to change this: the Khalifa Fund for Enterprise Development (KFED) was launched in 2007 to foster entrepreneurship and develop SMEs, and it continues to roll out new products. In May 2012 KFED and the National Bank of Abu Dhabi (NBAD) announced that they would jointly launch a private equity fund targeting SMEs with strong potential. Initially stocked with around $21m, it is hoped that further support from the public and private sectors will boost funds to some $136m.

This initiative is one example of how banks are attempting to become more accommodating to the needs of smaller enterprises. Multinationals such as HSBC, Citibank and Standard Chartered now all have their own dedicated forms of SME groups. Yet, according to Dun & Bradstreet, SME loans in the UAE still stood at around 4% of total lending portfolios – higher than the GCC average, but lower than the 15% seen in many developed countries.

“We would like more support from the banking sector,” Al Haira told OBG. On the regulatory side, steps could be taken to further this goal, such as an overhaul of stringent bankruptcy laws which some consider to be a detriment to new investors.

OUTLOOK: While the UAE’s non-oil GDP is expected to grow in 2012, a slowdown in Abu Dhabi’s main trading partners in Asia, as well as fragilities in the wider global economy, could cause difficulties in the short term for export-oriented industries. At home, shortages in natural gas – on which several major operations rely as a feedstock – could also be a limiting factor, but several large-scale gas developments should mitigate the worst of these effects.

Like others in the GCC, Abu Dhabi is engaged in a large-scale industrial expansion programme, but there are good reasons to believe that there will be sufficient uptake from investors. These mainly include the attractiveness of low-cost energy inputs and new applications and project initiatives.

Low-cost energy is likely to be more attractive to global industrial giants at a time when their profit margins are tight. New applications for investment continue to stream in; while many of these are still focused on the oil-and-gas and construction sectors, upcoming projects are also in areas such as glass, steel, food processing and clean technology. Infrastructure developments, such as the Khalifa Port and Etihad Rail, will likely help to inspire further interest among investors.

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