Pillar of strength: Downstream processing and minerals development are both part of the drive towards economic diversification

As part of broader efforts to diversify its revenue streams, Oman has invested a significant portion of its oil revenues into developing a robust industrial base. New ports, free zones and transport networks illustrate the government’s commitment to providing the infrastructure for the sultanate’s industrial development. As oil reserves continue to draw down, the state is turning its attentions to maximising its geostrategic location in the Indian Ocean and its proximity to a large number of growth markets. By relieving pressure on imports, domestic industry stands to boost Oman’s overall macroeconomic growth. “Economies of scale are important,” S Gopalan, CEO of Reem Batteries, told OBG. “In order to achieve this there must be a strong local market. In Oman most manufacturers are dependent on exports.”

Numbers

In the first Financial Stability Report released by the Central Bank of Oman (CBO) in mid-2013, it noted that non-oil GDP growth outperformed oil-related GDP growth since 2010. Indeed, during 2012 non-oil GDP grew by 12% as compared to 10.9% growth in oil GDP, and industrial activities have contributed 16-18% of total GDP since 2006, according to research from Gulf Baader Capital Markets.

However, non-oil revenues as a percentage of total revenues have decreased from 19.2% in 2010 to 14.6% in 2012 – a dip which reflects high oil prices rather than any drop-off in the non-oil sector. According to a June 2013 report by the IMF, the break-even oil price that Oman required in 2012 was $80 per barrel, compared to $62 in 2008. Consequently, as the government increases public sector hiring and minimum wage levels across the sultanate, the state may become more vulnerable to international shocks in oil prices. “To build more resilience and accumulate fiscal buffers to offset the risk of a sustained reduction in oil prices, it has become urgent to restrain spending growth and increase non-hydrocarbons revenues,” the IMF recommended. The government responded by increasing its spending on economic diversification, particularly with respect to industrial development in Oman’s major port cities.

In the initial nine months of 2012, industrial production totalled OR3.22bn ($8.34bn), 6.6% higher than the same period in 2011, according to the National Centre for Statistics and Information. The manufacturing segment grew by 7.5% to around OR2bn ($5.18bn) and construction grew by 4.2% to OR946m ($2.45bn). By 2020, the government aims for industrial activities to contribute nearly 30% of GDP and to reduce oil’s share of GDP from half to 19%. Its ambitions for other sectors include increasing natural gas’s GDP contribution from about 5% to 10%, and agriculture and fisheries from 1% to 5%.

Exports

Oman’s non-oil exports have risen along with its industrial growth. According to the National Centre for Statistics and Information, the value of Oman’s non-oil exports increased from OR555.3m ($1.44bn) in 2005 to OR1.96bn ($5.08bn) in 2008 and to OR3bn ($7.77bn) by 2011. The top five non-oil markets are India ($1.59bn), the UAE ($1.43bn), Saudi Arabia ($856m), China ($718m) and the US ($606m). The most valuable non-oil goods exported included chemical products ($2.8bn), mineral products ($2.6bn), base metals and articles ($1.74bn), and plastic and rubber products ($656m).

The rapid rise of investments into industrial projects has generated significant employment for the sultanate, which measured at 33,664 employees by the end of 2012, up from 22,000 at the end of 2010. The jump is important, as the government is intent on its citizens joining the private sector in increasing numbers. Oman’s parliament, the Shura Council, raised the minimum wage for Omani citizens more than 60% to OR325 ($842) per month in 2013. The council also announced nationwide Omanisation standards, limiting the total number of foreign workers in Oman to 33% of the country’s population in a further move to promote local employment. Currently, expatriates (predominantly from South Asia and South-east Asia) are estimated to account for 39% of the population, and no timeframe has yet been announced regarding the 33% target.

Development Plan

The majority of Oman’s industrial production takes place in its six industrial estates, all managed under the umbrella of the Public Establishment for Industrial Estates (PEIE), located in Rusayl, Salalah, Sohar, Sur, Nizwa and Buraimi. In addition to the estates, there are three free zones: Al Mazunah Free Zone, Salalah Free Zone and Knowledge Oasis Muscat, a technology park run via public-private partnership. According to the PEIE’s 2012 annual report, the government has implemented a new long-term strategic plan (2013-25) that consists of a phased investment schedule through the quarter century (Phase I: 2013-16, Phase II: 2017-20, Phase III: 2021-25). Preliminary studies are being conducted for future industrial states to develop in the following governorates: Dhahira, Mussandam, Dhofar, Wusta, North Batinah, South Batinah, Buraimi and Dakhiliyah.

By the end of 2012, in the midst of Oman’s eighth development plan (2011-15) and the initiation of PEIE’s first phase, ongoing investments into Oman’s industrial estates had increased substantially, reaching OR4.45bn ($11.53bn), a 43% increase in two years, according to the PEIE report. By the end of 2015 the government expects that overall investments, including national, Arab and foreign assets, would amount to OR6.13bn ($15.9bn). Furthermore, the number of projects that were set up throughout the estates rose from 750 by the end 2010 to 1286 projects by the end of 2012. The PEIE expects 2950 projects to be operating in Oman’s industrial estates by 2015. “By attracting a variety of investments, introducing advanced technologies and developing human resources, Oman can become a regional centre for manufacturing, ICT and entrepreneurship,” Bassim Al Nassri, the director-general of marketing and communications at PEIE, told OBG.

Challenges

The recent rise in the minimum wage is likely to increase costs for many companies in the short term. However, “the new rules will open up more jobs for Omanis in the private sector as well as control demographic complexity between foreigners and nationals,” explained the Shura Council announcement. The wage increases could also stimulate spending, thereby boosting the economy overall.

As Ajay Ganti, CEO of SARCO Oman, an electronics firm, told OBG: “Salary increases over the years have led to a growth in spending, as well as greater purchasing power for consumers. The salary increase in July 2013 will no doubt support this trend in increased spending and purchasing power.”

With a relatively young industrial base, Oman has to work with a skilled labour shortage, an underlying reason for its reliance on foreign workers. In order to improve Omani technical capacity and develop an adequately skilled domestic workforce, the Ministry of Manpower (MOM) has put a strong emphasis on Omanisation across the various industries, with varying requirements based on the development of the sector. “While the Omani labour law stipulates 35% Omanisation, firms can exceed that through careful selection and training. However, technical skills, specialised engineers such as metallurgists and specific skills are not readily available in the country. These are the skills that preclude most companies from reaching even higher rates,” Lloyd Stemple, the CEO of Oman Aluminium Rolling Company, told OBG.

In-house training programmes are therefore increasingly in demand, and businesses are investing more in their Omani workers. Enrolment in independent training institutions is also on the rise. The most notable players are a group of training partners including the Polyglot Institute, Knowledge Grid, Rusayl Institute and Sohar International. Polyglot, the state’s first vocational training centre, focuses on industry-specific language skills and administrative and managerial development. Student enrolment has increased from 3940 in 2008 to 5012 in 2012.

Lending Rules

Small and medium-sized enterprises (SMEs), which employ nearly 80% of the workforce, require resources in order to continue hiring from a large youth population. In the latest effort to bolster SME performance, the CBO announced in April 2013 that it would create a new set of rules to help increase lending to SMEs. In addition to lower rates, the CBO stipulated that commercial banks were required to allocate at least 5% of their total loans to SMEs. Banks are required to meet this target by 2014, according to the CBO announcement.

However, SME quantity is not the only problem. Gert Hoefman, the CEO of Oman Cables Industry, told OBG that the true SME development potential for Oman lies in the establishment of innovative, value-adding firms: “The majority of SMEs in Oman are centred around trading and import, which doesn’t provide real added value to Oman’s economy.”

R&D

Another key challenge for Oman-based industrial firms is the limited investment into research and development (R&D). “Oman’s industrial sector is in need of a change,” Hoefman said. “It must be modernised and enter new markets. In order to accomplish these tasks the government and the private sector must collaborate to drive the sector into an era of innovation.” The government recognises this as an issue, and in 2010 it mandated the Industrial Innovation Centre (IIC) to liaise with industry leaders in order to enhance innovation capacity. The IIC does this by facilitating partnerships between qualified academics and local industry managers with the goal of introducing an R&D culture to the business. The centre funds the research partnerships as well as 75% of project implementation costs. As of mid-2013 there were more than 30 new projects taking place.

“China is mature in its industrial development and immature regarding innovation,” Abdullah Al Zakwani, executive director of the IIC, told OBG. “Taiwan, on the other hand, introduced innovation during its industrial infancy, and although it initially took a loss, look at it today. Oman is still in a nascent period for both categories, and it’s important for us to advance incrementally, allowing a gradual incorporation of a research culture into each of Oman’s industries.”

Downstream

A key government goal is to add value to basic manufactured products and raw materials, bringing employment opportunities to industrial regions and port cities. Indeed, the Ministry of Commerce and Industry (MCI) announced in February 2013 that it would only issue new mining licences to companies that export value-added products.

As Oman develops its various industrial activities, such as mining and petrochemicals, it continues to integrate new facilities into a network of economic zones, ports, local airports and road projects in order to develop peripheral clusters of downstream industry. These have been needed for some time; as V Sundaresan, managing director of National Detergent Company, told OBG, “To increase manufacturers’ productivity and efficiency, the logistics infrastructure must be upgraded. That means interconnectivity between ports and airports, which we are seeing.”

Companies will likely have to invest in processing facilities in order to get or renew a licence. While this may lead to more short-term operational costs, the move should enable Oman’s value-added downstream segments to expand, creating new jobs and industry specialisations. “The US petro-chemicals industry is picking up steam, and for Oman to remain globally competitive the downstream oil and gas sector must be further developed,” Ronald Okker, the CEO of Oiltanking Odfjell Terminals & Co, told OBG.

Sohar

North of Muscat in the Al Batinah region, the Port of Sohar is Oman’s most developed industrial area, housing the Sohar Industrial Estate (SIE), and the shipping hub of Oman’s north-west. Sohar Industrial Port Company (SIPC) operates the area, and its ownership is a 50:50 joint venture between the government of Oman and the Netherlands-based Port of Rotterdam. The port recently expanded to include Freezone Sohar, an industrial base also managed by SIPC, which is divided into various downstream clusters: logistics, petrochemicals, cement grinding, iron and steel, and aluminium services.

As Said Al Masoudi, acting CEO of Sohar Aluminium, told OBG, such downstream activities should have far-reaching effects: “Downstream industries will help spur economic development, and create more direct and non-direct jobs in Sohar and Oman.” The clusters enable transportation and processing of raw or basic materials to be exported or sent downstream efficiently, thereby supporting SME development around the industrial estate.

Salalah

In the south-western region of Dhofar, Salalah’s port complex is Oman’s largest trans-shipment hub, employing 2200 workers (1300 of whom are Omani) and ranking among the 30 largest container ports worldwide. It is in the midst of a capacity upgrade to both its container and general cargo terminals; since 2006, it has sat alongside the new Salalah Free Zone (see Regions chapter) that houses some of Oman’s largest industries, such as OCTAL Petrochemicals, Salalah Methanol and Salalah Mills.

The Oman National Railway Project aims to connect Salalah to Sohar and on to the proposed broader GCC network, giving Salalah the potential to be the entry point to a land transport corridor across the sultanate. With a cruise industry and agricultural projects developing at the port, Salalah is also ripe to emerge as an SME centre for local businesses.

Duqm

The newest major port city in Oman is Duqm, located on the coast of the Al Wusta region. The Port of Duqm Company launched soft operations of the $2.6bn terminal in 2011, with plans to be fully operational by 2015. The Oman Drydock Company (ODC) already operates a $1.5bn drydock facility, which is the largest of its type in the Middle East and North Africa. The ODC yard measures more than 1.28m sq metres of land with 1.14m sq metres of sea surface and 2800 metres in quay length. The geography around Duqm is rich in minerals, attracting a range of local and foreign mining companies to start operations at the new Duqm Special Economic Zone. The government has also invested in a $250m Fisheries Industrial Zone (FIZ) to be located at the Port of Duqm, which is planned to become the region’s largest multi-purpose fisheries facility (see Regions chapter).

Mining

New technologies have enabled geologists to uncover significant mineral deposits throughout Oman, which gives the industry potential to contribute to economic diversification. Metals such as copper and chromite are found in abundance in Batinah and Sharqiyah; the same goes for carbonate-based minerals in Al Wusta, Sur and Dhahira. Exports are steadily increasing, and various local and foreign companies are joining the market, such as Australia-based Alara Resources and Belgian-based Carmeuse Group. According to a report in the Oman Observer, the number of mining and quarrying operations in 2012 were as follows: fill material (over 150), chromite (71), crushed rock (183), marble (71), sandstone (three), gypsum, laterite and clay (four each), copper (two), limestone for cement (two), limestone for export (two), and salt and sand dune (one each).

Recently discovered chromite deposits in Batinah have enabled mining firms to develop ferrochrome smelter facilities in Sohar, generating a new export and downstream industry. Four new ferrochrome smelters are in different phases of development, and Oman is the first GCC exporter of the metal. New limestone discoveries could also enhance the cement manufacturing segment. As Oman continues to grow its transport and commercial infrastructure, cement is the key building material, and an increasing domestic supply would help generate local job growth.

While the wide range of mineral deposits are quickly becoming apparent, an international rush has yet to take place in Oman, as the market is still waiting for government legislation that would outline excavation and processing requirements. New laws have limited the exportation of raw materials, obliging mining companies to invest in processing facilities that would facilitate downstream industry development. Already, the MCI has decided not to renew certain mining licences for various reasons, such as licence violations or lack of production (see analysis).

Petrochemicals

The state-owned Oman Refineries and Petroleum Industries Company (Orpic) is one of Oman’s largest companies and operates a refinery and two petrochemicals plants at the SIE. Omani crude oil is transferred from the Mina Al Fahal refinery in Muscat to the Sohar refinery, which together maintain a production capacity of 222,000 barrels per day. Crude is subsequently refined into various fuels or redistributed to an aromatics plant, to create plastics ingredients like benzene and paraxylene, and a polypropylene plant to make polymer pellets. Benzene production capacity is measured at 198,000 tonnes per annum (tpa), paraxylene at 818,000 tpa and polypropylene at 350,000 tpa.

In April 2013 Orpic announced plans to invest $5bn in infrastructure, $3bn of which would be allocated to a new steam cracker and polyethylene plant at the Port of Sohar. The company also aims to provide 50% of the feedstock to power the project, while the additional energy demand would be satisfied by new gas deliveries, depending on the government’s allocation decisions. “As Sohar Freezone continues to grow and develop it requires greater amounts of electricity,” said Ahmed bin Saif Al Mazrouy, the CEO of Majan Electricity Company. “Majan Electricity, along with Oman Transmission Company, is investing more than OR50m ($129.5m) in the form of grid, primary and distribution systems to accommodate a demand of 500 MW.”

According to Orpic CEO Musab Al Mahrouqi, the project should be ready by 2018 if the government provides adequate gas support. The company also plans a $1.5bn refinery upgrade at its Sohar facility that would increase capacity by 60,000-70,000 barrels per day. The engineering-procurement-construction tender is likely to be awarded before 2014.

Sohar also hosts Oman Oil Company’s (OOC) newest project, an $800m petrochemicals facility that, once operational, will produce 1m tpa of terephthalic acid – the main raw material used in polyester fibre, resin and film – and polyethylene terephthalate, used to manufacture plastics. OOC announced its plans for the facility in October 2012, and along with other recent investments into petrochemicals, it is evident that the sultanate intends not only to export all of its crude but to diversify the commodity’s use and add value through downstream industries.

Fertiliser

Another chemical facility at the SIE is the Sohar Fertiliser Project, operated by Sohar International Urea & Chemical Industries. The facility produces 1.2m tpa of granular urea, making it one of the largest ammonia/urea projects in the world, according to Masayoshi Yano, the project director of Mitsubishi Heavy Industries, which built the project. Further east in Sur, the Oman-India Fertiliser Company, a joint venture between the Omani government and two Indian fertiliser cooperatives, operates a $1bn urea-fertiliser plant with the capacity for 1.65m tpa of urea and 350,000 tpa of surplus ammonia.

Gas Scarcity

The availability of natural gas is an obstacle for Oman’s rapid industrialisation efforts, leading to various expansion projects being put on hold. In early 2013 Darwish Al Balushi, the minister of finance, announced that Oman would double its natural gas prices for major industrial clients by 2015 in order to conserve fuel. The price rose from $1.50 per million British thermal units (mmbtu) in 2012 to $2/mmbtu in 2013, and this figure is expected to hit $2.50 by 2014 and $3 by 2015. Following 2015, the price will adjust annually by 3% or the rate of inflation, depending on which is higher, according to the Ministry of Oil and Gas. To maintain downstream and SME growth levels, retail clients and small businesses are initially exempt from the price hike.

One line of support may come from BP’s Khazzan & Makarem fields, located in Oman’s Block 61, which holds 15-30trn cu feet (tcf) of natural gas. The government and BP reached an agreement in June 2013 regarding the sale price for gas produced from the field, providing the initial step in what would be a welcome energy boost for Oman’s industries.

Metals

The metals industry is responsible for $1.74bn of Oman’s total exports, and iron production is quickly becoming the dominant segment. In 2007 Brazil-based mining conglomerate Vale began developing a $2bn iron-ore pelletising plant in Liwa, just north of Sohar. As of March 2012 the plant was able to produce 11m tonnes per annum (tpa) of iron ore pellets. Vale plans to develop an additional plant by 2018 that would increase capacity to 18m tpa, although this expansion depends on a natural gas agreement with the government. Vale’s Oman operation has a throughput capacity of 40m tpa and the Port of Sohar is able to receive iron ore shipments from Brazil with a loading capacity of 400,000 tonnes.

The domestic steel industry has benefitted from the surge in infrastructure and construction activity. “Projects in construction, roads and airports have triggered an upsurge in the sector,” N A Ansari, the director and head of plant at Jindal Shadeed, told OBG. A new entrant, India-based Jindal Steel & Power, operates a $500m iron and steel plant with a capacity of 1.5m tpa of hot briquetted iron and hot direct reduced iron. The firm aims to boost capacity to 5m tpa by 2015. In early 2013 India’s Sun Metals Group announced it had appointed a project consultant to oversee development of a 1.2m-tpa capacity steel mill at the Sur Industrial Estate, on Oman’s eastern tip. Rebar production is expected to begin in the second quarter of 2014, according to P T Sivarajan, director of operations at Sun Metals.

In the region’s first experiment with ferrochrome production, four ferrochrome smelters are planned for development at the free zone in Sohar. Two of them would run through a 50:50 joint venture between Muscat Overseas Group and India’s Indsil Group and one would be operated by Oman-based Gulf Mining Materials. The last is set to be another joint venture by Freezone Sohar, which is yet to be announced in detail. In total, the four smelters together would provide Oman with around 2m tpa of ferrochrome to export to international markets (see analysis).

Aluminium production is another important component in Oman’s metals segment. The main aluminium producer, Sohar Aluminium, is managed through a joint venture between state-owned Oman Oil Company (40%), Abu Dhabi National Energy Company (40%) and the Brazil-based multinational Rio Tinto Alcan (20%). The company operates a 1000-MW power plant and smelter with a capacity of 360,000 tpa of aluminium. By the fourth quarter of 2013, Sohar Aluminium is set to supply liquid metal to a newly constructed rolling mill plant in Sohar, operated by Oman Aluminium Rolling Company, a subsidiary of Takamul Investment Company. Italy-based FATA EPC is the contractor for the project, and the plant is expected to produce 160,000 tpa of flat rolled products.

Foods

As food consumption rises across the GCC, processing and refining capacities are also increasing to meet the new demand. Oman currently remains reliant on food imports; however, there have been a number of new investments and factory expansions over the past year to increase local food production.

Government investments to develop the fisheries segment amount to OR100m ($259m) over the course of Oman’s eighth five-year development plan ( 2011-15), and the new FIZ is being constructed at the Duqm Port, with 60 processing plants. While Oman has always imported 100% of its refined sugar, the Oman Sugar Refinery Company has developed a $200m refining plant at Freezone Sohar, which is expected to come on-line in 2015. Similarly, companies such as A’Saffa foods and Salalah Mills each implemented facility expansion programmes in 2012 in order to increase capacity (see analysis).

Outlook

While challenges remain – such as a lack of skilled labour, the need for innovation, regulatory pressures and gas provision – the government is investing in training programmes and research centres to complement industrial developments. “Oman is a great place to invest. It provides political stability, continuous infrastructure developments and well-informed consumers,” Ajay Chopra, the managing director at OTE Group, told OBG. The continued support for new large-scale industry ventures, as well as a number of expansion projects, illustrates the push toward economic diversification and points to sustained growth in the sector over the coming years.

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The Report: Oman 2014

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