Key industries set to propel manufacturing in Bahrain forward

 

Outside of financial services, Bahrain’s manufacturing sector has grown to become the largest contributor to non-oil GDP. The sector has benefitted from rising foreign direct investment (FDI) inflows, one of the world’s leading global aluminium industries and increasing diversification into value-added production across several segments, most notably fast-moving consumer goods (FMCG). Manufacturers and exporters in Bahrain have long exploited significantly lower operating costs than elsewhere in the GCC, generous investor incentives, and well-connected logistics at a network of free zones offering easy access to regional and global markets. The kingdom’s biggest industrial segment by far is aluminium production, the importance of which is set to grow with the launch of a new potline from national aluminium producer Aluminium Bahrain (Alba), which will increase the firm’s capacity by nearly half. Even as the industry grapples with a concurrent increase in input costs, production and exports are set to rise.

Outside of aluminium, petrochemicals growth is anticipated over the medium term as authorities move to implement a sweeping modernisation programme at the Sitra refinery. Rising electricity tariffs and a subdued regional macroeconomic climate will likely continue to pose challenges for the sector in 2020. However, medium and long-term growth prospects remain broadly positive due to a surge of domestic and regional infrastructure investment, population growth, and an anticipated economic recovery slated to support development and expansion.

Structure & Oversight

Industrial and manufacturing activity in Bahrain is concentrated in eight areas across the kingdom: the Salman Industrial City – which is home to the Al Hidd industrial area and Bahrain International Investment Park (BIIP) – the Mina Salman seaport, along with the Ma’ameer, North Refinery, Sitra Roundabout, South Alba, North Sitra and Haffera industrial areas. The Ministry of Industry, Commerce and Tourism (MICT) is the primary government entity responsible for industrial policy-making and development. The ministry is responsible for providing services, including registering and licensing new businesses, processing applications for duty exemption – machinery, equipment, spare parts and raw materials for industrial establishments are all eligible – and handling cases involving anti-dumping or countervailing measures.

Industry Aims

The MICT’s goals are broadly aligned with the government’s long-term economic development agenda Bahrain Economic Vision 2030, which aims to boost the kingdom’s competitiveness, infrastructure and investment climate, with the broader goal of diversifying economic activity away from oil and gas. Support for small and medium-sized enterprises (SMEs) is a priority, and one of the MICT’s medium-term targets is to increase the number of SMEs operating in Bahrain from 36,000 as of 2019 to 43,000 by 2024, and boost SME exports from 8% to 20% of the total over the same period. Under these mandates, the MICT is working to develop an integrated strategy for sustainable development, which includes supporting infrastructure projects, adopting advanced technology, reducing bureaucracy, attracting new investment, as well as developing technology, communications, business and training services. The ministry also helps coordinate joint economic action with other GCC states, particularly Saudi Arabia, which is the largest export market for Bahrain’s manufactured goods.

Investment

The Bahrain Economic Development Board (EDB), the kingdom’s export promotion agency, also plays a key role in supporting manufacturing and industry. According to the EDB, multiple competitive advantages for investors in Bahrain include easy access to the $1.6trn Gulf market; a large, educated and skilled local workforce; well-developed infrastructure and logistics networks; and a liberalised economy. Following reforms rolled out in 2016, investors are now permitted 100% foreign ownership in almost every economic sector in the kingdom, including manufacturing. According to the EDB’s annual report for 2018, direct investment to the kingdom that year increased by 13% to reach $830m. This was spread across 92 new and expanding companies, and created 4772 new jobs. Of this, the manufacturing, transport and logistics sectors accounted for almost one-quarter of the total, or $200.3m. Although Alba’s Line 6 expansion project was the most high-profile investment project under way in 2018, the kingdom’s value-added manufacturing segments, most notably food processing and FMCG, also witnessed an influx of new investment, creating hundreds of new jobs and supporting economic diversification efforts mandated by Vision 2030. “While investors may perceive it as a volatile region, though one with large upside potential, Bahrain is widely considered to be a very low-risk environment,” Sumaira Yasmin, managing director of G4S, told OBG.

Size & Scope

Manufacturing contributed 14.5% to GDP in 2018, according to figures from the Ministry of Finance and National Economy (MOFNE). This makes manufacturing the second-largest, non-oil sector in the kingdom by GDP contribution, and the third-largest economic sector in the kingdom after oil and gas (17.8%) and financial services (16.5%). Growth remained positive despite challenging macroeconomic conditions, with the sector growing by 2.7% and 2.8% in the first two quarters of 2018, respectively, before moderating to 1.2% in the third quarter and 0.8% in the fourth. This put expansion for the year at 1.9%, up from 1.1% on 2017.

Manufacturing has also been one of the fastest-growing segments for business lending in the kingdom, with MOFNE data showing business loans to the sector rising by 27.7% year-on-year in February 2019 to comprise 10% of retail banks’ total lending portfolio. Meanwhile, the Central Bank of Bahrain reports that lending to the manufacturing sector has expanded significantly over the previous decade, with total outstanding retail bank loans and advances rising from BD389.5m ($1.03bn) in 2009 to hit BD557m ($1.48bn) in 2011, and BD631.1m ($1.67bn) in 2013. Figures declined to BD630.4m ($1.67bn) in 2015 and BD553.3m ($1.47bn) in 2016, before rising to BD717.8m ($1.9bn) in 2017, BD916.3m ($2.43bn) in 2018, and hitting BD1.04bn ($2.76bn) in the second quarter of 2019, the most recent period for which statistics are available.

Subsectors

Much of the recent growth in manufacturing can be attributed to aluminium production, which is the largest manufacturing segment by value and output. Majority-state-owned smelter Alba is the sector’s dominant player, with $2.4bn in total revenues and total assets of $5.87bn in 2018. In addition, production rose to surpass the 1m-tonne mark for the first time in 2018, following upgrades at two of the company’s existing potlines. Aluminium’s contribution to economic growth is set to rise further in 2020, following the conclusion of the Line 6 expansion project, which was inaugurated in late November 2019. Completion of the project, which makes Bahrain home to the world’s largest aluminium smelter outside of China, is expected to boost output by 540,000 tonnes per annum (tpa), for a total production capacity of 1.5m tpa. This should allow the company to capitalise on rising international aluminium prices, despite a corresponding rise in input prices as the global supply of alumina comes under increased pressure. With successful completion of the Line 6 project, Alba’s contribution to Bahrain’s GDP is expected to increase from 12% to 16%. Although Alba exports 50% of its annual production, a readily available domestic supply of aluminium allows the kingdom to develop a well-diversified base of value-added aluminium processors and exporters. Downstream processors are well positioned to capitalise on new growth opportunities in construction and other sectors, as Bahrain and many of its neighbours move to implement major infrastructure investment programmes.

Downstream Aluminum

One of the most important downstream aluminium producers in Bahrain is Gulf Aluminium Rolling Mill Company (GARMCO), the largest aluminium rolling mill in the Middle East with a production of 165,000 tpa. Annual turnover at GARMCO stood at $450m, with 75% of its products exported outside of the GCC. GARMCO has six global subsidiaries and associated companies, and established operations in Thailand in 2005, China in 2006, South Korea in 2008 and Europe in 2011. In 2014 the company officially approved plans for a new $55m casting facility, with the first cast announced in August 2017. The 120,000-tonne-per-hour casting facility produces aluminium slabs from clean and post-consumer aluminium, with the company reporting in January 2018 that it had commenced commercial production.

Another key player is Midal Cables, which was established in 1977 by Bahrain’s Intersteel and Australia’s Olex Cables. It was the first company in the GCC to manufacture and export aluminium and aluminium alloy rods, overhead conductors and wires. Today, the company manufactures high-quality aluminium rods, overhead transmission cables and conductors, exporting its EC grade and 6201 alloy rods globally. In December 2014 Midal Cables expanded operations to Dammam, Saudi Arabia. Like Midal Cables and GARMCO, Bahrain Aluminium Extrusion Company (Balexco) was the first company of its kind in the GCC. Balexco currently produces 25,000 tonnes of high-quality aluminium extrusions per year for construction companies.

Growing Demand

These companies are set to benefit from rising demand for aluminium products both regionally and globally. According to a September 2019 report published by business analytics and consulting company Adroit Market Research, the aluminium extrusion market, like the broader aluminium market, is set to benefit from rising demand from the automotive, construction, and aerospace and defence industries, as manufacturers increasingly seek durable, lightweight components for their products.

Growing government use of aluminium extrusions in building integrated photovoltaic solar power systems will also support future growth, as will rising demand from industries including power generation and air conditioning. Although there were concerns that Bahrain would be negatively impacted by US President Donald Trump’s decision to impose a 10% import tariff on aluminium in 2017, Bahrain was granted an exemption from the tariffs in November 2018.

Local Procurement

Recent investment in a new steel manufacturing facility has further diversified Bahrain’s manufacturing sector, and should allow the kingdom to reduce or eliminate millions of dollars of steel imports, an important consideration given an anticipated surge in infrastructure investment in 2020. Universal Rolling, the kingdom’s leading producer of steel reinforcement bars (rebar), launched its upgraded and automated facility in May 2019 in Salman Industrial City. The company invested $30m in the revamp, increasing its total production capacity from 175,000 tpa to 275,000 tpa. Raw material for steel rebar is procured from Bahrain’s SULB in the Al Hidd industrial area. The new facility is expected to greatly reduce the 250,000 tonnes of steel rebar imported per year.

Chemicals & Petrochemicals

Outside of aluminium, Bahrain’s chemicals and petrochemicals industries are also significant contributors to non-oil growth, with both segments slated for major near-term expansion as the kingdom moves forward on upgrades at its Sitra refinery. The EDB reports that within the specialised chemicals segment, five categories have experienced significant growth in Bahrain in recent years, including construction chemicals, water treatment chemicals, polymer and plastic additives, paints and coating additives, and oilfield chemicals. The plastics industry accounts for 11% of total manufacturing across the GCC, according to the EDB. This position is supported by the presence of major multinationals, including the Gulf Petrochemical Industries Company (GPIC), BFG International, Abahsain Fibreglass and JBF Bahrain, as well as German chemical firm BASF, US glass fibre materials manufacturers Lauscha Fibre International, Danish paint and coating suppliers Hempel Group and India’s paint manufacturers Berger Paints.

Front-end engineering and design work on a new $1.5bn aromatics factory was also completed in 2018. The project is a joint venture between stakeholders in Bahrain and Kuwait and forms part of an extensive modernisation programme currently being implemented by the Bahrain Petroleum Company (see Energy chapter). The new factory will produce 1.44m tonnes of paraxylene per year, which will be used for the synthesis of various polymers, including polyethylene terephthalate, a key component for clothing fibres, liquid and food containers, thermoforming, and engineering resins.

GPIC

GPIC is a joint venture between the state-owned National Oil and Gas Authority, Saudi Arabia’s Saudi Basic Industries and Kuwait’s Petrochemical Industries Company, with each holding a 33.3% share. Situated next to the Sitra refinery on 60 ha of reclaimed land, the GPIC complex uses locally produced natural gas as feedstock to produce ammonia, methanol and urea, with average daily production standing at 1265 tonnes per day (tpd) of ammonia, 1945 tpd of urea and 1230 tpd of methanol in 2018. Urea production has been rising steadily as the company moves to expand its facilities, and in February 2017 it announced that Japan’s JGC Gulf International had been selected to build a $8.8m, 22-tpd urea formaldehyde facility, with production to be used to manufacture urea granules. This is part of a $1.5bn expansion plan that was announced in April 2014. In July 2018 GPIC achieved a record monthly production of 60,209 tonnes of urea, and went on to hit its highest annual production levels in 2018, a combined total of 1.5m tonnes of ammonia, urea and methanol, of which 1.31m tonnes was exported. Meanwhile, GPIC’s net profits stood at $82.3m that year.

Free Zones

Manufacturing investors in Bahrain benefit from a well-developed free zone network, much of which is located within Salman Industrial City next to Khalifa Bin Salman Port (KBSP). Salman Industrial City was launched in 2010 and is home to BIIP and the Bahrain Logistics Zone (BLZ), two of the kingdom’s largest and most well-developed free zones, as well as the Al Hidd industrial area. Covering 2.5m sq metres and established in 2005, BIIP is Bahrain’s largest free zone. As of 2018 there were 114 companies employing more than 4500 people, up from 58 companies and 3000 employees in April 2014 and just 31 companies in 2011. Cumulative FDI in the park reached $2bn as of July 2018, up from $1.82bn in February 2014.

Major multinationals operating out of BIIP include Mondeléz International, which recently added a purpose-built biscuit factory to its facilities (see analysis); Singaporean subsea engineering firm MTQ; Abahsain Fibreglass, the UAE’s Banawi Industrial Group, local machining manufacturer RMA Middle East, BASF, German company Siemens, JBF Bahrain, India’s Chemco Group, and Saudi Arabian concrete pipe manufacturers Amiantit. One of BIIP’s major investor incentives includes competitive land rates. At $2.66 per sq metre per year, costs are lower there than anywhere else in the GCC. The free zone also offers 25-year renewable leases; custom, pre-built units between 2000 and 9500 sq metres, which are available for rent at $6.60 per sq metre per month; and serviced office spaces. Citing data from professional services network KPMG, the EDB reported that BIIP’s rental rates make the annual cost of set-up and operations in Bahrain 17% lower than in Oman, 43% lower than in Saudi Arabia and 46% lower than in the UAE. Additionally, there are no restrictions on foreign ownership or capital repatriation.

Also located next to KBSP, BLZ is the kingdom’s sole, Customs-bonded logistics park and the first in the Middle East to focus exclusively on re-export and value-added activities. BLZ offers investors the option to build their own facilities or rent purpose-built warehouses. In June 2017 the EDB reported that work is currently under way to increase BLZ’s size by 150% in an effort to attract $600m of new investment. As with BIIP, the BLZ offers a significant cost advantage, providing tenancy lease rates at BD4.14 ($10.98) per sq metre per year. The BLZ also offers the same incentives as BIIP, including zero corporate and personal income taxes, and no restrictions on capital repatriation. According to a September 2019 report published by market researchers HESE Press, setup and operating costs for a logistics business in Bahrain are between 30% and 40% lower than elsewhere in the GCC, which has encouraged several companies to choose the kingdom as their base of operations. In January 2019, for example, global logistics firm Agility opened a new $10m, 28,000-sq-metre facility next to BLZ, offering ambient, chilled and frozen storage, records management and turnkey logistics services for Bahrain-based FMCG manufacturers. Rising opportunities in e-commerce are also supporting demand at BLZ, with the GCC e-commerce market set to reach $20bn in value by 2021.

Investment Gateway

At the end of 2011 authorities also began developing the Investment Gateway Bahrain (IGB) free zone project, which will see the creation of 1600 plots of land between 450 and 1200 sq metres, designed for light industrial projects. Located close to KBSP in the Al Hidd area, IGB’s planned facilities will be constructed on reclaimed land, and include a business park, showrooms, warehouses and assembly units. In June 2019 Manara Developments, a subsidiary of Al Salam Bank, announced that it had completed 26% of its landfill target for the project’s second phase, laying more than 2.7m cu metres of sand in preparation for construction. The next phase of the project will involve building infrastructure at an estimated cost of BD100m ($265.2m). On completion, IGB will span 2.69m sq metres, making it the largest light industry project available for freehold ownership in the kingdom.

Outlook

Although rising electricity prices will weigh on Bahrain’s manufacturing growth in 2020, the sector is set to remain at the forefront of the non-oil economy in 2020. Direct investment in FMCG, aluminium and petrochemicals should remain on a steady upward trajectory. As the kingdom moves forward on implementing a large-scale infrastructure development agenda, local manufacturers are also positioned to benefit from rising domestic demand. Meanwhile, ongoing development of the IGB light industrial free zone project presents a host of opportunities for SME exports.

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