Dubai has invested heavily in the creation of competitive infrastructure and a business-friendly regulatory framework to help solidify its status as a regional hub for trade and manufacturing. In terms of logistics, the Jebel Ali Port and the rapid expansion of the national airline, Emirates, provide companies with streamlined import/export options and some of the world’s most well-connected air cargo terminals.
Demand for logistics is being driven by industrial production, globalisation dynamics, as well as government spending. Currently, the government strongly supports third-party logistics initiatives, and seeks to develop new hubs which can promote industrialisation and economic diversification in the emirate. On the policy side, a tax-free regulatory environment creates an exceptionally attractive business environment for investors looking to establish operations in the region.
Signs Of Success
Dubai’s successes in attracting inward investment have been part of a wider strategy that, according to the Dubai Economic Council (DEC), saw re-exports equivalent to 27.7% of the emirate’s total trade value in the first half of 2013, as goods were trans-shipped and as manufacturing facilities added value to imported goods destined for export. During the same period, exports (including re-exports) grew to Dh272bn ($74bn) and imports rose to a record Dh406bn ($110.5bn), led by gold (20% of total imports), telephones for cellular and wired communications networks (10%), and diamonds (7%).
While solid export performance has expanded the role of the manufacturing sector in Dubai’s economy, US sanctions on Iran have damaged trade with the country, which is has traditionally been one of Dubai’s major trading partners. Despite the drop, a significant portion of these losses are expected to be offset by the pace of economic recovery and domestic demand in the UAE, and growth in Africa, where 10.4% of the UAE’s manufactured products were shipped in 2012.
Declining trade and investment opportunities linked to the economic downturn in Europe could also result in short-term contraction. For example, production of aluminium, one of Dubai’s chief exports, could be affected by ongoing slowdowns in the European automotive or construction segments. Furthermore, any deterioration in the broader global economic outlook could impact the emirate’s exports of chemicals, processed foods, plastics and metals.
Any loss, however, could potentially be made up over the longer period with growing trade and investment relations between Dubai and the world’s fastest-growing economies, including China and India, as well as Africa. Sharief Habib Al Awadhi, director-general of the Fujairah Free Zone, told OBG, “While India will always be a strong trading partner due to historical relations with the region and the diverse range of products, the UAE is increasingly looking towards Africa due to its massive development potential and abundant mix of raw materials and resources.”
Free zones are perhaps the single most important regulatory driver for investment in Dubai’s manufacturing sector, responsible for around 75% of all exports and more than 25% of the emirate’s GDP in 2012. Whereas Dubai imposes a 5% across-the-board import tariff on most categories of goods, firms in free zones are legally treated as though they operate outside the UAE: capital gains and profits can be wholly repatriated with no foreign exchange controls; there is no corporate or personal tax; and goods may be landed, handled, manufactured or reconfigured and reexported without the intervention of Customs authorities. Investing in one of the emirate’s 23 free zones also allows for 100% foreign ownership of a company, with no need for a local partner (as is required elsewhere).
Each free zone is designed around one segment and therefore only offers licences for firms in that field (for example, industry or logistics). Four free zones are designated for industry or logistics: the Jebel Ali Free Zone (JAFZA); the Dubai Airport Free Zone; the Dubai Aviation City Corp – Dubai World Central; and the Dubai Multi Commodities Centre (DMCC).
JAFZA is one of the world’s largest trans-shipment points for containerised cargo. The area is host to over 7100 businesses from over 100 countries, which collectively employ 170,000 people, or about 13% of Dubai’s total labour force of 1.32m. Of the companies operating in the zone, the majority are involved in trading, warehousing, and distribution for large corporates, while 1500 are industrial and light manufacturing units. “Industrial zones are playing an important role in the greater supply chain of local and international companies, as more and more of businesses’ logistics and distribution can be consolidated or even outsourced,” Mohammed Al Hazzaa, director-general of Emirates Industrial City, told OBG. Collectively, firms in JAFZA are responsible for some 20% of the UAE’s foreign direct investment and more than 50% of Dubai’s total exports.
In September 2013, the state-operated DMCC overtook JAFZA to become the UAE's largest and fastest-growing free zone. Committed to promoting growth in the UAE’s commodities sector, the DMCC provides business-friendly licensing process. An average of 200 companies join the free zone each month, with 7330 active registrants and a target of 10,000 by 2015. Expansion plans include a new 107,000-sq-metre DMCC business park and a commercial tower. Malcolm Wall Morris, CEO of the DMCC, told OBG, “No matter how much we see an economy potentially slip, trade as a whole is not going to stop. It is a matter of adapting to change, embracing new opportunities and adjusting to the shifts we see in the flow of trade.”
Businesses operating in JAFZA and the DMCC are supported by streamlined government services, highquality infrastructure and consistent regulatory frameworks. Competition between Dubai’s free zones ensures that they stay efficient. Although some zones are sector specific, strong competition persists amongst them, which results in constant innovation to the ultimate benefit of the tenants. However, there are concerns that this can result in the trading of tenants, rather than focusing on attracting new businesses to Dubai.
Non-Free Zone Industrial Areas
In addition to the designated free zones, Dubai also offers a number of non-free-zone industrial areas, including Dubai Industrial City (DIC), Dubai Investment Park (DIP), Al Quoz, Umm Ramool and Ras Al Khor. Though these offer similar infrastructure and tax perks as the free zones, companies in non-free-zone industrial areas must include a local partner with at least a 51% stake in the firm, and must pay the standard duty fees. While free zones are well-suited for businesses operating in light industrial and re-exporting activities, non-free-zones are a better fit for manufacturers wishing to focus on the domestic market and on regional trade that falls under the GCC Common Market scheme.
Dubai Industrial City
The DIC is one of the largest industrial areas in Dubai, covering over 55 sq km of property. The site caters to small and medium-sized tenants in the manufacturing and logistics segments that are primarily concentrated on the GCC market. The DIC’s warehouses are presently at 95% capacity and the city is expecting to record 10-20% growth for 2013. Responding to the steady demand, the DIC is set to begin an expansion in 2014, which will see the creation of additional infrastructure worth Dh100m ($27.2m), increasing the total developed area.
Locating at the DIC provides opportunities for companies to benefit from greater operational efficiencies due to the co-location of similar industries ( potentially improving the availability of inputs and service providers), as well as the advantage of excellent connectivity and Customs duty exemptions for GCC sales. Proximity to JAFZA, Jebel Ali Port, Al Maktoum International Airport and two of Dubai’s major road networks makes DIC particularly attractive for businesses.
The city will also host a new freight terminal connected to the planned Etihad Rail network, one of only two initial stops in Dubai. “This will reduce [DIC-based businesses’] operational costs drastically,” Abdulla Belhoul, DIC’s managing director, told local media. “Plus it can open new markets throughout the GCC because this train will connect all GCC countries.”
Dubai Investment Park
The DIP in Jebel Ali, spread across nearly 17m sq metres of leasable land, is another large industrial zone in Dubai that has undergone significant expansion in the recent years, attracting new companies by virtue of its proximity and connectivity to the Jebel Ali Port, Al Maktoum International Airport and the major highways of the UAE.
Although DIP does not offer a blanket exemption to the foreign-ownership restrictions (as is provided in the free zones), foreign nationals can develop and own industrial property made available during the two final development phases of the park, provided they have a local partner or sponsor. A self-contained city within a city, buildings across the DIP are also eligible to be sold on long leaseholds to overseas investors.
As of January 2014, DIP accommodates over 2,715 tenants representing a wide array of industrial establishments, commercial entities and residential units. The industrial zone has emerged as a powerhouse in the manufacturing sector and is suitable for any kind of industry – from light to medium to heavy – and includes pharmaceuticals, plastics, printing, textiles, building materials and food and beverage processing.
Food enterprises are likely to experience healthy growth in the medium to long term due to increasing affluence, favourable demographics, urbanisation (and the resultant improvement in marketing and distribution infrastructure) and the proliferation of organised retail (hypermarkets, supermarkets, discount stores). Sector growth opportunities include food processing equipment, packaging, raw materials and the Islamic financial instruments required to support growth in the halal food segment.
Dubai is also emerging as a major food re-exporting hub. Although food production capability is limited, the emirate’s strategic location has helped it to become a significant link in the region’s food chain. The combination of growing local demand and export potential have attracted major food processors to the emirate, including Kraft, PepsiCo and Nestlé.
According to a recent report from the Dubai Chamber (DCCI), the UAE textiles industry is one of the country’s most significant industrial segments, in part as a result of the high number of people that it employs. The Dubai Statistics Centre reports that textiles production in the emirate alone increased from Dh1.4bn ($381.1m) in 2007 to Dh1.6bn ($435.5m) in 2011, an annual cumulative growth rate of 4%.
However, the DCCI report suggests that growth has been restrained by competition from textiles industries in countries in China and South-east Asia. Despite the challenges, Dubai’s strategic location, advanced infrastructure and growing population promise to sustain the industry in the near future.
Aluminium production is among Dubai’s most important industrial activities, accounting for more than 15% of the manufacturing sector’s contribution to GDP in 2010. Furthermore, although sector profitability has slumped worldwide because of global oversupply, Dubai is well positioned in the aluminium business in terms of cost per tonne due to its access to inexpensive natural gas, as energy typically accounts for as much as 40% of an aluminium smelter's costs, depending on the energy source.
DUBAL-EMAL MERGER: In June 2013, Abu Dhabi’s government-owned investment company, Mubadala, signed an agreement with its Dubai equivalent, the Investment Corporation of Dubai, to integrate Dubai Aluminium (DUBAL) with Abu Dhabi-based smelter Emirates Aluminium (EMAL), creating a new, jointly held company known as Emirates Global Aluminium (EGA).
In 2012, DUBAL posted a net profit of Dh1.58bn ($430.1m) on a gross sales revenue of Dh9.77bn ($2.66bn), making it one of the most profitable corporations in Dubai’s portfolio. The company produces more than 1m tonnes of aluminium per annum (tpa) at its 480-ha site near Jebel Ali. For its part, EMAL currently produces 800,000 tpa and is expected to raise annual output to 1.3m tpa when work on a $4.5bn capacity expansion project is completed.
The new joint venture will have an enterprise value of more than $15bn and a production capacity of over 2.4m tpa of aluminium once the current EMAL expansion is completed, making it the fifth-largest global aluminium maker when the merger is finalised. The new company is expected to reach $6.6bn in sales in 2015, up from $4.3bn in combined sales in 2012, based on estimates given by the two firms. The joint venture expects to add 2000 jobs by 2020 and it estimates that an additional 6000 indirect jobs will be created by the growing aluminium sector in the country.
The merger is part of a broader effort to use the UAE’s abundant energy supplies to diversify the country’s economy, even as aluminium producers elsewhere cut capacity. Global output of the metal has exceeded demand for the past eight years, and between a third and a half of producers are failing to break even at current prices, which fell by 10% in the first quarter of 2013. Weak global pricing and a supply overhang are expected to last through at least the end of 2014.
Downstream investment in the aluminium sector is also forecast to grow, particularly around extrusion activities that produce tracks, frames and rails, as well as in value-added industries like aviation and auto parts. This is primarily due to a number of initiatives undertaken by the Dubai government to provide the necessary soft and hard infrastructure required for industrial investors, particularly the port facility at Jebel Ali and the availability of electricity at affordable rates. The UAE as a whole accounts for as much as 35% of the GCC’s aggregate demand for extruded aluminium, and that number is forecast to grow at an 8-9% compound annual growth rate in the 2011-17 period, according to a report released by business consultancy Frost & Sullivan.
Buoyed by a recovery in the Dubai construction sector and an increase in the number of infrastructure projects in the GCC, steel is among the fastest-growing industries in the UAE. Preparations for Expo 2020 are set to further stimulate construction activity, giving an additional boost to the segment.
The only integrated steel plant in the country is operated by Emirates Steel in Abu Dhabi’s Mussafah Industrial Area. The company sells around 70% of its finished products to the local market, while the balance is exported. The Dubai steel industry is broadly focused on downstream products, including steel rebar, tube and pipe products, steel billets, slabs, hot-rolled coils, as well as a host of other industrial steel products.
Conares is the largest player in Dubai’s downstream steel manufacturing industry, with operations spread over more than 140,000 sq metres in JAFZA, and a total annual production capacity of 700,000 tpa.
Demand for steel products has also increased in recent years in the ship building, repair and maintenance industries, where Dubai is seeking to leverage its location on one of the busiest shipping lanes in the world. In mid-2013, Dubai Maritime City (DMC) – the mixed-use maritime cluster located close to the centre of Dubai – announced a long-term partnership agreement with Mubarak Marine for the Dh130m ($35.4m) development of an industrial complex for maritime services, shipbuilding and repair.
Drydocks World, part of the Dubai World group, is separately implementing a strategy aimed at repairing, refurbishing and building offshore vessels, with a particular focus on the oil and gas industry.
Plastics & petrochemicals
According to the Dubai Gold and Commodities Exchange (DGCX), in 2012 the UAE produced 12% of the global supply of propylene, one of the most common plastic products used in manufacturing and packaging. The sector is trending up in line with the price of plastics on the global market, which have recovered since a crash in 2008. In the first half of 2012, the most recent period for which data is available, exports of plastics grew by 127% compared with the same period in 2011.
Potential growth areas in Dubai include products and technologies required for the production of raw materials, including injection moulding, wrapping and packaging, as well as raw materials, such as additives and polymers. However, a decision issued by the UAE Ministry of Environment and Water in March 2013 may put a damper on the domestic market, as it makes it mandatory for manufacturers and suppliers of a variety of consumer plastics to register their products and ensure that they meet certain quality standards. Products that have not been registered by December 31, 2013, or which fail to meet the standards, cannot be sold or marketed in the country. The ministry is also reportedly considering imposing fees on consumer plastic bags as part of efforts to reduce usage.
DGCX Plastics Future
To help address volatility in the price of plastic on international markets, the DGCX is scheduled to begin issuing pioneering dollar-denominated futures contracts based on polypropylene plastics by the first quarter of 2014. The contracts are being developed in partnership with China’s Dalian Commodity Exchange and will trade alongside a renminbi futures contract, thereby enabling users to hedge their exposure to the currency.
The ability to deliver the plastics needed to fulfil all the futures contracts will be key to the initiative’s success. With this in mind, the DGCX has gathered a working group of plastics trading companies, producers, refiners and banks to ensure the prospective contracts have the support needed to succeed.
The DGCX’s working group includes international commodities giants with ample liquidity and visibility, including Cargill and Glencore, while the major banks involved include Standard Chartered and Deutsche Bank. “This will not be a cash settled contract, so we are looking for a location in Dubai for warehousing all the plastics we would need to make this a robust contract,” DGCX’s CEO Gary Anderson told local media. Jebel Ali was reportedly under consideration, along with other locations in the emirate.
With the launch of the DMCC in 2002, Sheikh Mohammed bin Rashid Al Maktoum, vice-president and prime minister of the UAE and ruler of Dubai, predicted the emirate would one day capture a 50% share of the global gold trade. Dubai’s commodities market has since expanded considerably to help meet these goals, with the net result that over 25% of the world's physical gold was imported and exported through the emirate in 2012, with an estimated value of $70bn, up substantially from the $56bn recorded in 2011 and $6bn in 2003. Munir AlKaloti, president of the Kaloti Jewellery Group, told OBG, “Dubai is the fastest growing gold and precious metals centre in the world. It is evident in the volume of incoming scrap shipments and outflow of refined metal to Europe and Asia that Dubai has replaced Switzerland as the main source for refined gold, thereby emerging as one of the leaders in the global precious metals refining market.”
Raw and half-manufactured gold continued to top the list of Dubai’s imports, with a share of 18% of the total. Despite having no locally sourced gold, exports of gold and jewellery in Dubai were valued at Dh104bn ($28.3bn) and accounted for 64% of the total non-oil exports from the emirate in 2012. Re-exports of gold jewellery and other ornaments made of precious metals accounted for Dh22bn ($6bn), or 7% of the total non-oil re-exports from Dubai during the same period.
These numbers dropped off noticeably over 2013, however, as both Pakistan and India implemented policies aimed at stemming the inflow of gold and other precious metals. As the world’s largest gold consumer, India has long been one of the biggest markets for Dubai’s exports. Gold, precious stones, pearls and metals accounted for almost half of the UAE’s exports to the country in 2012. “Overall, the Dubai gold trade is down by 60% as a result of the Indian move and a swathe of paperwork and laws introduced by Pakistan recently, which make it very difficult to ship gold there," Abid Riaz, chief accountant at wholesalers ACM Gold, told local media.
Total gold refining capacity in Dubai is expected to increase markedly in 2015, when the Kaloti Jewellery Group opens a new $60m refinery in the DMCC. The planned refinery will have the capacity to forge as much as 1400 tonnes of gold and 600 tonnes of silver and other precious metals per year, tripling the company’s current refinery capacity and helping it meet rising demand. Purchases from Asian markets in particular are expected to intensify as the price of gold drops, improving the outlook for Dubai’s gold sector. A record price drop in gold in mid-2013 led to rapidly rising demand for physical gold from the Middle East, South-east Asia, the Balkans, Turkey and parts of Europe.
Proximity to destination and source markets is the principal advantage for companies operating in Dubai’s gold sector. The emirate is at the very heart of the trade in physical gold for both producers and consumers. Advanced logistics infrastructure facilitates a hub-spoke supply system, whereby gold can be stored in Dubai (hub) and distributed to specific demand destinations in India, China or the GCC (spokes). This provides tremendous added value for the hundreds of gold trading, refining, aggregating and jewellery manufacturing companies that have moved to Dubai to set up shop.
The emirate’s tax-free status has made it one of the cheapest places to buy gold in the world and there is considerable potential for growth in refined white metals (silver, platinum, palladium, etc.). Tourist flows into Dubai are increasing from Russia and Eastern Europe, areas with a strong affinity for these metals.
The government of Dubai has invested heavily in constructing competitive infrastructure and establishing a business-friendly regulatory environment to develop the emirate into a diversified regional hub for trade and manufacturing. Dubai’s free zones, streamlined importing processes and some of the best-connected air cargo terminals in the world have helped to make this vision a reality, attracting growing levels of investment and diversifying the economy.
As a result, manufacturing has become one of the largest contributors to Dubai’s GDP, with key outputs including refined petrochemicals products (plastics, fertilisers, synthetics), aluminium, precious metals and processed foods. These segments are expected to trend positively throughout 2014, buoyed by strong economic fundamentals and major planned infrastructure and development projects. Dubai’s percentage share of international trade in jewellery and physical gold is also expected to rise in response to increased demand from Asian markets. Although any short-term market contraction is unlikely, a sustained economic downturn in Europe may result in fewer trade opportunities for chemicals, processed foods, plastics and metals.
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