Kuwait’s economy relies heavily on its hydrocarbons-related industries, and while plans are in place to transition to renewable energies, medium-term development strategies will see oil and gas extraction, processing and capacities ramped up, with the revenue channelled into the government’s industrial diversification drive. Downstream chemicals and petrochemicals production forms the backbone of Kuwait’s non-oil industrial output, and major capacity-expansion projects are planned.
The years leading up to the Covid-19 pandemic brought significant growth for the manufacturing sector, with the government announcing its decision to make more land available for industrial activities to increase sector momentum and cater to growing demand. The government’s portfolio of proposed mega-projects is designed to invigorate cross-sector growth, with a strong focus on manufacturing and logistics, including the implementation of a number of dedicated industrial and economic zones.
While there have been some impediments to infrastructure development, Kuwait should be well positioned to attract more foreign investment to support industrial expansion if these issues are addressed.
Structure & Oversight
The Public Authority for Industry (PAI), established in 1997, is mandated to develop, promote and supervise the sector. New Kuwait 2035, the overarching national development plan, envisages a diversified economy with reduced dependence on fossil fuel activities. The various phases of the Kuwait National Development Plan (KNDP) guide progress towards the realisation of the vision. In line with these goals, the PAI underwent significant restructuring and workforce expansion in 2019, transforming it into an entity that is better equipped to steer Kuwait’s industrial diversification agenda. Indeed, the PAI’s primary mandate is to develop, protect and expand Kuwait’s production base, while ensuring sufficient supply of goods vital to the country’s security. Foods, fast-moving consumer goods and pharmaceuticals are among the production lines that Kuwait is seeking either to strengthen or diversify into.
Under New Kuwait 2035, the government plans to transform the country into a regional and global transport and logistics hub, which will directly facilitate industrial expansion. One of New Kuwait 2035’s flagship projects, the Madinat Al Hareer – or Silk City – development includes plans for a logistics belt, incorporating a maritime port, an airport and an extensive integrated road network, with a major new industrial zone that is directly connected to the infrastructure.
The Kuwait Direct Investment Promotion Authority (KDIPA) was established in accordance with Law No. 116 of 2013 regarding the Promotion of Direct Investment in the State of Kuwait. In addition to the role its title makes clear, KDIPA’s remit includes developmental, regulatory and advocacy duties in relation to Kuwait’s direct investment environment and portfolio. KDIPA is therefore key to the government’s drive to attract direct investment in strategic areas of industry and has been afforded a prominent role in the implementation of proposed economic and free trade zones.
Meanwhile, the Kuwait Chamber of Commerce and Industry, established in 1959, is a non-profit, self-financed umbrella organisation for the private sector that shares its views on pertinent economic affairs.
Industrial Landscape
Established in 1980 as a state-owned enterprise, the Kuwait Petroleum Corporation (KPC) works in synergy with the Ministry of Oil, operationalising Kuwait’s upstream and downstream industries through its eight subsidiaries: the Kuwait Oil Company, Kuwait National Petroleum Company (KNPC), Petrochemicals Industry Company (PIC), Kuwait Oil Tanker Company, the Kuwait Integrated Petroleum Industries Company (KIPIC), Kuwait Petroleum International, the Kuwait Foreign Petroleum Exploration Company and Kuwait Gulf Oil Company.
Under the KPC umbrella, KNPC runs the country’s two existing refineries, the Mina Al Ahmadi and Mina Abdullah refineries, and is responsible for the domestic sale and distribution of all petroleum products. The completion of KNPC’s Clean Fuels Project, through which the company is targeting new market penetration, took KNPC’s refining capacity from 736,000 barrels per day (bpd) in 2014 to 800,000 bpd. Downstream hydrocarbons products, such as refined petroleum and coke, and petrochemicals dominate the manufacturing industry. Products belonging to these categories accounted for 10 of the country’s top-16 exports in the fourth quarter of 2021.
PIC was founded in 1967 and is the petrochemicals arm of KPC. Locally, PIC operates through a number of subsidiaries and joint ventures (JVs) in which it has varying shareholdings: PP Plant (100%), Kuwait Paraxylene Production Company (100%), Kuwait Styrene Company (57.7%), Kuwait Olefins Company (42.5%), Equate (42.5%), Kuwait Aromatics Company (20%). PIC is also working to expand its global operations.
Meanwhile, KIPIC was established in 2017 to manage refining processes and liquefied natural gas and petrochemicals production at the new Al Zour complex, whose crude refinery with a capacity of 615,000 bpd became partially operational in 2022. The complex is situated along Kuwait’s Gulf coastline, 45 km south of the Mina Al Ahmadi refinery.
Kuwait’s iron and steel manufacturing industries are also well developed, with both benefitting from the abundant availability of coke, which is vital to the metals’ production. Therefore, motor vehicles of various classifications, and semi-finished iron or non-alloy steel products also feature in the exports list.
Size & Performance
According to the Central Statistical Bureau (CSB), manufacturing sector performance, including refined petroleum products and coke production, fluctuated throughout 2019. It expanded by 1% year-on-year (y-o-y), rising by 1% in the fourth quarter of 2019 from KD737.9m ($2.43bn) in the corresponding quarter of 2018 to KD745.3m ($2.45bn). This dipped to KD613.9m ($2bn) in the first quarter of 2020 before declining sharply to KD420m ($1.4bn) the following quarter as pandemic-related restrictions set in and economic activity stalled. From that point, manufacturing activity in Kuwait underwent a steady recovery, rising by 24.7% y-o-y to KD524m ($1.7bn) in the third quarter and again by 11.6% in the final quarter to KD585m ($1.9bn).
Despite the improved figures, the sector experienced a contraction of 21.5% y-o-y between the closing quarters of 2019 and 2020. In addition, the manufacturing sector’s contribution to GDP declined from 6.9% to 6% over the same time frame. Kuwait’s GDP is subject to significant fluctuations due to oil price volatility, yet during the period 2010-20 value added by Kuwaiti manufacturing remained fairly steady, in the range of 6-8%, according to World Bank data.
Based on certain parameters by which it classifies foreign direct investment (FDI), the CSB surveyed 428 firms to identify the level of FDI in the country in 2020. Data showed that from a total of KD3.5bn ($11.5bn), industrial companies in Kuwait accounted for KD341.1m ($1.1bn), and KD340.7m ($1.1bn) of that went to manufacturing activities, a figure 6.3% lower than the KD363.6m ($1.2bn) registered in 2019.
Producer Price Index
The impact of national and global economic headwinds on Kuwait’s industrial sector can be observed through the CSB’s producer price index, which has four components: extractive industries, oil extraction, manufacturing and refined petroleum products. Indeed, the manufacturing index rose by 13.8% between the first quarter of 2021 and the second quarter of 2022, arriving at a value of 148.1, reflecting the sharp inflation affecting the post-pandemic global economy.
Employment
Kuwait’s total private sector workforce dipped from 1.7m in June 2019 to 1.5m in June 2022. There were 132,966 individuals employed in manufacturing, or 9.1% of the total. This represents a decrease from 235,785 in 2019. Foreign nationals comprise a large part of the private sector workforce, a trend also seen in the manufacturing sector, which employed 128,020 foreign nationals and 4946 Kuwaitis in June 2022. Boosting Kuwaiti participation in the private sector is a core component of the government’s development plans. This is important, as Kuwaitis accounted for 6.8% of the private sector manufacturing labour force in June 2022, a decrease from 10.4% in June 2019.
Business Environment
The potential benefit of investment to the local workforce is one of KDIPA’s core criteria when evaluating proposals from foreign entities. In 2021 KDIPA approved nine direct investments with 100% foreign equity shareholdings – one of which targeted the industry sector. The law regarding FDI includes a list of activities open to full foreign business ownership. Notably for the manufacturing sector, that list includes pharmaceuticals production.
Nevertheless, a foreign ownership threshold of 49% or lower is more commonplace, particularly for foreign investors keen to enter into JVs with local partners, but who may not meet KDIPA criteria. Companies that are either partially or fully foreign owned are the only companies in Kuwait that pay income tax, with a flat rate of 15% in effect. In addition, due to its scarcity industrial land is expensive in Kuwait. However, if executed, the government’s plans to open two new industrial zones would increase the volume of available industrial land by more than 50%, with additional economic zones in the offing. Furthermore, new laws regarding long-term residency visas and foreign ownership of a single residential property are under consideration with the aim of attracting more investors to the country. Meanwhile, the government has tightened regulations regarding default by contractors, and heavy fines are now in place in the case of construction project delays.
Economic & Industrial Zones
The PAI has established a number of industrial zones throughout the country to support key industries since its inception. The PAI has announced a series of new industrial zones designed to facilitate the expansion of hydrocarbons and chemicals activities and cater to industries strategically identified to boost economic diversification. This would also provide the infrastructure necessary to attract the level of investment required to diversify the production base.
Key among the proposed new zones is the Al Shadadiya Industrial Zone (SIZ). First announced in 2013 and initially slated for completion in 2016, the zone is still under construction. Following multiple delays, the PAI removed the original contractor from the SIZ project. A new contractor has been installed and a new completion date of 2024 has been set. The 5.8m-sq-metre zone will house separate areas for chemicals, foods and mixed-use production activities, while the government pledged to reserve 10% of the land for small and medium-sized enterprises (SMEs).
Since 2016 KDIPA has been exploring the possibility of constructing and implementing three new economic zones in different regions. One of those is set to be in Al Abdali in the country’s north and will cater to coke and petroleum products manufacturers, as well as firms involved in logistics, storage and waste management activities. In 2021 the government assigned KDIPA to oversee a direct public auction for the Al Abdali zone, conveying a sense of urgency around the project, which is seen as a key enabler of growth of SMEs.
Another zone has been proposed in Al Naim in western Kuwait to support basic and environmentally focused industries. The third is set to appear in the southern area of Al Wafra to facilitate cross-border economic activities. In September 2022 Meshaal Jaber Al Ahmad Al Sabah, director-general of KDIPA, spoke of the importance of connecting the Al Wafra zone with new road developments, the existing road network and the country’s major transport nodes. The new zones would provide the underlying infrastructure, while considering the development of fiscal and financial incentives to attract impact investment.
Chemicals & Petrochemicals
The GCC chemicals and petrochemicals industry grew by 2.7% from 2020 to 2021, and revenue climbed by 77.2% in the same period – the highest level recorded since 2013. Furthermore, the GCC chemical industry global market continues to rise, almost doubling in the past two decades to 6.7%. In terms of employment, Kuwaitis comprised 71% of the sector in 2021. Member countries are revamping their chemicals and petrochemicals strategies, with an emphasis on research, development and innovation. This will help to develop new products and find better applications of existing products. It should also contribute to the development of greener processes, better services, more efficient business models and innovative marketing strategies (see analysis).
While foreign involvement in the economy was limited in the past, a series of laws were implemented in 2015 to encourage investment and expertise in key sectors, along with a series of other laws related to businesses and public-private partnerships. Ethylene, polyethylene, ethylene glycol, urea and chemical catalysts are among Kuwait’s primary chemicals and petrochemicals products. Much of Kuwait’s petrochemicals output goes to China and India, Kuwait’s most prominent export markets. The chemicals industry accounted for 22% of manufacturing GDP during the fourth quarter of 2021, a quarter-on-quarter increase of 2.2 percentage points.
In 2022 PIC announced updates to its 2040 strategy as the company seeks to scale its portfolio and leverage local, regional and international partnerships to achieve value addition. The company plans to grow its annual production of basic petrochemicals to 14.5m tonnes, while it will also increase its focus on specialised petrochemicals production, which relies on advanced technologies and offers higher returns, harnessing partnerships and JVs with global industry players. PIC has set the target of producing 102m tonnes of specialised products, 15% of which will be manufactured in Kuwait, by 2040. Capacity expansion will therefore be required. To this end, in May 2022 PIC announced plans to release 31 project tenders, one of which was a consultancy contract regarding a feasibility study for a new chemicals production plant.
The Al Zour complex is designed to include ethylene glycol, ethylene and xylene plants, as well as two propylene plants, which would add 2.3m tonnes per year to Kuwait’s petrochemicals capacity. However, the project has encountered multiple delays due to fluctuating oil prices and subsequent uncertainty regarding project funding, in addition to more recent spikes in transport and building materials costs. A new feasibility study was set for completion in September 2022.
KIPIC has stated its intention to provide 30% of the estimated $8bn-10bn project funding, with the rest to be raised through loans. In 2019 KIPIC announced that Japan’s Sumitomo Mitsui Banking Corporation would be financial adviser for the project and would work to secure $4.9bn from international banks.
Pharmaceuticals
New Kuwait 2035 incorporates a focus on developing a high-quality health care system. Localising pharmaceuticals production is key to achieving that goal, and the government is inviting investment through its public-private partnerships initiative.
With imported patented medicines fulfilling a substantial proportion of market demand and the majority of health care costs covered by public funds, the government is keen to boost local production of generic medicines. This presents a significant opportunity for private investors. While Saudi Arabia is aggressively pursuing regional dominance in the pharmaceuticals and biotechnologies spaces, the fact that Kuwait currently contains a single manufacturer of generic pharmaceuticals, Kuwait Saudi Pharmaceutical Industries Company, could prove appealing to investors. The firm entered into a partnership with prominent US-based manufacturer Abbott for the local production of 26 medicines to be released throughout 2022. The agreement is intended to broaden access to high-quality medicines for Kuwaitis, though technology transfer, job creation and training opportunities are also key features of the deal in line with New Kuwait 2035.
Circular Production
The authorities are mindful that as manufacturing capacity rises, so too will the country’s economic footprint. Manufacturing is energy and emissions intensive, a fact that is amplified in the petrochemicals segment, given the feedstock used and the type of products produced. Across the GCC, companies are pivoting from a linear extract-produce-waste model of production to a circular process with recycling and greener energies at its core. Indeed, Kuwait’s annual development plans see the country focusing more on the UN Sustainable Development Goals.
In relation to chemicals and petrochemicals manufacturing, through effective implementation of this closed-loop design, monomers, polymers and polymer products could be retained and reintegrated into production processes, with positive environmental and economic impacts. PIC’s long-term strategy outlines the company’s intention to adopt circular-economy principles and collaborate with stakeholders, academics, scientists and industry experts in implementing and executing initiatives aimed at raising the environmental sustainability of its operations.
The government is also playing a role in promoting industrial sustainability. In April 2022 the Ministry of Finance agreed to a contract with Kuwait Cement Company to establish a factory for the purpose of converting municipal solid waste into dry fuel to be used in furnaces of cement production plants.
Outlook
The success of Kuwait’s industrial diversification drive will be influenced by the government’s ability to construct and implement its proposed industrial and economic zones. Regional competition is fierce, with GCC countries offering incentives to attract investment. While Kuwait will need a clear strategy in relation to the industries it targets, effective implementation would add to a diverse GCC network of industrial and logistics facilities. This would open up opportunities for regional and international partnerships, bringing in both experience and technology as well. If enacted, a number of proposed laws could enable sustained progress on stalled infrastructure projects. This would also improve investor confidence, thereby attracting higher levels of direct investment to the local market.
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