For over two decades Oman’s industrial sector has been a key plank in the government’s economic diversification strategy. During that time efforts have been focused on improving the physical and regulatory infrastructure necessary to attract investment and secure growth, and the results at flagship estates such as Rusayl and Sohar have been impressive. With a new five-year economic plan currently under development and preliminary work under way on Vision 2040 – the overall development strategy for the sultanate’s economy – the coming years will see a renewed focus on industrial policy from the government. Among the top priorities will be helping local industry move up the value chain, both to retain more value in-country for the economy and to enable domestic firms to become more competitive in regional and global markets. Equally, the creation of highly skilled and sustainable jobs for Omanis is an increasingly salient factor, particularly following a decade in which the private sector has created over a million new jobs for expatriate workers.
According to preliminary figures compiled by the Central Bank of Oman (CBO), non-petroleum industrial activities in the sultanate were valued at OR5.71bn ($14.8bn) in 2014, having grown by 3.8% compared with 2013 – up slightly from the 3.5% growth recorded the previous year. These figures compare with overall economic growth of 4.6% for 2014, with non-petroleum industrial activities outperforming the oil sector (which shrank by 2.4%), but being in turn outperformed by services, which grew by 13.1%. As a share of total GDP, non-petroleum industry currently accounts for 18.2%. The Vision 2020 target for the sector is 29% of GDP.
The largest share of non-petroleum industry is taken up by manufacturing, which is currently valued at OR3.2bn ($8.3bn). Despite being the largest, manufacturing is currently the worst-performing sub-sector: in 2014 it grew by only 0.4%, while the previous year it shrank by 0.1%. The last year of significant growth in manufacturing was 2011, when the sector grew by almost 25%.
By contrast, 2014 saw robust growth in the other non-petroleum sectors of Omani industry: electricity and water supply grew by 8.6% to reach OR376m ($973.5m), mining and quarrying expanded by 8.5% to OR124.5m ($322.3m), and building and construction was up 8.3% to OR2.1bn ($5.4bn).
The relatively poor figures for manufacturing growth are reflected in capital formation: while gross fixed capital formation in building and construction has grown from OR3.3bn ($8.5bn) in 2010 to a provisional OR4.8bn ($12.4bn) in 2013 – a rise of 45% – the same figure for machinery and equipment has risen by 27% over the same period, from OR2.1bn ($5.4bn) to OR2.7bn ($7bn). Given the government’s policy goal for domestic industry of maintaining more value in-country, it is also worth mentioning the gross savings rate for this period. There was a net outflow of financial savings from the country equivalent to 16% of GDP in 2013, while domestic savings exceeded investment by almost 20 percentage points of GDP.
Non- Oil Export Growth
Recent years have seen Omani industry grow increasingly successful in finding markets abroad, with total non-oil exports from the sultanate rising from OR2.5bn ($6.5bn) in 2010 to OR4.1bn ($10.6bn) in 2014. In particular, growth in exports of mineral products and base metals has been impressive during this period, with the former more than doubling from OR612.7m ($1.6bn) to OR1.26bn ($3.3bn), and the latter growing by 128% to reach OR765.8m ($2bn). Year-on-year (y-o-y) nonoil export growth for 2014 was 8.4%, with textiles in particular expanding by more than 25% (albeit from a low starting base), and plastics and chemicals up by 23.4% and 18.2%, respectively.
“Improvements to the transportation and logistics network will greatly increase Omani industry’s export capacities,” P K Raj, general manager of Asian Berger Paints, told OBG. “Oman is an ideal place to manufacture; we just need the solutions to transport our products cost effectively.”
In addition, according to Prem Maker, managing director of Areej Vegetable Oils and Derivatives, multinationals are becoming increasingly interested in Oman as a base to service the upper Gulf, Pakistan and India. “This is a huge market with which Oman already shares good relations. However, if the sultanate were to enhance its bilateral trade relations with any of these countries, the growth for industry will be exponential,” Maker told OBG.
Regarding the total labour force employed in Omani industry, recent official figures are not currently available. However, as of 2010 Ministry of Commerce and Industry (MoCI) figures showed Omani employment in the sector to total 80,238. With Omanisation for the sector at that point standing at 33%, this would have given a total estimated industrial workforce of just under 270,000, representing approximately 20% of the overall labour force.
While there are few comparative indicators relating directly to industrial performance, there are several composite indicators which include aspects relevant to the sector. The Global Innovation Index (GII), co-produced by Cornell University, INSEAD and the UN’s World Intellectual Property Organisation, is a ranking which attempts to measure the capacity of economies to innovate. In the 2015 edition Oman was ranked 69th out of 141 countries, up from 74th place out of 143 nations in 2014. Oman ranked relatively low on the GII in terms of knowledge absorption and the role of creative goods and services within the economy.
By contrast, the sultanate was relatively strong in ICT and general infrastructure, tertiary education, regulatory environment, and innovation linkages between public and private sector joint ventures.
Similarly, the World Economic Forum’s Global Competitiveness Index (GCI) contains several sub-indicators that are of direct relevance to industry. In the overall ranking for 2014/15 Oman was placed in 46th position. While Oman ranked relatively high in terms of institutions, infrastructure and macroeconomic environment, similarly to its performance on the GII, the GCI identified weaknesses in its capacity for innovation and efficient use of talent.
According to Arvind Bindra, CEO of Al Maha Ceramics, considering the global situation, Oman is still competitive when it comes to manufacturing. “Companies are still able to achieve healthy margins as long as there are no more gas price hikes or tighter labour restrictions,” Bindra told OBG.
Recent economic policy in Oman has been guided by a series of five-year plans, the first of which was produced in 1976 and the ninth of which (to cover the period 2016-20) is currently being finalised. It was not until 1983, however, that the government created the sultanate’s first industrial estate at Rusayl, close to the capital Muscat, under the auspices of the Authority for Rusayl Industrial Estate. Further estates followed in Sohar (Al Batina), Raysut (Dhofar), Nizwa (Al Dakhliya), Sur and Buraimi, and in 1993 responsibility for managing the sultanate’s industrial estates passed to a newly created entity, the Public Establishment for Industrial Estates (PEIE). As of the end of the first half of 2014 there were 1468 projects in the PEIE’s estates, up from 1409 in 2013, representing average growth of 4.2%, while total investment had reached OR4.94bn ($12.8bn). Government oversight for the sector, meanwhile, falls under the responsibility of the MoCI, which was established by royal decree in 1974 and whose jurisdiction was expanded in 2005 to include coordination with the WTO.
During the 1990s the government’s development strategy embraced economic diversification away from dependency on hydrocarbons. This movement culminated in the creation of Vision 2020 in 1996, which became the new strategic framework for Oman’s economic policy. Vision 2020 advocated that the non-oil economy reach 81% of GDP by 2020. To achieve this goal specific sectors were targeted for investment, among them non-oil industrial activities. To encourage investment in such activities the government established a framework of incentives for the industrial estates, including a minimum five-year exemption on taxation of profits, exemption of Customs duties (including on raw materials for the first five years of operations) and, for small and medium-sized enterprises, access to credit of up to OR1m ($2.6m) from the Oman Development Bank. Oman is also the only country in the Gulf region to offer export credit insurance.
More recently, the Omani authorities have also established free zones (FZs) and a special economic zone (SEZ) to complement the industrial estates. The sultanate currently has three FZs (Sohar, Salalah and Al Mazunah), as well as a SEZ in Duqm. The first of the FZs was set up in 1999 at Mazunah, alongside the border with Yemen. The SEZ at Duqm, which was established in 2011, is the largest in the MENA region at 1777 sq km.
It falls under the responsibility of the SEZ Authority Duqm (SEZAD), whose remit was extended in 2013 by royal decree to include the management, regulation and development of all economic activities within the zone, now recognised as being both financially and administratively autonomous.
The incentive scheme for investors within Oman’s SEZs builds on that offered by the industrial estates but also goes further. SEZAD, for instance, offers investors (among other things) 100% foreign ownership (industrial estate investments generally require an Omani partner), no minimum capital requirements, a lower 10% Omanisation rate, a 30-year tax exemption, exemption from Customs duties, and free repatriation of capital and profits.
As a result of such incentives the sultanate’s industrial estates and FZs have already succeeded in attracting substantial investment. Rusayl, for instance, is operating at 100% occupancy and is currently undergoing significant expansion, while Sohar has already managed to attract OR1.75bn ($4.5bn) investment for its industrial estate and OR240m ($621.4m) for its free zone.
The government’s policy for the industrial sector is likely to receive an update with the Ninth Five-Year Plan, which will cover the period 2016-20. While details of the plan had yet to be released at the time of press, early indications are that there will be a renewed focus on industry as a driver of economic diversification. Speaking to local press on the occasion of Oman’s Industry Day in February 2015, Ali bin Masoud Al Sunaidy, the minister of commerce and industry, explained that he anticipated new developments in the sultanate’s gas sector to provide a “catalyst” for the expansion of industry, which would be reflected in the priorities of the Ninth Plan. The Khazzan tight gas project, which is currently under development by BP, is expected to produce around 1bn cu feet per day, with the first gas set to arrive in 2017. The project should increase Oman’s domestic gas production by a third.
Oman’s mining sector has seen substantial growth over the past decade, with its contribution to GDP at current prices rising from OR14.2m ($36.8m) in 2003 to OR124.5m ($322.2m) in 2014, representing compound annual growth rate (CAGR) of 21.8%. The sultanate holds significant deposits of metallic minerals such as gold, silver, copper, lead, chromite, cobalt and zinc, as well as non-metallic minerals including limestone, dolomite, gypsum, silica, quartzite and various ornamental stones.
Growth in the mining sector has been helped in recent years by a change in the regulatory environment, with government royalties falling in 2010 from 10% of sale value to 5%. Other changes to the regulatory regime made in 2013 sought to promote the involvement of national companies in the sector (as opposed to individual investors or foreign corporations). Most recently, in September 2014 a new government body, the Public Authority for Mining, was established to regulate the sector. Currently, licence applications for mining must be made in January and February, with a maximum of 30 gravel quarry licences and 15 mining licences awarded per year. The licensing framework is divided according to the various stages of exploration and extraction, with viable discoveries qualifying for a renewable mining concession of 25 years.
Substantial activity in the sector includes the copper mining operations of Oman Mining Company and Mawarid Resources in the Sohar and Shinas areas, which have reached around 35m tonnes of ore exploited. New investment in copper mining is also under way at Yanqul, in a joint venture between Oman Mining Company, Mawarid and Oman Oil Company (OOC) consisting of five separate deposits. Australian mining company Savannah also announced in 2015 that it had found indications of substantial gold deposits in the North Batinah governorate, with feasibility studies currently being undertaken in collaboration with the Public Authority for Mining. In addition, media reports indicate that four new companies have been granted exploration licences for developing copper mining projects on the Al Batinah coast, while there are currently more than 15 companies involved in mining marble in the northern mountains. According to data gathered by Charles Russell Speechlys, a legal firm, as of 2013 there were over 150 quarrying and mining operations under way in the sultanate.
Rail & Port
A further boost to the mining sector’s potential is set to arrive in the form of the Oman national railway. Tendering is currently under way to build the 2244-km network, which will be constructed in nine segments, and will link the sultanate’s ports with the UAE. The railway will provide a significant boost to the mining sector, as at present output must be transported in trucks to the sultanate’s ports, often across mountainous and harsh terrain.
The port of Salalah in particular is divided from its hinterland by a large mountain range, separating it from the gypsum mining industry at Thumrait, which has seen substantial growth in demand in recent years. The 93-km Thumrait-Salalah connection, which represents section 4c of the network, is being tendered separately owing to the specific challenges of construction, which is likely to involve long tunnels.
Plans are under way to significantly expand Oman’s refining and petrochemicals industries, with major projects under development at Sohar and Duqm. The sultanate’s current refinery capacity stands at 220,000 barrels per day (bpd), produced by its two existing refineries at Sohar and Mina Al Fahal in Muscat. The two plants are joined by a 266-km pipeline, which supplies feedstock from Mina Al Fahal to a polypropylene and aromatics plant at Sohar. All of these facilities are owned and managed by the Oman Oil Refineries and Petrochemicals Company (ORPIC), a state-owned company established following the merger of the previously separately managed refinery and petrochemicals plants.
ORPIC has three expansion plans under way. The first is a $2.1bn expansion plan at the Sohar refinery known as the Sohar Refinery Improvement Project (SRIP). The tender, which was awarded in November 2013 to a joint venture of Petrofac and Daelim, is expected to increase capacity at the plant by more than 70%, and will allow ORPIC to reduce naphtha imports from 70% to 25%, while also enabling bitumen to be produced for the first time in Oman. The project is due for completion by the end of 2016.
In addition to SRIP, a second, 290-km pipeline will be commissioned in 2017 to provide another link between the Sohar and Muscat refineries, as well as Muscat International Airport. The $320m Muscat Sohar Products Pipeline project broke first ground in May 2015, and is set to be completed in three stages. It will link to a new $80m fuel terminal at Jifnain that will expand storage capacity in the sultanate by an estimated 171,000 cu metres.
ORPIC’s largest proposed project, however, is the Liwa Plastics Industrial Complex to be located in the Sohar industrial area. In total, the $4bn project will comprise a natural gas liquids extraction plant in Fahud, a 300-km pipeline between Fahud and Sohar, a steam cracker unit with a capacity of 900,000 tonnes per year, high- and low-density polyethylene plants, a 300,000-tonne-per-annum polypropylene plant, as well as pyrolysis gasoline, butene and methyl tert-butyl ether units. The total capacity of the facility will be 1.1m tonnes of petrochemicals per year and is hoped to be completed by the final quarter of 2018. A total of eight bids were received in August 2015 for the first two tenders related to the project, while ORPIC has announced it intends to approach banks and export credit agencies to help cover financing, with the government possibly contributing between $600m and $1bn in funding.
Further south in the sultanate, plans are advancing for an entirely new $6bn refinery, which is to be located within Duqm’s SEZ. The planned facility will have a capacity of 230,000 bpd and is being developed by the Duqm Refinery and Petrochemical Industries Company (DRPIC), which is a joint venture between the OOC and the Abu Dhabi-based International Petroleum Investment Company.
Tendering for the project is already well advanced, with Foster Wheeler receiving the front-end engineering design contract in early 2014, and UK-based Technip E&C appointed as project management consultants. In May 2015 the tender for preparation works on the 800- to 900-ha site was awarded to Galfar Engineering and Contracting, with the site expected to be ready for construction by the early part of 2016. The refinery will eventually comprise hydrocracking, hydro-treating and delayed coking units, as well as sulphur recovery, hydrogen generation and merox treating units.
Primary products will be diesel, jet fuel, naphtha and liquefied petroleum gas. DRPIC has also announced plans for a possible second stage to the development that would add an associated petrochemicals complex at an estimated cost of $9bn. Commissioning of the refinery is anticipated in 2018, with full capacity before the end of 2019. The combined additional capacity of the Sohar and Duqm works is set to more than double Oman’s refinery capacity, increasing production by 312,000 bpd.
In addition to these domestic investments, the Omani government is also in talks to invest $7bn in a refinery, petrochemicals plant and storage facility in Indonesia’s Riau Province. According to recent media reports, the project in South-east Asia is expected to break ground in 2016, with the oil products due to be purchased by Indonesia’s state-owned Pertamina.
Production of steel and aluminium has increased significantly over the past five years as new facilities have come on-line in the sultanate’s industrial estates. Investment has seen exports in the sector rise to OR765.8m ($2bn) in 2014, y-o-y growth of 5.7%. In total, however, the sultanate still maintains a trade deficit in the sector, as imports currently stand at OR1.3bn ($3.4bn), though this figure is steadily declining from a peak of OR1.4bn ($3.6bn) in 2012.
Among the most substantial facilities are Brazilian mining company Vale’s $1.36bn iron ore pellet plant, which opened in 2011 at the Sohar port complex. The plant’s two units have a nominal capacity of 4.5m tonnes per year and are intended to meet demand for Vale’s ore in the MENA region and India. Production at the plant reached a record 2.4m tonnes during the second quarter of 2015, representing growth of 27.7% on the previous quarter and 17.7% y-o-y. The associated distribution centre at the Sohar facility is one of only two established by Vale, and has a throughput capacity of 40m tonnes per year.
There are also plans to expand steel production in the sultanate, with Sohar Steel and Sharq Sohar Steel Rolling Mills (SSSRM) and Jindal Shadeed Iron and Steel Oman (JSISO) both intending to invest in increasing production at pre-existing facilities, while media reports have stated that local firm Sun Metals has signed an engineering, procurement and construction (EPC) contract with Korean firm POSCO for a $400m, 2.5m-tonne-per-year plant at Sur. JSISO, which is considering a $500m listing on the Muscat Securities Market, announced in late 2014 that it was planning a $2bn investment to upgrade capacity to 2.5m tonnes per year over the next three to four years. This would follow on from the commissioning of a new rebar rolling mill, due in first-quarter 2016, which will have a capacity of 1.4m tonnes per year. SSSRM, meanwhile, announced plans in April 2014 to double capacity to 700,000 tonnes per year at its Sohar facility. With commodity prices currently low, however, and the government doubling the price of gas supplied to industrial estates and cement manufacturers in January 2015, not all of these investments may be carried out. Al Jazeera Steel, for instance, saw first-half 2015 profits fall 58% due to weaker demand and lower prices. The Sun Metals project in particular (which would use scrap metal as a feedstock) is reportedly considering relocating to Duqm if mid-sea loading at the initial Sur site is not permitted, which would likely delay commissioning.
“The low oil prices have put the government under pressure to reduce subsidies. The gas price hike for industrial manufacturers affects our whole supply chain and squeezes our margins, reducing our ability to expand,” S Gopalan, the CEO of Reem Batteries and Power Appliances Company, told OBG.
Similar concerns also appear to be at play in Oman’s burgeoning aluminium sector. Sohar Aluminium, which currently produces 375,000 tonnes per annum (tpa) of hot metal, has plans for a modest expansion of capacity to 390,000 tpa by 2019, involving an investment of $35m. Oman Aluminium Rolling Company, also based at Sohar, began operations in mid-2013 following an OR100m ($258.9m) investment, and has plans to increase production by a third to 140,000 tonnes per year by 2017. Oman Aluminium Processing Industries is, however, reportedly reconsidering plans to double capacity following flat sales in the first half of 2014.
As previously mentioned, Oman’s manufacturing sector has experienced relatively stagnant growth in recent years, with the sector growing by only 0.4% in 2014 to reach OR3.2bn ($8.3bn). Recent efforts to boost the sector have included the creation of an in-country value (ICV) scheme, specifically addressed towards the oil and gas industry, which aims to develop local content in servicing the energy sector (see Energy chapter).
According to Hassan M J Ali Abduwani, CEO of Voltamp, a manufacturer of power transformers, the sultanate is still underutilising small and medium-sized enterprises, mainly due to the lack of a clear guidelines within the ICV policy. “ICV itself is still relatively new to Oman, but we are still seeing that tenders which could be awarded in-country are being sent outside,” Abduwani told OBG.
Efforts are also being made to establish an automotive cluster at the Sohar Freezone, with a 150,000-sq-metre Nissan finishing facility opening in September 2015, and the state-owned Oman Investment Fund (OIF) buying a 40% stake in Italian automotive parts supplier Sigit in April 2015. According to Fabio Scacciavillani, the OIF’s chief economist, the sultanate intends to begin production of auto parts in Oman within two years and to open a plant by 2020.
Also emerging at Sohar is a major food-processing centre, including the sultanate’s first sugar refinery and a new flour mill. The sugar refinery, which should reduce and eventually eliminate the current need to import more than 120,000 tonnes of refined sugar annually, is to be built by China Light Industrial Corporation for Foreign Economic and Technical Cooperation, following an EPC contract worth $250m signed with the Oman Sugar Refinery Company (OSRC) in June 2015. Initial output is set to reach 700,000 tonnes per year in phase one, increasing to 1m tonnes per year within three years. The refinery is expected to be completed within 18 months of breaking ground.
The new mill is a joint venture between Oman Flour Mills Company and Emirati investor Essa Al Ghurair. The mill, which will have a capacity of 500 tonnes per day, is expected to cost OR15.5m ($40.1m) and will be set up next to silos being constructed by the government as part of the country’s strategic reserve. The mill is anticipated to have capacity for future expansion up to 2000 tonnes per day, and will add to Oman Flour Mills’ current daily capacity of 850 tonnes.
In addition to the Sohar facility, a $19m flour mill is also being planned in the southern port of Salalah. Salalah Mills, which has a current milling capacity of 1500 tonnes per day, will build the 600-tonne-per-day facility after having reached 100% utilisation of its existing facilities in first-half 2015. The new mill is scheduled to be operational by 2017.
Oman Food Investment Holding Company, a state-owned investment vehicle for agri-business, also has plans to invest a total of $623m in joint ventures in the food production sector, including a $260m dairy project in Al Buraimi, a $260m poultry plant in Ibri and a $104m red meat facility in Salalah. These investments in food production are hoped to encourage growth in spin-off industries such as food packaging. For instance, a joint venture between the OOC and LG International called Ompet is currently in the process of constructing a $600m beverage packaging factory at Sohar Freezone due to open in 2016.
The Omani construction sector is currently valued at OR2.1bn ($5.4bn), having experienced strong CAGR of 11.8% since 2010 – making it one of the sultanate’s strongest performing sectors. However, first-half 2015 saw the sultanate’s two largest cement manufacturers, Raysut and Oman Cement, experience a significant decline in profits. Oman Cement’s profits fell by 40% y-o-y, despite sales remaining more or less flat, while Raysut Cement saw profits fall by 33% in the second quarter of 2015. The results came after the increase in natural gas prices in January 2015, which Raysut predicted would add 3% to its bottom line, and which Oman Cement had suggested would add OR2.1m ($5.4m) to its costs. Oman’s cement producers also protested in early 2014 against perceived dumping practices by firms from the neighbouring UAE. Raysut claimed market demand in Oman was just 1m tonnes per year against exports of 2.5m tonnes per year from the UAE, while Emirati producers said local demand was closer to 3m tonnes. Oman Cement would seem more bullish regarding domestic demand, as a cement mill with capacity of 150 tonnes per hour is expected to come on-line by the fourth quarter of 2015, while the company is also investing $11.3m on upgrading pollution control equipment to reduce emission levels.
Elsewhere in the construction materials sector performance has been less severely affected. Oman Cables Industry’s first-half 2015 profits rose by 10.2%, despite the weaker commodities market, which saw a fall in revenues. Al Maha Ceramics also saw a rise in profits of 29% in the first quarter of 2015 at a time of falling revenues, and the company announced it would be expanding capacity by 7.6m sq metres to reach 13.6m sq metres per annum. Finally, in May 2016 a $37m gypsum board manufacturing plant opened at the Salalah Free Zone in a joint venture between US-based USG Corporation, Australia’s Boral and local mining company Zawawi Minerals.
While falling commodity prices may be having a negative effect on Oman’s oil sector, the sultanate’s non-oil industries will likely benefit from the resulting boost to their bottom line. Equally, on the demand side the government’s commitment to the deficit financing of major infrastructure works means that industries associated with the construction sector in particularly are likely to see a relatively soft landing from any broader economic downturn that may result from a sustained fall in oil prices.
On the policy side, in the medium term the industrial sector is likely to benefit from government investment in improved transport links and the increasing supply of natural gas due to come on-line over the next two to three years. However, in the short term the doubling of gas prices at the beginning of 2015 and new limitations on haulage weights have both added to the operating costs for heavy industry in particular. “Internally we will continue to do all the actions to reduce impact through cost control measures in all the activities of plant operations,” N A Ansari, CEO of Jindal Shadeed, told OBG.
In the longer term, the government’s Omanisation and ICV policies are both designed to move Omani industry up the value chain, and nurture capital-intensive (rather than labour-intensive) growth. According to Grant Phipps, group general manager of Muna Noor Manufacturing and Trading, the sultanate must strike a balance between encouraging Omanisation and utilising foreign workers. “Industrial growth in Oman all comes down to manpower. Expatriates are still vital to sustain growth; creating more economic prosperity means more jobs for Omanis and more management positions for them to grow in to,” Phipps told OBG.
With much of the sector’s recent growth being driven by primary goods, there is clearly a great deal of potential for such policy instruments to encourage downstream diversification. However, with neighbouring GCC countries pursuing similar policies, it may be necessary to look further afield for export markets, while the authorities will need to remain vigilant about the potential risks for productivity associated with traditional import-substitution policies.