Construction contractors enter an age of manufacturing

08 December 2009

Opportunities for contractors have dwindled in the real estate sector since the onset of the global slowdown, but the GCC’s industrialisation plans offer a rich seam of potential work

Industrialisation is a core component of the economic development plans being implemented by the six GCC states. Abu Dhabi, for example, in its Economic Vision 2030 masterplan, cites petrochemicals and metals manufacturing as key engines of growth that are vital to the emirate’s development, alongside investment in healthcare and education infrastructure.

Each of the Gulf states has initiated a raft of government-backed industrial projects in a bid to diversify their economies beyond a dependence on oil revenues.

“The residential construction market is not what it was, so industrial projects will become more important”

Riad Bsaibes, chief operating officer, Amana

With these masterplans come major contract and supply opportunities for the region’s construction and engineering companies.

Gulf stateshave also implemented legislation to encourage foreign as well as local investment in the industrial manufacturing sector. Since it was set up in 2004, for example, Abu Dhabi’s Higher Corporation for Specialised Economic Zones (ZonesCorp) has launched the Industrial Cities of Abu Dhabi programme to attract foreign investment to the its manufacturing sector.

Generating investment

Of the five industrial cities planned, two focusing on heavy-to-medium manufacturing, engineering and processing industries are up and running. A third, which will focus on attracting firms involved in manufacturing construction materials and engineering, is under development. Two more industrial cities are planned, which will be dedicated to the automotive industry.

According to projects tracker MEED Projects, more than $382bn worth of industrial projects are either under way or planned in the GCC. This figure includes about $20bn worth of non-hydrocarbons-related industrial projects under construction, such as steel mills, cable -factories and cement plants, with a further $22bn in the planning phase.

The giant $18bn gas-to-liquids  (GTL) facility being developed by UK/Dutch Shell at Ras Laffan, in Qatar, is a prime example of the opportunities that industrial projects offer to the construction sector. With a capacity of 1.6 billion cubic feet a day of gas, the Ras Laffan GTL facility will be the world’s largest when it starts up at the end of 2010.

The project has provided many billions of dollars worth of contracts for technology providers and engineering firms, both international and regional. Approximately 160 Gulf contractors and subcontractors are involved in the construction of the plant, including Saudi Arabia’s Nasser Saeed al-Hajri Corporation and Al-Jaber & Partners, the Qatar subsidiary of the Abu Dhabi-based conglomerate.

The project has also generated huge demand for construction materials. Some 600,000 cubic metres of concrete, 11,000 kilometres of cables, 120,000 tonnes of steel and 100,000 tonnes of pipes have been used to construct the gas processing complex on a plot covering 2.3 square kilometres. At peak construction, up to 48,000 workers were on site at any given time.

Key fact

More than $382bn worth of industrial projects are under way or planned in the GCC

Huge projects such as this invariably help to spawn new, smaller industrial investments in response to the strong demand for key building materials, such as cement and cables. France’s Nexans, for example, was one of the cable suppliers to the GTL project, as well as to the aluminium smelter being developed at Mesaieed by Qatalum, a joint venture of Qatar Petroleum and Hydro of Norway.

Nexans is now building a cable manufacturing plant in Mesaieed in partnership with local industrial group Al-Neama Industrial. UAE-based Amana Contracting & Steel Buildings has been awarded the contract to build the cables factory.

“We are a 17-year-old company but in the past four years we have taken a conscious decision to focus on the heavy industrial sector,” says Riad Bsaibes, chief operating officer of Amana. “It is a decision that has been driven by the business opportunities available today.”

The Gulf states actively encourage this trickle-down effect by promoting a cluster approach to industrialisation, whereby a number of interrelated manufacturing projects are located in close proximity.

For example, several ancillary industries developed in Bahrain following the opening in 1971 of the Alba aluminium smelter, including the Gulf Aluminium Rolling Mill Company, Bahrain Aluminium Extrusion Company, Midal Cables, Bahrain Atomizers and AluWheel.

“If you look around the region you see a big push on petrochemicals plants and aluminium smelters,” says Bsaibes. “These primary industries are important not just on their own, but because they also provide the incentive to set up secondary and tertiary industries related to them.”

The main driver behind the creation of such clusters is to ensure that the maximum economic value is gained from the investments in large energy and capital-intensive primary industries, such as refineries and gas processing plants.

Instead of the basic product being exported for downstream processing, governments are promoting manufacturing as a way of creating both jobs and higher value products. This approach also generates additional work for the construction industry, boosting local demand for building materials, pre-engineered buildings and civil contractors.

Saudi Arabia has been the biggest proponent of the cluster concept. The giant industrial -cities of Jubail and Yanbu are home to more than 230 primary, secondary and tertiary industries, at a total investment cost of $120bn.

About 70 per cent of the kingdom’s non-petroleum exports originate in Jubail and the city accounts for 11.5 per cent of gross domestic product. Such has been the success of these twin industrial hubs that Riyadh is now setting up Jubail 2 and Yanbu 2 alongside the original sites. Each city is expected to attract a further $30bn in investment from -foreign and local firms.

Industrial estates

Jubail 2 alone will accommodate 22 new basic petrochemicals and smelting plants, as well as secondary and support industries. The infrastructure planned for Jubail 2 includes expansions to ports, the installation of new drinking water and wastewater networks, highways to connect the original Jubail development with the new city and an industrial railway linked to the commercial port.

The industrial focus at Jubail and Yanbu is on hydrocarbons-processing activities, but the same clustering method has also been used to create hundreds of other industrial estates across the kingdom. These focus on non-hydrocarbons-related manufacturing, such as food and beverages, textiles, building materials and manufactured metals.

Since the kingdom’s second economic development plan was launched 34 years ago, which called for an industrial revolution, the manufacturing sector in the kingdom has grown almost tenfold. In 1975, there were about 472 factories in operation. By the end of 2008, that figure had risen to more than 4,000. Over the years, these investments have provided a stream of business opportunities for the local and regional construction sector.

In addition to ZonesCorp’s industrial cities, Abu Dhabi is also planning industrial clusters similar to those in Saudi Arabia. It is planning to spend up to $100bn over the next 20 years developing a chemicals industrial city at Taweelah, which will cover everything from basic petrochemicals production to high-value end-products. A metals city is also planned to convert output from Emirates Steel Industries and Emirates Aluminium.

Projects such as these are important engines of growth for the construction sector as well as the wider economy. “The residential construction market is not what it was, so industrial projects will become more important to the sector now,” says Bsaibes. “Especially since on the industrial side you have the large players such as Abu Dhabi National Oil Company [Adnoc] and [state oil firm] Saudi Aramco. When they put out tenders you know they are not speculating, they have the budget for it.”

During the first half of 2008, when the projects market was overheating, timelines for many industrial projects were slowed down as costs threatened to escalate out of control.

Saudi Arabian Mining Company’s flagship aluminium project at Ras al-Zour, for example, was delayed at the beginning of this year when UK-headquartered Rio Tinto dropped plans to take a 49 per cent stake in the $10bn smelter because of the global financial crisis. While the two parties signed a technology transfer -agreement in March, the completion date for the project has been pushed back to 2014, from 2012.

But, following the change in the global economic climate in the second half of 2008, those costs have tumbled. For instance, the price of reinforced bar (rebar) steel in the UAE peaked in July 2008 at about $1,500 a tonne, but prices for UAE rebar are now less than $550 a tonne.

In recent months, several industrial projects have been retendered in the light of lower materials prices and activity is picking up as clients seeks to take advantage of that.

Adnoc in particular has accelerated the pace of its contract awards. On 5 November, its subsidiary, Abu Dhabi Oil Refining Company, awarded $5.2bn of contracts to two South Korean firms for the main process units on its refinery at Ruwais. Bids had gone in less than two weeks earlier.

Other clients are likely to follow in the coming months. Despite the ongoing economic difficulties in many markets, with $120bn of major industrialisation projects either planned or under way in the Gulf states, the sector still represents a major business opportunity for the region’s contractors and specialist engineering firms.

A MEED Subscription...

Subscribe or upgrade your current package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.

Get Notifications