Iraq in numbers
1.7 per cent: Contribution of industry to Iraq’s GDP today
13.9 per cent: Proportion of GDP accounted for by industry in the late 1980s
2 million t/y: Capacity of the new cement plant planned by MerchantBridge and Lafarge in Karbala
GDP=Gross domestic product; t/y=Tonnes a year. Source: MEED
With some $350bn-worth of projects planned or under way in Iraq, the country is set to experience a major construction boom over the next few years.
This will require ready access to millions of tonnes of key building materials such as steel and cement.
In addition to sourcing reliable imports, the Gulf state needs to increase domestic production of cement and steel considerably in the years ahead in order to supply the construction industry with essential building materials.
It is not going to be easy. The contribution of industry to Iraq’s economy is woefully small. At present, the sector accounts for about 1.7 per cent of gross domestic product, compared with 13.9 per cent in the late 1980s.
Power shortage in Iraq
The reasons for the decline are myriad and have hit the whole industrial sector, not just the metals and cement industries.
An acute shortage of power is cited as the number one problem affecting the development of the industrial sector.
“Iraq needs to reindustrialise itself from scratch,” says Ameen Killidar, managing director of London-based investment company MerchantBridge. “And to do this, the country is going to need an uninterrupted power source.”
At present, demand for electricity in Iraq stands at 13,000MW and is forecast to rise to about 18,000MW by 2015. But power generation is currently less than 10,000MW. While Baghdad is confident the independent power projects it plans to execute will be able to meet demand by 2014, interruptions to supplies are expected to continue until then.
Despite such concerns, the expected surge in demand for construction materials means investment in manufacturing plants in Iraq is now on the rise.
South Korea’s STX Heavy Industries (STX) has signed up to be the lead contractor on a $3bn steel mill rehabilitation scheme in Basra. The firm intends to overcome the power shortage by installing its own independent power supply. STX has said a 500MW power plant will be needed to support the steel mini-mill that contains an electric arc furnace and a caste house for long products, which the company will build alongside a new steel shop.
When completed, the Basra mill will have a capacity of 1.2 million tonnes a year (t/y) of iron bars, 600,000 t/y of section steel, and 1.2 million t/y of hot-rolled products. The State Company for Iron and Steel will operate the plant.
“STX has been very canny with this deal,” says a Middle East-based steel source. “Basra is a relatively safe area to carry out a project and the firm will be hoping that if it proves itself with this job, then it will be in a good position to carry out others when the security improves.”
Iraq needs to reindustrialise itself … the country is going to need an uninterrupted power source
Ameen Killidar, MerchantBridge
Major international steel manufacturers are also beginning to take a serious look at Iraq. Luxembourg-based ArcelorMittal has teamed up with Turkey’s Dayen to build a $130m steel mill fed on scrap metal at Sulaimaniyah in northern Iraq. “One of the main attractions in Iraq is the enormous amount of scrap metal that is available,” the steel source says. “While power supply is a problem, scrap metal is abundant across the country.”
Security is another major reason why an estimated 70 per cent of companies working within Iraq’s industrial sector have ceased operations, according to government figures.
This includes terrorist attacks, theft of raw materials and vandalism. During the height of the violence, many industrialists were also the targets of kidnap attempts, which caused them to flee to neighbouring countries to ensure the safety of their families.
Improved security in Iraq
Security has improved significantly in the south of Iraq and in the semi-autonomous Kurdistan region. Of the reported incidents of violence in Iraq during 2010, only 5 per cent occurred in the south, with 2 per cent in Kurdistan. The improvement in the security situation makes it possible to execute projects in Basra and northern Iraq.
“Despite the fact that there are still a few hot-spots, the Iraq government is succeeding in increasing security,” says Killidar. “And as it improves you will see more and more projects start to proceed.”
MerchantBridge is itself investing in several cement projects in Iraq in anticipation of a surge in demand triggered by the reconstruction effort. The investment house has teamed up with French cement giant Lafarge to undertake the $200m Karbala cement rehabilitation project.
Iraq should build on its strengths and move downstream as soon as it can. It is the natural progression for them
Samuel Ciszuk, IHS Global Insight
The plant, which the joint venture partners have leased from the Iraq government for 15 years, will add an additional 2 million t/y of cement production to Iraq’s current capacity of just under 16 million t/y. Work has already started and is due to be completed in March 2013.
Lafarge’s ambitious expansion plans will boost its production in Iraq to 10 million t/y. The firm currently produces about 4 million t/y, which amounts to about 25 per cent of the country’s total cement output.
Iraq cement production
MerchantBridge and Lafarge are also planning a 2 million-t/y greenfield cement project in Karbala. Killidar says that construction will begin after work on the Karbala rehabilitation scheme is well under way.
Both the Karbala cement plants were part of the licensing round conducted by Iraq’s industry ministry in 2005. The licences were issued for rehabilitation of existing facilities, as well as for new projects in the country. Many cement facilities were badly damaged or looted during the years of conflict and operation and maintenance was neglected. As a result, many plants are sitting idle or running below capacity.
Cement production is vital for Iraq’s reconstruction effort. Baghdad has outlined an extensive rebuilding programme, with 4 million new houses planned, along with hundreds of public buildings, such as schools and hospitals.
If all the existing cement plants in Iraq are rehabilitated, production will increase to about 15.4 million t/y. Another 25 million t/y of capacity will be added if all the new cement projects planned are built.
While steel and cement are essential for the rebuilding programme, Iraq also needs to revive other industrial sectors.
Industry experts say developing downstream hydrocarbons should be a long-term priority for Baghdad. Without a downstream industry, Iraq will continue to export crude to countries with huge petrochemicals industries, such as China, and buy back millions of tonnes of plastic products at a huge additional cost. The country produces enough oil to service both large-scale crude exports and a domestic petrochemicals industry, which would also supply the construction sector.
“Iraq should build on its strengths and move downstream as soon as it can,” says Samuel Ciszuk, Middle East energy analyst for London-based consultants IHS Global Insight.
“It is the natural progression for them, although many of their neighbours in the Gulf have similar plans.”
Killidar agrees that the petrochemicals industry remains the logical choice for expanding manufacturing and creating employment opportunities. However, he says steps will need to be taken by the government to protect fledgling industries.
“From a commercial point of view, the Iraqi industry has been completely devastated thanks to the previous regime and decades of conflict,” he says. “For Iraq’s industry to come through a period of resurgence and compete on an international level it is going to take some sort of protection from the government.”
According to regional projects tracker MEED Projects, Iraq has just three planned petrochemical projects that are worth a combined $9.2bn.
One way of developing the country’s industrial base would be to offer the private sector support similar to that offered by the Saudi Industrial Development Fund (SIDF). The SIDF offers loans of up to $160m for projects in the kingdom, depending on the scheme’s scope.
“A fund like the SIDF would be an important way to promote private sector business in Iraq and an excellent impetus for progress,” says Killidar. “In my opinion it is too early, but even some form of guarantee would be better than nothing. The lack of credit lines open to businesses at the moment is slowing progress.”
Baghdad has put self-sufficiency as a key element of its reconstruction programme and it is actively encouraging foreign investors to execute industrial projects. Firms such as ArcelorMittal, Lafarge and MerchantBridge have identified Iraq as a key area for growth.
However, it will be several years before domestic production is able to meet the needs of the local construction industry. In the meantime, imported building materials will have to plug the gap.