Oman’s industrial hub shapes up

04 October 2012

Sohar is the focal point for Oman’s industrial strategy and the port’s new free zone aims to add value to the existing businesses there. But can Sohar compete on a global scale?

Sohar, Oman’s biggest industrial hub, has endured a challenging couple of years. In 2011, the shooting of two protesters triggered demonstrations across the country. In May, the port city was hit by waves of strikes and protests as thousands of workers took to the streets to demand better pay and working conditions.

These are the growing pains of an area that has transformed over the past decade from a sleepy port and shipping town into the centre of the country’s industrial development strategy. As Muscat plans to boost Sohar’s profile further in the coming years, new challenges will have to be overcome.

Quick progress

“[When] the Port of Sohar was starting off six years ago, it was greenfield, quite a lot of it sand and less infrastructure,” says Neelima Vyas, chief operating officer at Sohar Freezone, and former chief financial officer at Sohar Industrial Ports Company (SIPC), the firm that runs the port and the freezone.

Although the port was first conceived by a Japanese development agency in the early 1990s, it was 1999 before construction work on the modern port started and 2004 before its general cargo operations began. In 2002, Muscat forged an agreement with the Netherlands’ Port of Rotterdam to set up SIPC, a 50:50 joint venture company to operate and develop the facility.

Today, cargo accounts for just a small fraction of the port’s overall workload, thanks to the entry of what was Sohar Refinery Company. In 2003, the state-run firm signed an agreement with SIPC to build a new refinery, Oman’s second, at the port. In 2006, work was completed on a 266-kilometre pipeline connecting Sohar with the Mina al-Falhal refinery and oil distribution hub in Muscat. Shortly after, the Sohar refinery was completed, along with a polypropylene plant then run by Oman Polypropylene Company, a public-private venture operated with South Korea’s LG International.

Sohar had become a refining and petrochemicals hub, which in 2010 was complemented by the addition of an aromatics facility run by Aromatics Oman, another partnership with LG. In 2011, Oman’s refinery and petrochemical assets were all merged under the banner of Oman Refineries and Petroleum Industries Company (Orpic).

In 2008, Sohar Aluminium, a joint venture of Oman Oil Company (40 per cent) Abu Dhabi National Energy Company (Taqa) (40 per cent), and Montreal-headquartered Rio Tinto Alcan (20 per cent), started up a 360,000 tonnes a year (t/y) aluminium smelter.

Both Orpic and Sohar Aluminium are in the process of expanding their facilities. Orpic is undertaking a $1.5bn expansion of its refinery complex and Sohar Aluminium is investing $2.4bn in the expansion of its smelter complex. Both companies hope to award construction deals on the projects by the end of 2013. Meanwhile, the local Khimji Ramdas Shipping is working in partnership with India’s Tata Steel to build a new dry bulk port facility to handle the export of minerals.

The port’s cargo operations are also likely to get a boost as Muscat’s main facility, Port Sultan Qaboos, is wound down and its business transferred. The port will be converted into a high-end tourism and housing scheme. Vyas thinks this should take about 18 months to complete, but other executives remain sceptical as to how quickly it can be completed.

But what excites Vyas more than anything is the potential of the port’s new freezone. “It is a rather young organisation, which we call phase two of the Sohar Industrial Port,” she says. “It focuses on small to medium enterprises. That is where you have greater value addition and you create greater employment opportunities. When we have this huge industrial base – the refinery, the metal and mineral cluster, logistics – it creates an automatic market. You can tap into the feedstocks for raw materials.”

Future scope

Vyas breaks the freezone’s potential clients down into three groups: downstream metals and minerals processors, light metal manufacturers and logistics firms.

Among the most exciting prospects at the freezone currently are the firms making use of Oman’s abundant chrome resources. Oman accounts for 11 per cent of global raw chrome supply, but until now has not had a dedicated smelter to turn it into ferrochrome, which is used in the production of stainless steel.

Three companies are currently working on ferrochrome schemes. In 2011, the local Muscat Overseas Group and India’s Indsil Group announced plans to build four smelters at a total cost of $80m by the mid-2010s. It is currently in the process of building two smelters capable of producing 75,000 t/y of ferrochrome at a cost of $30m. The smelters are expected to be operational by mid-2013.

In 2012, two more companies, the local Gulf Mining Materials and India’s Metkore Alloys and Industries, announced plans to build smelter units. Gulf Mining hopes to complete a 50,000 t/y unit by the end of 2013, while Metkore is planning to complete a 165,000 t/y unit by 2015, at a cost of $78m.

Interest in ferrochrome is likely to play a big part in the future development of the freezone. “Oman has always had chrome, but they would mine it and just export it before,” says Vyas. “It has been very valuable to turn into ferrochrome. The first client increased the interests of others, like an anchor and that led to several others looking to process concentrate.”

Another major investor in the port and free zone is Shadeed Steel, a subsidiary of India’s Jindal Group, which started up a $700m steel plant at the port in 2008. The company is in the process of a $400m expansion of its facilities and, in early 2012, signed up Italy’s Danieli to further expand the plant at a cost of $600m.

Gas feedstock in Oman

Further growth of metals projects in Sohar could be limited by constraints on gas supplies. Metals production is energy intensive, and while the area is supplied with gas from a major pipeline linking Sohar with the Fahud gas supply hub, businessmen in Oman say it is becoming difficult to obtain gas agreements from the government and Oman Gas, the state-run producer and supplier.

Meanwhile, despite talk in the past that the area could become a hub for petrochemicals production, executives at the port do not discuss the potential for downstream plastics.

“If I am an oil producer with a relatively attractive cost of production, the question in part is, how dependent do I want to be on oil and gas?” says Paul Hodges, chairman of UK-based petrochemicals consultancy International Echem. “It’s actually a difficult question, because there is definitely a market for oil, for [gasoline product] naphtha and so on, but where is the market for all these other products? You have to look at the base case for just selling the oil and then ask where the added value is and what the social needs are. You have to be careful that you do not end up creating value destruction rather than addition.”

The social aspect of industrial development is an important one, says Vyas. “Our primary focus is not commercial,” she says. “You do need to get your bread and butter so you need your liabilities covered. The main priorities are; how do you contribute to the nation and add employment [both] direct and indirect.”

Part of what the port and freezone have provided, she says, is a growing number of residents in the area. “Most of the people live in Sohar and we have seen social and economic development in Sohar – international schools, hotels and restaurants, malls,” she says. “You see fewer people commuting between Sohar and Muscat.”

The development is yet to lead to a corresponding increase in demand for accommodation and housing, says Benjamin Cullum, general manager of the Oman branch of UK real estate agency Hamptons. “The majority of the expats I know who live in Sohar [still] have a weekly commute,” he says. “There is quite a big oversupply of residential stock.

“Prices rose quickly during the boom times with the expectation of all the business it was going to be bringing in. It is pretty easy to build a house, but it’s much harder to build an industrial facility. The houses were built, but [some of] the facilities weren’t.”

Stability key

Perhaps the most important thing for Sohar, says an Omani businessman, will be the level of stability seen in the coming months. Tensions are high in Oman as social issues come to the fore. Many national workers in Sohar complain that they are not paid well enough and that their working standards are well below those in Europe and the US.

“If the strikes and the tensions continue, then it will be difficult to attract new investors or reinvestment,” the businessman says.

Key fact

Oman accounts for 11 per cent of global raw chrome supply

Source: MEED

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