Across the Gulf, governments are seeking to diversify their hydrocarbons-dominated economies by promoting investment in industrial sectors such as petrochemicals, manufacturing and mining. The UAE is no different.

The objective is to develop mature, diversified economies that are less vulnerable to energy market volatility, and which, most importantly, can provide jobs for the region’s rapidly growing young population. For the UAE, the development of the industrial sector is seen as vital to addressing both issues.

To encourage this, the UAE government is planning to pass new legislation to better regulate the industrial sector. This includes plans to establish the Emirates’ Authority for Industrial Development, which will supervise industrial expansion.

Better regulation will make the sector more attractive to foreign investors and reduce any counter-productive rivalry between the emirates. Buoyed by significant government expenditure and cheap energy, the UAE’s industrial output is predicted to grow phenomenally when major projects are completed.

However, it will not be easy. A limited local market for manufactured goods could restrict its development. “The GCC is not a huge consuming market from a global perspective,” says Armin Schmiedeberg, senior partner and managing director, Abu Dhabi and Dubai, for the Boston Consulting Group.

He sees a future in which GCC countries will “supply the world with intermediate products, and will do that very competitively”. This competitiveness is enhanced by the creation of dedicated industry clusters based around major infrastructure developments, especially ports.

However, a lack of qualified contractors and specialised equipment has radically inc-reased engineering, procurement and construction (EPC) costs, and may delay some of the larger projects.

With many qualified plant engineers locked into employment for the next three to five years, this is becoming a serious constraint for companies bidding for EPC contracts. In some cases, schemes may have to be postponed to give the market time to cool off, and for prices to drop. Despite this, the UAE’s recent industrial development is impressive.

Construction boom

Cement manufacturing is one of the federation’s oldest sectors, with commercial production starting in the early 1970s. The UAE and Saudi Arabia are setting the standard for expansion, with the biggest increases in cement production in the region.

The construction boom is playing a major role in raising domestic demand. In three years’ time, both the UAE and Saudi Arabia will account for 90 per cent of the GCC cement market.

With $6.7bn being invested in planned projects across the region, the industry is preparing for an unprecedented build-up in production. About 29 schemes are planned or under way. Output will more than double to about 106 million tonnes a year (t/y) in 2010 from 50 million t/y today.

Among the first firms to emerge in the UAE were Ras al-Khaimah’s Union Cement Company in 1972; Al-Ittihad Cement Company in 1975, also based in Ras al-Khaimah; the Sharjah Cement & Industrial Development Company in 1976; Emirates’ Cement Factory in Al-Ain in 1976; and Fujairah Cement Industries in 1979.

Aluminium is one of the federation’s main industrial products, and Dubai Aluminium (Dubal) has historically dominated the market. Dubal has entered a joint venture with Abu Dhabi-based investment company Mubadala to build an $8bn smelter at Taweelah. And the newly formed industrial conglomerate Abu Dhabi Basic Industries Corporation (Adbic) is negotiating a deal with Australia’s Rio Tinto to develop a facility at Ruwais.

Light industry is developing in the northern emirates as the number of textile, furniture and foodstuff factories increases. The time is right for the UAE to take advantage of cheap energy supplies and global markets keen to secure industrial products from the region.

Despite all the difficulties, new regulation and growing private sector interest are creating a positive outlook for the industrial sector in the UAE.

Key challenge

To co-ordinate investment in new industries to ensure inter-emirate competition does not become another hurdle to overcome.

TABLE: The UAE’s industrial centres

Ajman Fujairah Jebel Ali Mussafah Ras al-Khaimah Ruwais Sharjah Taweelah Umm al-Qaiwain
Aggregate
Aluminium
Building materials
Cables
Cement
Ceramics
Fabrication
Fertilisers – /td>

Glass
Iron
Petrochemicals
Pharmaceuticals
Plastics manufacturing
Shipbuilding
Steel
Sugar refining
Textiles

Source: MEED

Case study: Adbic

Abu Dhabi Basic Industries Corporation (Adbic), a newly formed industrial holding company, plans to redefine Abu Dhabi’s industrial sector. The company was set up in March and its mandate closely follows that of the Saudi Basic Industries Corporation (Sabic). It will invest in the aluminium, steel, cement and petrochemicals sectors, and will promote downstream manufacturing activities in metals and plastics.

The establishment of Adbic is part of Abu Dhabi’s drive to restructure the emirate’s economy. Attracting private sector participation and encouraging the growth of the underdeveloped western region are important elements of this strategy.

Adbic will operate as a holding company and bring in existing industrial projects, in addition to partnering with private investors to develop new initiatives. The local Emirates Steel Industries, formerly a part of the government-owned General Holding Company, is one of the first additions to the emerging company’s portfolio.

Adbic plans to spend $23bn over the coming seven to nine years to develop new manufacturing industries in the UAE, according to chief executive officer Jim White. Its first major project is the development of an aluminium smelter on a 50-square-kilometre plot of land at Ruwais. This will be undertaken in partnership with Australia’s Rio Tinto. Negotiations between the firms to establish a joint venture to develop the multi-billion-dollar project are in the final stages, although they have been complicated by Rio Tinto’s acquisition of Canadian mining giant Alcan. If construction begins in 2008, however, the first aluminium is expected to be produced in late 2011.

The project will consist of three phases, each with a capacity of 700,000 tonnes a year. The first is expected to cost $5bn. There are also plans to invest up to $3bn in a steel plant in Abu Dhabi, says White. HSBC is arranging the $850m in pro-ject finance needed to fund the first phase, which will produce 2 million tonnes of rebar and rod.

In the downstream chemicals sector, Adbic is set to take responsibility for speciality chemical production at the planned Ruwais aromatics plant. Majlis Investments, another state-linked entity, will be responsible for intermediate base chemical output.