Downstream Flows

Adynamic industrial sector that produces value-added goods is one of the Qatari government’s main goals as it seeks to diversify its economy away from oil and gas. The Gulf state has faced challenges as it seeks to implement this, but it also has a host of well-established relationships with key countries and private firms and a forward-thinking government that is committed to making the necessary investments needed for change.

CHEMICALS

While hydrocarbon production continues to be the dominant industry in Qatar, a concerted diversification effort has resulted in significant growth in the non-oil sectors of the economy. 2015 saw the non-hydrocarbons sector’s share of GDP rise to 63.8%, up from 49.8% in 2014. Services have been the largest contributor to this growth, but an emphasis on developing the country’s industrial sector has played a major role as well. One of the first steps taken was to build upon the nation’s hydrocarbons industry, moving down the production chain to add value by refining petroleum products. This was a natural step in many ways due to the preexisting knowledge base in the sector and the ability to further take advantage of Qatar’s ample natural resources. Firms have sprung up in these sectors, mostly geographically concentrated around the ports that have been hubs for petrochemical transports. Industries Qatar, for example, is a conglomerate that counts significant investments in the petrochemical industry; its subsidiary Qatar Petrochemical company is one of the world’s leading producers of low-density polyethylene.

Yet the connections to the petroleum industry that make the petrochemicals sector such a natural fit for Qatar bring their own drawbacks. The linkages between the two are close enough that the petrochemicals industry is susceptible to the same fluctuations in the price of oil and natural gas, at times defeating Qatar’s efforts at diversification. In 2016, for example, Industries Qatar posted a profit of QAR3 billion, down 34% from 2015, and much of this decrease can be attributed to the same declines in the price of oil that impacted Qatar’s petroleum industry. Ethene, a petroleum refining byproduct that is a key input for petrochemical production, was in shorter supply as oil production shifted. More generally, the fiscal shortfalls and reduced activity that came with the drop in the oil price led to reduced investment that was even more pronounced in downstream industries; a joint petrochemicals facility with Shell that was canceled in 2015 due to concerns about falling oil prices is just one example of a major project in the industry that has fallen through due to these external forces. However, there are signs that 2017 will bring better times. The price of oil has risen slightly due in part to OPEC cuts, and the petrochemicals sector has improved accordingly. Industries Qatar reported a 33% rise in net profit in the first quarter of 2017, earning QAR928 million and exceeding analysts’ expectations. Industries Qatar also signed an agreement with Qatar Petroleum in April 2017 that calls for the petroleum producer to increase ethane supply to Qatar Petrochemicals by 10% in an effort to raise efficiency and productivity and strengthen both sectors. Agreements like these should help the petrochemicals sector remain a key part of the Qatari economy.

Elsewhere in downstream industrial production sector, Qatar’s chemicals sector has grown in recent years thanks to many of the same reasons. In 2014, 3.19% of Qatar’s exports were chemicals, with the majority coming from fertilizer and ammonia. The Qatar Fertilizer Company is home to the world’s single-largest urea site and recently added more than 4,400 metric tons per day of ammonia to its production capacity. Chlorine, ethylene, and sulfur are also all produced on large scales on industrial sites near crude exporting facilities, and have benefited considerably from the Qatari government’s announcement in 2014 to increase annual chemical production from 10 million tons per year to 23 million by 2020. Still, the problems that have affected the petrochemical industry are present here as well. Though not as directly dependent on petroleum outputs as petrochemicals, the fall in oil prices has led to the cancellation of the USD6-billion Al Sejeel chemical project, and the sector as a whole has had to deal with decreased demand. When it called for production to more than double by the end of the decade, Qatar’s chemical industry was enjoying massive demand from China and India for the chemicals needed for construction, and industrial operations that come with wide-scale development. As the price of oil dropped, however, global demand for Qatar’s chemical exports fell as economic activity fell, leading to supply surpluses that further drove down prices. 2017 has seen the chemicals sector get leaner and more efficient with an emphasis on cutting production costs; Qatar Petroleum merged two chemical production operations into Qatar Petrochemical in an effort to increase margins in the face of declining exports.

METALS

The majority of Qatar’s manufactured goods exports consist of metal goods, which have a long history in the country—Qatar Steel, today a subsidiary of Industries Qatar, was the first integrated steel plant in the Arabian Gulf when it opened in 1974. Since then, the steel, iron, and aluminum industries have been a significant source of labor and industrial activity, supplying construction goods both domestically and abroad. Qatalum, Qatar’s primary aluminum plant, has become a global leader since its establishment in 2006. A joint venture between Qatar Petroleum and Norwegian firm Norsk Hydro, Qatalum produces more than 610,000 tons of aluminum products per year. “Although about of 95% of our production is for exports,” Qatalum CEO Khalid Mohamed Laram told TBY, “Quatalum’s mission is also to support the downstream industry of Qatar.” In practice, this means that Quatalum is uniquely involved in both domestic and international industry, working with global automobile manufacturers to meet supply needs and local Qatari construction firms to increase the use of aluminum in building materials. With exports to more than 50 countries, Qatar’s aluminum industry is one of the most successful examples of how diversification can work: Qatalum’s technological capabilities and extensive international connections have given it a stable base of partners, and that same expertise has been put to use within the country to increase standards and construction quality.

Still, the sector is not immune to some of the same forces that have affected the country as a whole. “Aluminum demand is volatile,” Laram noted, and global economic shifts have affected the construction and automobile industries. Construction slowed during the global economic downturn and has not returned to pre-2008 levels in many areas, but rapid growth in automobile production in major Chinese and European markets have helped to counterbalance this. China recently saw passenger car sales growth reach double digits after a sales tax cut, and strong demand on this side is one of the reasons that Quatalum has devoted much of its energy to the automobile sector in recent years. “Over the last three years we decided to mainly focus on the automotive sector,” Laram told TBY, “which currently absorbs 65% of our production. Our goal is to continue expanding and to ensure that the car industry is a great consumer of aluminum… Almost 50% of our production goes to Asia.” The strategy has appeared successful thus far, with exports of unwrought aluminum rising 20.6% YoY in 1Q2017 and non-ferrous metals (a category that includes finished aluminum and aluminum alloys) rising 21.2% in the same timeframe. In the longer run, the aluminum industry expects global demand to continue growing steadily and reach 70 million tons by 2020. With technologically up-to-date facilities and a strong support structures in the Qatari government and the Gulf Aluminium Council—a joint group that coordinates the interests of the Gulf’s largest aluminum producer—Qatar’s aluminum industry looks well positioned for the future.

GCC TENSIONS

Gulf integration has helped build Qatar’s chemical and metal industries, but the political tensions that are a longstanding part of the region bring their own risks as well. In June 2017, Qatar found itself suddenly cut off from the rest of the Arabian Peninsula when a group of countries led by Saudi Arabia cut diplomatic and trade ties over political differences. The GCC represented 7.7% of all Qatari exports and 17.4% of Qatari imports in 1Q2017, so the immediate severing of all trade was a heavy blow for Qatari industry. While Qatari officials reported that the blockade was having a limited effect on the country’s economy thanks to the immediate substitution of alternative supply chains, the disruption speaks to a larger issue about the nature of instability in the region and the importance of developed domestic markets. The regional unity that makes the GCC’s aluminum sector a global force will be needed in other industries to reach the diversification goals that Qatar possesses, and conflicts such as these are a significant step back in this regard. The loss of key trading partners also reinforces the need for robust domestic markets. “There is a gradual growth in demand in the country,” Laram told TBY, “which is a positive indicator for the future,” but exports accounted for 56% of GDP in 2015—well above OECCD and MENA averages. Giving the industrial sector a stable base of domestic demand would be a major step forward for Qatar’s goals of prosperity and self-sufficiency.