Trade and Export Middle East | September 2013

ISSUE 20 | September 2013

BUSINESS INTELLIGENCE FOR INTERNATIONAL TRADE

Promoting UAE’s trade Minister of Economy, H.E Sultan bin Saeed Al Mansouri gives an exclusive interview about the trade and investment scenario in the country PUBLICATION LICENSED BY IMPZ

www.tradeandexportme.com

EDITOR’S LETTER

Winds of change…

As we wrap up our September issue, this region is witnessing a lot of changes – How will that impact the Middle Eastern economies in the long run is anyone’s guess.

Publisher Dominic De Sousa Chief Operating Officer Nadeem Hood Managing Director Richard Judd richard.judd@cpimediagroup.com +971 4 440 9126 EDITORIAL Senior Editor Aparna Shivpuri Arya aparna.arya@cpimediagroup.com +971 4 440 9133 Business Assistant Adelle Louise Geronimo adelle.geronimo@cpimediagroup.com +971 4 440 9160 ADVERTISING Media Sales Executive Ibrahim Parwaz ibrahim.parwaz@cpimediagroup.com +971 4 440 9135 PRODUCTION AND DESIGN Production Manager James P Tharian james.tharian@cpimediagroup.com +971 4 440 9146 Database and Circulation Manager Rajeesh M rajeesh.nair@cpimediagroup.com +971 4 440 9147 Head of Design Fahed Sabbagh fahed.sabbagh@cpimediagroup.com +971 4 440 9107 Designer Froilan A. Cosgafa IV froilan.cosgafa@cpimediagroup.com +971 4 440 9107 Photographer Jay Colina Abdul Kader Pattambi DIGITAL SERVICES www.tradeandexportme.com Digital Services Manager Tristan Troy Maagma

The tense situation in Syria and Egypt has impacted other economies with a fall at the stock exchange in the UAE and a surge in oil prices. With UAE and Qatar’s entry as “emerging markets” on the MSCI Index just a few months ago, this news doesn’t sound very promising. This could also affect future investments, if a foreign investor were to look at the region in totality and not on a country-tocountry basis. So with Syria and Egypt on an economic precipice it is indeed a sombre mood in this part of the world.

However, as it is often heard – change is the only constant in life. So hopefully these gloomy clouds will also pass and these economies will take a turn for the better. In the meanwhile, it is our job to do whatever little we can do to promote trade and business in the region. We have been through tougher times and this too shall pass.

And keeping up with this spirit, our cover story this month, is an exclusive interview with H.E Sultan bin Saeed Al Mansouri, Minister of Economy, UAE, about the trade and investment scenario in the country. It was reassuring to know that the country can weather regional and global crisis and still come out fine.

We also got talking to the CEO of Katara Hospitality, Hamad Abdulla Al–Mulla to understand the extraordinary growth of this company, not only in Qatar but also globally. These stories are testament to the vision and tenacity of this small country and the faith it puts in its people.

And while we also have some interesting stories on the MSCI Index, Islamic finance, commodities trading and the movement of currencies in September, we have also been working hard on our event at the end of September. With only a month to go for the PRO ECUADOR event on the 29th of September, we are very excited about the interest being shown by our readers.

If you would like to attend the event, please do check the details on our Website or drop me a line.

Until next time.

Web Developer Abey Mascreen online@cpimediagroup.com +971 4 440 9100 Published by

Aparna Shivpuri Arya, Senior Editor, Trade and Export Middle East Registered at IMPZ PO Box 13700, Dubai, UAE Tel: +971 4 440 9100 Fax: +971 4 447 2409 Printed by Printwell Printing Press © Copyright 2013 CPI All rights reserved While the publishers have made every effort to ensure the accuracy of all information in this magazine, they will not be held responsible for any errors therein.

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SEPTEMBER 2013

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12 20 SEPTEMBER 2013

updates

ISSUE 20

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trade talk

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SEPTEMBER 2013

34

06

News: International news and trends with domestic trading relevance.

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EVENTS CALENDAR: A snapshot of exhibitions and conferences around the region, which can help you spend less time planning and more time attending.

INTERNATIONAL TRADE Emerging markets: With the recent move of Qatar and the UAE to the ‘Emerging Markets’ category in the MSCI Index, there is a lot of talk about the impact of this development. We try and understand what it means for these two economies and the region.

14

ECONOMIES: The Open Market Index, published by the International Chamber of Commerce (ICC) highlights the extent to which governments are following through on their commitments to create genuinely open economies. We bring you a synopsis of the report.

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UAE’s trade pattern: In this article Michael Gasiorek, an international trade specialist, examines the changing composition and competitiveness of the UAE’s exports – excluding petroleum and gas.

20

INTERVIEW Minister of Economy: In an exclusive interview, Aparna Shivpuri Arya got the opportunity to speak to H.E Sultan bin Saeed Al Mansouri, UAE Minister of Economy, to know his thoughts on how the country is doing when it comes to trade and investment.

trade talk

CONTENTS

24

28

30

34

focus

48 38

Deal with competition: Dr. Ashraf Mahate, Head, Market Intelligence, DED, tell us how to deal with too many players in your field.

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LEGAL: Many business professionals establish their ventures under a corporate or limited liability structure in an effort to protect their personal assets from claims made by internal and/or external forces. Paul Saba, Senior Associate, Al Tamimi & Co., looks into how a company can be held liable for its actions.

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48

Katara hospitality: “We have a passion for the extraordinary”, says Hamad Abdulla Al- Mulla, CEO, Katara Hospitality in an interview with Aparna Shivpuri Arya about what makes Katara Hospitality stand out!

FINANCE Islamic finance: In the second of a multi-part series, Ehsan Ahmed, Global Transaction Services and SME Head at Noor Islamic Bank PJSC explains how Islamic finance is a very viable option for international trade transactions.

Currencies: Western Union Business Solutions (WUBS) team gives us the low down on the Euro, the Pound and the US Dollar.

STRATEGY How to handle commodities?: Commodities are generally considered to be speculative investments. To a certain extent this is true but there are highly sensible ways in which investors can use commodities to reduce their long-term investment risks. In the Part II of this series, John Butler, CIO, Amphora explore how this can be done in practice.

INDUSTRY WATCH Canada’s mining industry: Canada, with its many competitive advantages and rock-solid economic fundamentals, should be one of the front runners on your short list of locations. We take a look at what opportunities this sector offer for foreign investments.

Energy: Amrita Sen, Chief Oil Analyst at Energy Aspects talks to us about the oil market in Kingdom of Saudi Arabia (KSA) and the challenges and opportunities in this industry.

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5

Updates Regional news

KSA exporters seek new markets

Qatar’s outward FDI flow declines Foreign Direct Investment (FDI) flows from Qatar to other countries declined by 8.5% to USD 1.8 billion, last year.

Meanwhile, the inward fund flow saw a marginal increase of 0.6% to USD 327 million, the United Nations Conference on Trade and Development (UNCTAD) said in its “World Investment Report 2013.”

UNCTAD’s country fact sheet on Qatar’s ‘cross-border merger and acquisition’ shows Qatar’s net purchase reached USD 4.61 billion in 2012.

The report noted FDI flows from the GCC to other countries declined last year, by 17.7% to USD 18.6 billion. Kuwait was once again the largest investor overseas, accounting for 41% of outflows with USD 7.6 billion, followed by Saudi Arabia with USD 4.4 billion and the UAE with USD 2.5 billion.

Overall, the FDI in the GCC in 2012 increased slightly over the previous year to reach USD 26.4 biliion, bringing to an end three consecutive years of declining FDI flow to the region since the pre-financial crisis peak of USD 61.7 billion in 2008.

USD 1.9 billion value of business opportunities from Qatar Rail

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Saudi exporters say they are seeking new alternative markets to those witnessing unrest and political upheavals that have affected the outflow of their exports.

They stated that the African markets are their best choice for the time being and in the future. The African markets, they pointed out, are still under matured, and anyone having access and the capabilities to establish a marketing base there will be a winner in the next few years.

Saudi non-oil exports took a rising trend last June (6.4%) with the announcement of the authorities in the country of a historical industrial project worth more than SAR 327 billion.

Dubai Chamber launches an online business portal As part of its strategy to expand its global membership base and to promote Dubai as a major destination for business and finance, the Dubai Chamber of Commerce and Industry launched an online business community, International Business Network (IBN), for global businesses looking to expand their footprint in Dubai and to do business in one of the fastest growing economies in the world.

The online network, which also comes as part of the Chamber’s strategy to enhance the competitiveness of Dubai businesses in the overseas markets, offers a wide variety of benefits currently available only to Dubai Chamber members including business setting up advice, business matching opportunities with potential local partners, contract drafting services for new businesses, use of the Chamber’s business lounges and meeting facilities, and discounted rates for networking events and business conferences.

KSA’s attempt to move beyond oil A USD 22.5 billion plan to build Riyadh’s first metro rail system aims to achieve more than improving the quality of life in the congested Saudi capital. It is part of an ambitious effort to shift the country’s economy beyond oil.

The government awarded contracts for the system to three foreignled consortia. Six rail lines carrying electric, driverless trains and extending 176 km are to be completed by 2019.

Updates Regional news

Qatar and Singapore promote bilateral ties

Middle East’s energy sector unshaken Research conducted by marketing communications consultancy Orient Planet shows that upcoming upheavals to the international oil supply chain will significantly impact the global economy and oil security. These movements, however, will not be enough to displace the Middle East as a global leader in oil, in particular, and energy in general. Aside from having the largest proven crude oil reserves in the world (66% of reserves of OPEC

members), the region enjoys close proximity to – and strong economic and cultural ties with – oil-hungry markets such as China and India. China alone is projected to account for half of global oil demand growth in the next five years.

Moreover, the report notes that the Middle East has had the foresight of broadening its energy horizons to include alternatives such as solar, wind and nuclear power. In addition, while the region has vast oil reserves, it has not yet maximised its production potential. It can still boost output to match surges in global demand as opposed to other countries where production is already at, or near, peak levels.

Companies submit tender for Bahrain’s airport expansion At least five companies are competing to design a major expansion of Bahrain International Airport, which includes a new terminal and could cost up to BHD 20 million (USD 52.8 million), a report said.

They have already submitted tenders to Bahrain Airport Company (BAC) for the first step of

the overhaul project.

Talks about the scheme have been underway since 2011, but were pushed back due to several issues, including Gulf Air’s threeyear restructuring programme.

The 50% expansion is being carried out in co-operation with Mumtalakat and Transportation Ministry.

Qatar and Singapore have explored various “synergistic opportunities” in recent years resulting in surge in bilateral trade and development, according to Doha Bank Group CEO R Seetharaman.

Highlighting that Qatar is Singapore‘s 21st largest trading partner with total trade at SGD 9.8 billion, he said bilateral trade has increased by more than 26% during 2010-12 mainly on account on increase in exports by Qatar.

“Singapore has emerged as a strategically important hub for Qatar’s LNG exports to the region,” Seetharaman said at a recent knowledge sharing session hosted by the bank on “Opportunities in Qatar and the GCC (Gulf Co-operation Council)” .

DED sets up new centre for business registration and licensing The Business Registration and Licensing (BRL) sector in the Department of Economic Development (DED), Dubai, has set up an External Relations section as part of reaching out to potential investors and enabling them to set up and expand their businesses in Dubai.

The new section focuses on attending local and international exhibitions to meet investors and provide information on the business registration and licensing options available in Dubai.

SEPTEMBER 2013

7

Updates Global Watch

The world economy needs to pick up The world economy has weakened slightly this quarter, mainly due to declining optimism in Asia and Latin America, while North America shows signs of continuing recovery, according to a World Economic Survey published by the International Chamber of Commerce (ICC) and the Munich-based economic research institute Ifo. Developments in the next three months are crucial for global economic recovery.

Carried out in partnership with ICC, the latest Ifo World Economic Survey of more than 1,000 economists in 123 countries shows some decline in both the current global economic situation and the six-month economic outlook. The poll’s climate indicator dropped to 94.1 for the third quarter of 2013, back down to early 2013 levels, despite a rise to 96.8 in the second quarter.

China and Kenya enhance bilateral cooperation China and Kenya have signed a series of bilateral cooperation agreements worth USD 5 billion ranging from finance, environmental protection to renewable energy.

This was announced after the meeting of Kenyan President Uhuru Kenyatta and Chinese President Xi Jinping in the Great Hall of the People in Beijing.

The funds will be used for an energy project, and the construction of a railway project linking the port city of Mombasa to its border town of Malaba.

Increased exports from the Eurozone Exports from the 17-nation bloc rose a seasonally adjusted 3% in June from May, when they dropped 2.6%, the European Union’s statistics office in Luxembourg said.

Shipments from Germany, Europe’s biggest economy, gained 6.3%, after a 9% decline the prior month.

The Euro-area inflation rate remained at 1.6% in

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July, a separate report showed.

Europe’s economy emerged from a record-long recession in the second quarter, expanding for the first time since 2011.

Accelerating growth in the United States, the world’s largest economy, and relative calm on financial markets have helped the Euro-area begin to recover.

Updates Global Watch

New routes for LATAM IAG Cargo announced that it will offer cargo services on a new Iberia route connecting Quito in Ecuador with its Madrid hub, commencing 26th October 2013. The route will be serviced by Iberia’s largest aircraft the Airbus A340-600. This has been made possible due to the opening of a new facility in Quito capable of facilitating this large aircraft. These flights are in addition to the existing Madrid-Quito-GuayaquilMadrid flights, which will now operate four times a week, rather than the current seven. Through the IAG Cargo network, customers in Ecuador can connect to 350 destinations worldwide.

On the outward legs, the new flights will depart Madrid on Mondays, Wednesdays and Saturdays at 12:35,

arriving in Quito at 18:05. The return legs, meanwhile, will see flights depart Quito at 21:20, arriving at Madrid at 14:05 the following day. These direct flights will provide an important trade link for businesses in, amongst others, the perishable goods sector, with Holland and Spain in particular, being important export markets for Ecuadorian goods such as fresh flowers.

US and Japan reaffirm commitment on TPP Trade minister Toshimitsu Motegi and US Trade Representative Michael Froman agreed to work together toward concluding the Trans-Pacific Partnership talks by the end of 2013.

Meeting before the 19th round of the talks, which are aimed at forging one of the largest free trade areas in the world, the two reaffirmed their commitment to the target set by the 12 members of the TPP, which began more than three years ago.

India – US consider trade talks Indian Prime Minister Manmohan Singh will meet US President Barack Obama at the White House on September 27th to hold talks on trade, investment and regional security, according to an official US statement.

Singh will also attend the United Nations General Assembly in New York.

Obama had visited India in November 2010 and announced trade deals with the Asian nation worth USD 10 billion.

PetroChina explores possibility of investing in Iraq Chinese oil company, PetroChina is reportedly in talks with US based Exxon Mobil to jointly develop the West Qurna Iraqi oilfield.

The deal would make the Chinese company the biggest single foreign investor in the Iraqi oil industry.

A PetroChina official confirmed discussions were taking place to a Chinese newspaper, but noted, “It is not a good time now to release the details of the ongoing talks.”

Iraq overtook Iran last year to become the second-largest oil producer in the Organisation of Petroleum Exporting Countries (OPEC).

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Community events calendar

Save the date!

We know that you are a busy trader with a demanding events diary. Therefore, we are providing you with a snapshot of exhibitions and conferences in the region, so you spend less time planning and more time attending.

Date

Event

Location

2-4

Food and Hotel Oman

Oman International Exhibition Centre

19 - 22

PCI Abu Dhabi

Riyadh International Exhibition Centre

3-5

Gulf Glass

Dubai World Trade Centre

3-5

GulfSol

Dubai World Trade Centre

10 - 12

Materials Handling and Logistics

Dubai International Exhibition Centre

16 - 18

The Big 5 Kuwait

Kuwait

16 - 19

Saudi Agro-Food Industries

Riyadh International Exhibition Centre

19 - 22

INFDEX

Doha Exhibition Centre

22 - 25

EPICT

Dammam- Dhahran International Exhibition

23 - 25

Power + Water Middle East

Abu Dhabi National Exhibition Centre

23 - 25

MedHealth and Wellness

Oman International Exhibition Centre

24 - 26

Paper Arabia

Dubai International Exhibition Centre

25 - 26

3rd Annual Iraq Airport, Aviation & Logistics Show

Baghdad International Airport

27 - 29

World Luxury Expo Abu Dhabi

Emirates Palace

29 - 01/10

The Hotel Show

Dubai World Trade Centre

30 - 02/10

Telecoms World Middle East

Jumeirah Beach Hotel

30 - 02/10

Iraq Mega Projects

Madinat Arena

Date

Event

Location

October

3-5

Inventions and Nanotech MiddleEast

Qatar National Convention Centre

2-3

Mubadarat Forum

Jeddah Centre For Forums and Events

1-3

Private Label Middle East

Dubai World Trade Centre

4-7

Saudi Build

Riyadh International Exhibition Centre

1-5

Middle East Watch & jewellery Show

Expo Centre Sharjah

9 - 13

Irf World Meeting & Exhibition

Riyadh Intercontinental Hotel

1 - 10

Gulf expo-Qatar

Gulf expo-Qatar

9 - 13

Middle East International Motor Show

Dubai World Trade Centre

1-4

Electrolight Qatar

Doha International Exhibition Centre

10 - 13

Abu Dhabi International Petroleum Exhibition and Conference

Abu Dhabi National Convention Centre

7-9

Arabiashop

Dubai World Trade Centre 10 - 21

Real Estate Cruise

Kuwait City (TBA)

7-9

Light Middle East

Dubai International Exhibition Centre 11 - 13

Airport Exchange

Qatar National Convention Centre

12 - 14

Real Estate Fair Qatar

Doha (TBA)

14 - 15

Mena Forex Show, Managed Funds & Investment Opportunities

Jumeirah Beach Hotel

7 - 10 8 - 10

Doha International Oil and Gas Exhibition Kuwait Oil and Gas Show

Doha Exhibition Centre Kuwait International Fair Ground

8 - 10

Cityscape Global

Dubai International Exhibition Centre

8 - 10

Future Build

Dubai International Exhibition Centre

16 - 17

Real Estate Bahrain

Manama

8 - 10

Future Cities

Dubai International Exhibition Centre

16 - 19

GITEX Saudi Arabia

Riyadh International Exhibition Centre

8 - 10

Future Retail

Dubai International Exhibition Centre

16 - 19

Saudi Communications

Riyadh International Exhibition Centre

20 - 24

GITEX technology Week

Dubai International Exhibition Centre

18 - 19

Real Estate Fair Saudi Arabia

Dammam

20 - 24

Infocomm MENA 2013

Dubai World Trade Centre

17 - 21

DubaiAirshow

Dubai World Trade Centre

27 - 29

Abu Dhabi Medical Congress & Expo.

Abu-Dhabi National Exhibition Center

17 - 19

The Speciality Food Festival

Dubai World Trade Centre

28 - 29

MENA Mining Congress

Dubai World Trade Centre

17 - 19

Seafex

Dubai World Trade Centre

28 - 30

SPE Intelligent Energy

Dubai International Exhibition Centre

17 - 19

World Luxury Expo Doha

St. Regis Hotel Doha

28 - 30

Green Middle East

Expo Centre Sharjah

18 - 19

Gulf Aviation Training Event

Dubai World Trade Centre

29 - 31

NAJAH Education Exhibition - Abu Dhabi

Abu-Dhabi National Exhibition Center

18 - 23

Kuwait Internationa Property Show

Kuwait International Fair Ground

30 - 31

Middle East Big Data Summit

Radisson Blue Hotel Kuwait

19 - 23

Jewellery Arabia

Bahrain International Exhibition & Convention Centre

20 - 21

Kuwait Drill Tech Conference and Exhibition

Hilton Kuwait Resort

23 - 25

Medhealth and Wellness

Oman International Exhibition Centre

November 2-4

10

Food and Hotel Oman

Oman International Exhibition Centre

SEPTEMBER 2013

Get in touch! Would you like to list your event here? Or better still, list your detailed event profile? If yes, then please contact: aparna.arya@cpimediagroup.com

September

TRADE TALK Trade Guru

Is your stock up?

With the recent move of Qatar and the UAE to the ‘Emerging Markets’ category in the MSCI Index, there is a lot of talk about the impact of this development.

Aparna Shivpuri tries to understand what it means for these two economies and the region.

T

he index is created by Morgan Stanley Capital International (MSCI) and is designed to measure equity market performance in global emerging markets. In 1988, MSCI launched the first comprehensive emerging markets index. Since then, emerging markets have become an important and integrated part of a global equity portfolio allocation. In 1988, there were just 10 countries in the MSCI Emerging Markets Index, representing less than 1% of world market cap. Today the MSCI Emerging Markets Index covers over 800 securities across 21 markets and represents approximately 13% of world market cap.

Emerging markets are considered relatively risky because they carry additional political, economic and currency risks.

They certainly aren’t for those who value safety and security above all else. An investor in emerging markets should be willing to accept volatile returns - there is a chance for large profit at the risk of large losses.

An upside to emerging markets is that their performance is generally less correlated with developed markets. As such, they can play a role in diversifying a portfolio (and thus reducing overall risk).

MSCI regularly reviews the market classification of all countries included (or under consideration for inclusion) in its global equity universe based on extensive discussions with the investment community. Using the MSCI Market Classification Framework, MSCI examines each country’s economic development, size, liquidity and market accessibility in order to be classified in a given investment universe. Every year in June, MSCI communicates its conclusions on the list of countries under review and announces the new list of countries, if any, under review for potential market reclassification in the upcoming cycle.

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MSCI Emerging Markets Index - Current Country Coverage

The story so far….

Talking to experts in the UAE and Qatar helped us gain some understanding of how both the countries made this transition.

According to a report by Emirates NBD, MSCI stated in its 2012 review that the MSCI UAE Index meets all requirements in terms of size, liquidity and market accessibility other than specific market accessibility issues related to custody, clearing and settlement.

The UAE (which introduced DVP in 2011) made further improvements to its DVP process in May 2013, including buyer cash compensation if securities are not delivered on the settlement date.

For Qatar, MSCI stated in its 2012 review that the issue of low Foreign Ownership Limit (FOL) levels for Qatari companies was the only remaining impediment to the reclassification of the MSCI Qatar Index to Emerging Markets.

Other than the issues relating to FOLs, the MSCI Qatar Index should meet all the other requirements for inclusion in the MSCI Emerging Markets Index, as the false trade mechanism introduced on May 1st 2012 on the Qatar Exchange has been successfully tested over time.

The report also pointed out that the UAE and Qatar have been potential candidates for upgrade for several years. According to MSCI, in order to be classified in a given universe, a country must meet the requirements of all three criteria listed in the table below.

So what does this mean for these two countries?

According to Sam Vecht, BlackRock’s Head of the Emerging Markets Specialist Team and Portfolio Manager of the Frontiers Investment Trust, “The MSCI’s decision to upgrade Qatar and United Arab Emirates from Frontier Markets to Emerging Markets on Tuesday June 11th 2013, with effect May 2014, reflects a growing realisation of how far these economies and their financial markets have developed in recent years.”

Talking about the impact of this development, Sam added, “While we welcome the move, it is unlikely to have any significant nearterm impact on how we manage our client portfolios. We have been broadly positive on both of these countries for the last two years as the combination of economic restructuring post financial crisis, strong earnings growth, depressed valuations, and high dividend yields offers an attractive proposition.

“Morocco will move from the Emerging Markets Index to the Frontier benchmark in November 2013. We have extensive investment experience in Moroccan equities and believe that the market is looking increasingly attractive having underperformed in recent years. The point at which many others are selling is often a good time to buy,” he further remarked.

“We continue to believe that frontier markets with their strong GDP growth,

MSCI Eligibility Criteria Criteria

Frontier

Emerging

Sustainability of economic development

No requirement

No requirement

Size and Liquidity Requirements Number of companies meeting the following Standard Index Criteria Company size (full market cap) Security size (float market cap) Security Liquidity

2 USD 516 mn USD 37 mn 2.5% ATVR

3 USD 1,033 mn USD 516 mn 15% ATVR

5 USD 1,796 mn USD 898 mn 20% ATVR

Market Accessibility Criteria Openess to foreign ownership Ease of Capital inflows/outflows Efficiency of the operational framework Stability of the institutional framework

at least some at least partial Modest Modest

Significant Significant Good and tested Modest

Very high Very high Very high Very high

Economic Development

ATVR is the annual traded value ration based on the trading activity to free float market cap Source: Bloomberg, Emirates NBD Research

Developed Country GNI per capita 25% above the World bank high income threshold for 3 consecutive years

positive demographic profile, low debt burden and relatively low correlation to developed markets are a great place to invest for those who have both a long term horizon and wish to see capital and income growth,” Sam concluded.

However there is no denying that this move will boost confidence in the economies of both these countries. The move is an indication of approval from institutional investors for the countries’ stock markets, and is expected to attract more stable sources of capital to local equities.

According to the MSCI, Qatar would account for 0.45% of the weighting of the Emerging Markets Index, with the UAE accounting for 0.4%.

The UAE and Qatar first sought index inclusion in the Emerging Markets Index 2008 and had been denied entry to the grouping five times since the first review in 2009. Both had been designated as “frontier markets”.

According to HSBC an upgrade to the “emerging market” status could bring more than USD 430 million flowing into Qatar and around USD 370 million into the UAE. MSCI Emerging Markets is the most widely-used index by investors in developing markets. Because much of the funds tracking the index are passive investors, inclusion in the index compels additional capital to be funnelled to the markets it covers.

According to a feature by Reuters, elsewhere in the Gulf, Saudi Arabia’s index gained 0.5%. Some fund managers speculate that to avoid missing out on new flows of funds into the Gulf due to the MSCI decision, Saudi Arabia may now go ahead with a long-delayed plan to open its market to foreign direct investment, though there is no concrete evidence of this.

With less than a year to go for this development to take effect, all we can do is wait and watch on how this will impact both these countries and the rest of the region.

One thing is clear though that this move shows a vote of confidence in the economic growth of these Middle Eastern economies.

SEPTEMBER 2013

13

TRADE TALK International trade

Removing barriers to entry The Open Market Index (OMI), published by the International Chamber of Commerce (ICC) highlights the extent to which governments are following through on their commitments to create genuinely open economies. We bring you a synopsis of the report.

T

he purpose of the ICC OMI is to generate a balanced and reliable measurement of a country’s openness to trade. It uniquely combines indicators of actual, de facto, openness of markets with those reflecting government measures considered barriers to market entry.

The OMI set out in this report comprises four key components: • Observed openness to trade • Trade policy • Foreign direct investment (FDI) openness • Infrastructure for trade The table sets out the key findings from the OMI 2013. It presents, for the 75 countries considered as part of the analysis, both their aggregate score and ranking In understanding the scoring, it is important to bear in mind the interpretation of scoring presented in the previous section: Category 1: Most open, excellent (score of 5-6) Category 2: Above average openness (Score 4-4.99) Category 3: Average openness (Score 3-3.99) Category 4: Below average openness (Score 2-2.99) Category 5: Very weak (Score 1-1.99) 14

SEPTEMBER 2013

As we can see from the table, UAE and Saudi Arabia are the two countries from the GCC which are a part of these 75 countries. UAE ranks quite high with a score of 4.6 which indicates above average openness and reinforces UAE’s position as a trading hub.

Category 1: Most open economies Only two economies, Hong Kong and Singapore, receive an aggregate score of excellent in terms of their overall market openness. These two economies always rank among the top three countries and obtain scores above 5.0 in all four components of the OMI.

Category 2: Above average openness The 27 economies with above average market openness include 22 European countries, three other developed countries (Canada, Australia, and New Zealand) and two developing countries (United Arab Emirates and Chinese Taipei).

The highest scores within the group are recorded by the smaller European economies (with a population less than 15 million) and the United Arab Emirates. The smaller European

countries combine an above average score in trade policy with higher scores in trade and FDI openness than those countries found with lower rankings in this group. The above average score of the United Arab Emirates (4.6) can be attributed to its excellent score in in trade openness (5.3) and in trade enabling infrastructure (4.8), both linked to its function as regional trade hub.

Canada, Germany, Australia and the United Kingdom are the only four G20 countries which record an above average openness.

Category 3: Average openness 24 countries score average openness. This heterogeneous group is made up of 12 developing countries, eight EU member countries, Ukraine, Japan and the United States.

Japan and the United States share the same overall score of 3.7 but differ much at the component level. While Japan has excellent scores in trade policy (5.2) and trade enabling infrastructure (5.1), its scores for trade openness (2.0) and FDI openness (2.7) are rather weak.

The US scores for the basic components are far less divergent than in the case of Japan. However, the US score is – as is the case for Japan – weakest for trade openness (2.2).

Category 4: Below average openness 19 countries are found to have below average openness. These include five G20 emerging economies (China, Russia, Argentina, India and Brazil) as well as a wide group of developing economies from Africa, Asia and Latin America.

China ranks 57th with a score of 2.8, slightly ahead of Russia (also at 2.8). While China’s scores for trade openness (3.1) and trade enabling infrastructure (3.8) are slightly above average, the scores for trade policy (2.6) and FDI openness (2.0) are quite low.

The disappointing trade policy record can be attributed largely to the relatively high applied MFN tariff rates (close to 10%) of China and the marginal tariff preferences granted to its trading partners.

The duty free imports into China’s special economic zones are not taken into account even though they account for up to 40% of China’s total merchandise imports. China’s score in FDI openness is also quite low, although the country has seen very large FDI inflows over the past years.

With an overall score of 2.5, India ranks 64th while Brazil (67th) is the lowest ranking of all G20 members with an aggregate score of 2.2.

Both countries have their weakest score in trade policy (2.0 and 1.7 respectively). Indian trade openness exceeds that of Brazil largely due to the faster real import growth. Brazil, however, records a better score for trade enabling infrastructure than India.

Category 5: Very weak There are three least-developed countries which record very weak market openness with aggregate scores below 2.0 – Bangladesh, Sudan and Ethiopia. All three countries have their lowest score for trade policy (less than 1.5). Sudan and Ethiopia record also very low scores for their trade-enabling infrastructure.

CONCLUSION On balance, there are positive signs in the direction of more openness from the trade policy indicators. In particular, tariff averages declined further as did the average

ABOUT ICC was awarded the highest level consultative status with the United Nations (UN) in 1946, and since then has represented the private sector by engaging in a broad range of activities with the UN and its specialised agencies. Today, 13 ICC commissions comprising experts from the private sector cover specialised fields of immediate concern to international business.

To read the full report, please visit http://www.iccwbo.org/

share of tariff lines with peak tariff rates.

Tariff binding levels increased, which also point to improvements in market access.

Also, the major G20 countries lag behind global averages, with only one G20 country, Canada, ranking among the top 20 countries.

Third, four of the five “BRICS” countries (Brazil, the Russian Federation, India and China) record an aggregate score below average.

There are four countries which improve their aggregate score by at least 0.4 percentage

points in this report compared to OMI 2011: Malta, Peru, Norway and Canada. The main factor behind the better results is their relatively strong trade performance reflected in the trade openness component.

Economies which record a decline in their aggregate score by at least 0.3 percentage points compared to the OMI 2011 include Kazakhstan, Nigeria, Kenya, Uganda and the Philippines. The largest decline in ranking was observed for Kazakhstan (35th to 55th) and Nigeria (56th to 66th).

SEPTEMBER 2013

15

TRADE TALK International trade

UAE – A snapshot of changing trade patterns In this article Michael Gasiorek, an international trade specialist, examines the changing composition and competitiveness of the UAE’s exports – excluding petroleum and gas - with a particular focus on the technological intensity of those exports.

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SEPTEMBER 2013

ABOUT Michael Gasiorek is a specialist in international trade whose interests lie in both empirical and theoretical research. Michael Gasiorek has published widely in both books and journals, such as the European Economic Review, World Economy, Economic Policy, Journal of Common Market Studies, Applied Economics and the European Economy. He is also a member of the FEMISE (Forum Euro-Mediterranéen des Instituts Economique) Steering Committee. Together with colleagues from the University of Sussex he has developed the TradeSift software designed to make the analysis of trade and trade policy much easier (www.tradesift.com).

United Arab Emirates Exports Share to World 1999-2010 1999-2010 100% 95% 90% 85% 80% 75%

7%

8%

17%

17%

10%

13%

1%

Exports share

70%

4%

65%

3% 2%

3%

25%

17%

60% 55%

18%

22%

3%

0%

21%

22% 8%

33%

3% 9%

50% 25%

45% 40% 35%

76%

77%

75%

63%

81%

79%

74%

74%

76%

78%

30% 88%

25%

67%

20% 15% 10% 5% 0% 1999

T

he analysis is based on the most recently available consistent annual trade statistics (i.e. up to 2010) as provided by the UN Comtrade database. This article is an exploratory analysis examining the evolving nature of the UAE’s pattern of trade.

The graph gives the share of petroleum and gas products in the exports of the UAE. What emerges clearly is the declining total share of petroleum and gas from a high of 93% of total exports in 2000 to 58% in 2010.

Note that while the share of exports has declined the absolute value of these exports

2000

2001

2002

2003

2004

2005

2006

2007

2709: Petroleum oils, oils from bituminous minerals, cru 2710: Oils petroleum, bituminous, distillates, except cr 2711: Petroleum gases and other gaseous hydrocarbons

has continued to increase over this time period. So the declining share simply means that exports in other sectors/products are growing more.

This declining share of petroleum products suggests the growing diversification of the export profile. In order to consider this in more detail we look at the top ten non-petroleum and gas exports in 2010 at the HS 4-digit level of aggregation, and

2008

2009

2010

Source: Comtrade via WITS 4-Digit

see how this trade has evolved over time.

At the 4-digit level there are a total 1239 possible export sectors, and out of these the UAE had some exports in 1206 categories.

Out of these 1206 categories, the top ten (non-petroleum and gas) 4-digit products accounted for just over 22% of the UAE’s total exports in 2010. The next ten most exported products only accounted for an additional 5% of the UAE exports. The same SEPTEMBER 2013

17

TRADE TALK International trade

Figure 1

Top 10 products exported by the UAE in 2010 (excluding petroleumm and gas)

9.50% 9.00% 8.50% 8.00% 7.50% 7.00%

Exports share

6.50% 6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.05% 0.00% 7108

7113

8703

8517

8803

8905

8708

Gold, unwrought, semimanufact...

Jewellery and parts, containing precious....

Motor vehicles for transport of persons...

Electric apparatus for line telephone...

Parts of aircraft, spacecraft, etc.

Special purpose ships, vessels, nes

Parts and accessories for motor vehicles

7112 Waste or scrap of precious metal

5407

8471

Woven synthetic filament yarn, mo...

Automatic data procession machine

Source: Comtrade via WITS 4-Digit

UAE revealed comparative advantage

Figure 2

1999 and 2010 0.90 0.80 0.70

Revealed Comparative Advantage

0.60 0.50 0.40 0.30 0.20 0.10 0.00 -0.10 -0.20 -0.30 -0.40 -0.50 -0.60 -0.70 -0.80 -0.90 -1.00 -1.10

5407

7108

7112

7113

8471 1999

8517

8703 2010

Source: TradeSift calculations using data from Comtrade via WITS, aggregated from 6-Digit data)

18

SEPTEMBER 2013

8708

8803

8905

top ten products accounted for less than 0.3% of the UAE’s exports in 2000. Hence, these 10 products alone have seen a big increase in their importance. The shares of each of these products are given in the chart (figure 1); and what we see from this chart is the dominance of gold exports (8.9%), followed by jewellery (2.9%) and motor vehicles (2.5%). There are only seven sectors with an export share greater than 1%.

The chart (figure 2) then considers the extent to which these products exported by the UAE can be seen as being “competitive” in world markets. In order to do this we have calculated the indicator of “Revealed Comparative Advantage” (RCA) for the UAE for these products. The RCA uses the underlying data on trade to compare the share of exports of the product in a country’s total exports compared with the share of the product in the world’s total exports. This measure thus examines the degree of international competitiveness of a product/sector in the world as ‘revealed’ by the trade data. The indicator ranges from -1 to 0 for relatively uncompetitive industries; and from 0 to 1 for relatively competitive ones. The chart gives the RCA for each of these 10 products for both 1999 and 2010 which enables us to see how competitiveness has changed over time.

Several features are of note here. First we see that out of the top 10 products exported in 2010, there is only one product – 7112 (waste or scrap of precious metals) where the UAE had a positive RCA in 1999. By 2010, the UAE has a positive RCA for seven out of the 10 products, but interestingly still has a negative RCA for three of the products: 8471 (automatic data processing machines); 8703 (motor vehicles), and 8708 (parts and accessories for motor vehicles). Secondly, we see that for all of the products there is an increase in the relative competitiveness of the UAE in world markets.

The preceding section focuses on ten products only, and it is also worth to be taken in a broader perspective. So in the next chart (figure 3) we track for each year (the blue line, based on the left hand axis) the number of products which the UAE exports for which they have a positive

Figure 3

In 2010, there were 106 products with a positive RCA, and these accounted for nearly 26% of exports. This is a clear indication of both the growing diversification of exports, and the growing share of non-petroleum and gas exports, which reflects what we saw earlier.

UAE Share of exports by technological intensity

Figure 4

(excluding petroleumm and gas)

40.00% 35.00%

Exports share

revealed comparative advantage. Once again in counting the number of products we have excluded petroleum and gas products. On the right hand axis we plot the share of the UAE’s exports which these products account for. What we see is that in 1999 the UAE had a comparative advantage in 22 products, and these products accounted for just over 5% of exports. In 2010, there were 106 products with a positive RCA, and these accounted for nearly 26% of exports. This is a clear indication of both the growing diversification of exports, and the growing share of non-petroleum and gas exports, which reflects what we saw earlier.

Rather than looking at just the most important export products, in the following we consider the full range of products exported by the UAE but where we classify the trade by level of technological intensity.

This is based on the OECD’s STAN industry list which distinguishes between high-tech,

medium-high tech, medium-low tech, lowtech products as well as those that could not be assigned. The chart below (figure 4) shows the evolution of trade since 2002 for these different categories of trade where, as before, we have excluded the petroleum and gas products.

There are several interesting features which emerge from this analysis. The first is that we see a clear decline in the importance of medium-high technology and low technology products. This is primarily driven by the rise in the importance of medium-low technology intensity products which by the end of the period account for just over 35% of the non-petroleum and gas exports. We also see a smaller rise over the entire time period of high technology products, though with some variability over the years.

Here it is interesting to establish within each technological intensity category how concentrated is the trade in just a few products, or whether there trade is more highly diversified. One way of capturing this is to use the Trade Concentration Index.

We will work in detail at the TCI and other parameters in the second part.

30.00% 25.00% 20.00% 15.00% 10.00% 5.00 0.00% 2002

2003

2004

High

2005

Low

Med-High

2006

Med-Low

2007

2008

2009

2010

Unassigned

Source: Comtrade via WITS 4-Digit

SEPTEMBER 2013

19

TRADE TALK INTERVIEW

The trade facilitator In an exclusive interview, Aparna Shivpuri Arya got the opportunity to speak to H.E Sultan bin Saeed Al Mansouri, UAE Minister of Economy, to know his thoughts on how the country is doing when it comes to trade and investment.

You took office at a time when the global economic situation was very bleak. What was your strategy to ensure that the UAE doesn’t get impacted?

The UAE’s economy is open and globalised, and therefore not immune to the impact of events in the global economy.

However, while matured economies of the West are still reeling under recessionary impacts, UAE’s economy has overcome the challenges of the global downturn and is forging ahead.

We managed to considerably insulate the economy by staying focused on the path of innovation and partnerships, which are essential elements in building the nation’s competitiveness.

We adopted the policy of diversification and are on course to create a sustainable knowledge economy.

We are all along working to strengthen bilateral relations with several countries through measures such as key agreements on the promotion and protection of investments, avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital, establishment of air services, and co-operation in the field of information, culture and science.

We have been making sustained efforts to sit together with key partners in trade and identify areas where we can support each other in building on our strengths.

The Joint Economic Forum, established with a number of countries, is one of the platforms which have proved to be very effective in this exercise.

You mentioned once that the country’s success is due to its openness and diversification. Can you please elaborate on that?

The UAE is one of the most open and globalised economies in the Middle East. Our network of trade partners is diverse, from OECD countries to new and emerging markets.

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SEPTEMBER 2013

We have created an attractive business environment that provides investors stability and a wide room for growth of their businesses as well as many other benefits.

The UAE has emerged as a global hub for business and trade, connecting nations, peoples and ideas across the world. In our effort to establish a knowledge based diversified economy, we are investing heavily in education and focusing on mutually beneficial partnerships.

As a result, we are now the regional headquarters of over 25% of the top 500 companies in the world.

The UAE is ranked 24th in the Global Competitiveness Report 2012-13 released by the World Economic Forum, out of 144 countries globally, jumping three ranks from previous year.

We are also ranked as the 26th easiest place to do business, moving three places up, out of 185 countries worldwide on the World Bank’s Doing Business 2013 report.

The UAE continues to exercise a critical role in facilitating trade, retaining its top position in the MENA region, and is number five in the world in “Trading across Borders” category, according to the World Bank’s Doing Business Report 2013.

How important, according to you, is trade to UAE? How has it helped in promoting economic growth in the UAE?

The UAE has a rich trade heritage. Trading activity is one of the UAE’s core strengths, the backbone of the economy and one of its major sources of income.

The country’s trade activity has remained buoyant even at the height of the global financial crisis. The geographical location of the UAE between the key economies of the West and the East has raised its profile as the crossroads for world trade.

Realising the massive economic relevance of trade to the UAE economy, we have built a world class infrastructure in communication, ports and logistics to support the growth of this vital sector. Foreign trade contributes to the national economy’s growth through support in terms of raw materials, fulfilling the economic requirements of investment goods and meeting the increased need for consumables.

The UAE’s non-oil foreign trade volume rose from AED 927.7 billion in 2011 to AED 1,083 billion in 2012, registering about 17% growth rate.

Trade volume in the UAE free zones in 2012 reached around AED 420 billion compared to AED 367.7 billion in 2011, which is an increase of AED 52 billion, representing about 15% growth. All this highlights the importance of trade.

Which sectors, according to you, are most likely to attract FDI into the country in the coming years?

FDI inflow into the UAE is estimated to have surged 21% to USD 9 billion in 2012 from USD 7.6 billion in the previous year.

The UAE has succeeded in cementing its leading position in the international investment map, and in the coming years we expect increased FDI inflow in infrastructure, renewable energy, industry and agriculture.

Are you looking at promoting economic relations with any particular countries? What is your opinion on UAE’s relationship with emerging economies such as India and China?

We enjoy strong cultural and trade relations with India. India is the UAE’s largest trade partner. Bilateral trade stood at AED 200 billion (USD 54.4 billion) in 2012.

More than 636 flights per week link the UAE and India, the UAE National airlines SEPTEMBER 2013

21

TRADE TALK INTERVIEW

operate about 353 flights per week which represents 55.5% of total flights operated in the sector, demonstrating the high level of connectivity between the people and economies of the two countries.

India remains a long-term, high-growth, demand-led economy, and we are confident that our trade ties with the country will continue to be strengthened in the future.

The UAE-China economic exchanges have grown significantly, especially after the agreements and memoranda of understanding signed by the two countries in recent years.

Following the then Chinese Premier Wen Jiabao’s official visit to the UAE last year, the two countries have decided to seek all-around development of bilateral trade and economic cooperation and make full use of the complementary advantages of the two economies.

We have had crucial trade and investment meetings last year with a number of other countries, including the UK, Ireland, Italy, Spain, South Korea and Azerbaijan.

A healthy economy requires a sound financial/banking system. What role has the financial sector played in providing stability?

The UAE is a global business and financial hub. Our focus on financial sector as a core area in the economic diversification policy helped it to ride out the impact of the global financial crisis and achieve growth.

Commercial and specialised banks played an important role in promoting economic activity and trade in the country. Financial markets contributed by mobilising domestic savings.

Besides the Dubai Financial Market, Dubai International Financial Centre (DIFC) was

Trade volume in the UAE free zones in 2012 reached around AED 420 billion compared to AED 367.7 billion in 2011, which is an increase of AED 52 billion, representing about 15% growth.

The UAE and China are making use of the joint commission on economic cooperation and trade to boost trade and economic exchanges.

Efforts are on to increase two-way investments, expanding mutually beneficial cooperation in house building, railway and bridges, telecommunications, energy, financial services and in the high-tech fields.

Both countries need to maintain strategic relations to protect common interests and optimise trade considering that the UAE is China’s leading trade partner in the region and also one of the most attractive destinations for the Chinese community.

Although recent events in the Eurozone have had an impact on Chinese export growth, we believe that our trade relations with the country will continue to be enhanced in the years to come.

22

SEPTEMBER 2013

established to become a free zone for one of the most important financial centers in the Middle East and North Africa.

The Nasdaq Dubai International Stock Markets serves as a link between Western and East.

Credit availability is an important element in economic growth. Modern economies have developed primarily by making best use of credit availability in their systems.

The finance sector has played an important role in the UAE’s economy by providing much needed credit to support the growth of all other sectors.

An efficient banking system caters to the needs of high end investors in terms of massive amounts of capital for major projects in industries, infrastructure and service sectors.

After the global crisis broke out, the

UAE central bank was quick to secure the country’s financial system from potential investor panic through a range of measures such as liquidity support to banks, deposit guarantee and recapitalisation of banks, instilling confidence in the stability of the UAE economy and the financial system.

The financial sector has been providing critical support to small and medium enterprises through credit availability for new investments and expansion of existing units.

Currently 51 bank is operating in the country, 23 national, and the rest are foreign, in addition to several money exchange.

Are there any sectors that you’ll be concentrating on in the near future?

The knowledge economy and innovation will play a major note in contributing up of 5% to UAE GDP by 2021 and with this we believe that sectors such as renewable energy, IT, water technologies will be given specific attention.

UAE’s GDP is projected to grow by around 4% in 2013. What will fuel that growth?

The UAE is aiming to become one of the fastest growing economies in the world.

Diversification policy and efforts to achieve a knowledge economy will lead to sustainable development in line with UAE Vision 2021.

Economic diversification has opened new avenues for investment in the UAE with the non-oil sector contributing 68.7% of the UAE GDP in 2011.

Core focus will be on the industries of the future – transport, logistics, hospitality, tourism and renewable energy.

This initiative’s aims are threefold: to make the UAE one of the global pioneers in green economy, a hub for exporting and re-exporting green products and technologies, and a country preserving a sustainable environment that supports long-term economic growth.

The green initiative will strengthen the UAE’s competitive position in global markets, especially in the areas of renewable energy products and technologies on the green economy.

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TRADE TALK INTERVIEW

“We have a passion for the extraordinary” Says Hamad Abdulla Al- Mulla, CEO, Katara Hospitality in an interview with Aparna Shivpuri Arya about what makes Katara Hospitality stand out!

Please give us some history about Katara Hospitality’s inception and vision.

Katara Hospitality is an organisation that combines experience and heritage with a bold new vision for the future.

We have been at the vanguard of the hospitality industry in Qatar for more than four decades. As pioneers in the market, we introduced the first 5 star hotel with the property currently known as Doha Marriott Hotel. The Sheraton Doha was the first internationally branded property, while Ritz-Carlton was the tallest building in Qatar at the time it opened. Moreover, Sealine Beach resort was the first leisure destination in the 24

SEPTEMBER 2013

country, while Sharq Village & Spa was the first luxury resort in the market. We identified the growth potential of business tourism in the country and we created the Merweb brand designed to meet the needs of discerning business travellers.

Currently, the properties owned and managed by Katara Hospitality in Qatar form an eclectic portfolio. Our hotels can cater to high end business travellers or more cost conscious ones, covering the MICE segment and offering outstanding recreational facilities.

As we aim to become one of the leading global hospitality organisations, we are creating a portfolio of iconic hotels around

the world. We acquire properties that have a hospitality legacy, as well as develop new hotels in key or emerging destinations. At home or abroad, we are striving to deliver peerless hospitality that not only brings renown to our portfolio, but for Qatar as well.

Our goal is to have 30 properties by 2016, with another 30 by 2030.

As an industry leader, what is your opinion about the trends in the hospitality sector and the investment opportunities available?

Katara Hospitality has always been at the forefront of the industry by identifying areas of growth and developing innovative hospitality assets.

and well-being has increased in the recent years.

Properties in our portfolio host some of the most renowned spas in the world. The Six Senses Spa at Sharq Village & Spa is the largest of its kind in the Middle East and it has been at the forefront of the industry since it opened in 2007. Le Royal Monceau – Raffles Paris showcases one of the most prestigious wellness centres, with Spa My Blend by Clarins. Waldhotel, the medical wellness hotel at Bürgenstock Resort Lake Lucerne will be the leading healthy living destination.

With the rising number of business travellers in the GCC and an increase in the duration of their stay, serviced apartments are

We anticipate 30% growth for Qatar’s travel market over the coming two years. The development of infrastructure projects will generate significant business opportunities for the hotels, with occupancy rates expected to grow significantly in the build-up to the FIFA 2022 World Cup. Premium tourism destinations show a strong demand for luxury hotels. Travellers looking for such accommodation have become more sophisticated, looking for genuine luxury hospitality experiences that go beyond recognition and personalised service. We are now witnessing the emergence of various niche hospitality products within the luxury segment that merge local heritage to create unique experiences and memories for global travellers.

For example, Raffles Hotels & Resorts is one of the operators that have developed its brands, focusing on “emotional luxury” which works perfectly for both Katara Hospitality properties under its management (Le Royal Monceau – Raffles Paris and Raffles Singapore) The spa and wellness industry complements luxury hospitality. The sector has emerged because awareness regarding personal health

another emerging trend. These apartments provide the option of longer stays at lower rates as compared to traditional hotels.

Somerset West Bay Doha is Katara Hospitality’s first operational property to offer serviced residences with two- and three-bedroom apartments. Merweb Hotel City Centre Doha is set to open towards the end of the year and will offer 97 serviced apartments with different configurations, while the Iconic Development in the Marina District of Lusail City will offer 203 ultraluxurious branded apartments.

Last but not least, the increase of more cost conscious travellers has led to the diversification of the offer under the 3 and 4 star hotel segment. Operators that have been traditionally known for managing 5 star properties have started developing brands and concepts that operate within the 3 and 4 star market.

Alternatively, operators in the luxury segment that have traditionally counted on the net value of their services and reputation have started introducing incentives and reward programmes which enable them to retain customers in a very competitive market place.

We at Katara Hospitality also recognise the importance of diversification and we focus on creating a network of first class business and leisure hotels located in key destinations.

Do you think the dynamics will change in the next ten years in the hospitality and tourism sector with the FIFA World Cup 2022? If so, how?

Qatar is one of the fastest growing countries in the world. The strong economic and demographic growth requires infrastructure development. We believe that a strong hotel network is needed to support development at different levels.

We anticipate 30% growth for Qatar’s travel market over the coming two years. The development of infrastructure projects will generate significant business opportunities for the hotels, with occupancy rates expected to grow significantly in the build-up to the FIFA 2022 World Cup. New hotel openings will contribute to maintaining competitive room rates amongst other GCC markets while stimulating healthy competition to maintain service standards.

In general, we regard 2022 as a milestone in the country’s development. Qatar is pursuing an articulated strategy for economic diversification, opening the horizons for future generations. 2022 is our opportunity to showcase a country that has grown into an international destination, while its people have an innate hospitability trait.

How do you identify locations and hotels for partnership and expansion?

The National Vision 2030 leads the country on the path of economic diversification and hospitality and is one of the strategic drivers.

As a government-owned organisation whose goals are aligned to the country’s objectives, SEPTEMBER 2013

25

TRADE TALK INTERVIEW

Supply of specialist services has always benefited from a wealth of opportunities for SMEs that are interested in penetrating the hospitality sector.

Katara Hospitality has a two-tier expansion strategy.

In Qatar, we are committed to investing in hospitality assets which aid the development of the country’s tourism infrastructure.

With a global portfolio of iconic hotels, our investments abroad support our mission to become one of the leading hospitality organisations in the world.

Katara Hospitality was launched last year as a platform for growth, with a short term goal of 30 hotels by 2016 and 30 more by 2030. Katara Hospitality’s portfolio currently includes 25 properties and projects. In the past 18 months the company tripled its portfolio by acquiring properties and initiating projects in strategic international locations.

Our European presence is strong and, in the next year, we will see the opening of several iconic hotels. With properties in France, Switzerland and Italy, we expect to invest in other markets, including the United Kingdom and Germany, as well as further enhancing our presence in the Mediterranean. North America is also a possibility and of course we want to expand in Asia where we plan a major renovation of Raffles Singapore.

We have a passion for the extraordinary – something special which will add an exceptional dimension to our business. At home or abroad, we strive to deliver peerless hospitality that not only brings renown to our portfolio, but for Qatar as well.

How does Katara Hospitality play its role as an operator and a developer?

First and foremost, Katara Hospitality is an asset manager. However, the developer area of our business is closely related and interconnected with our core expertise.

Many hotels under our portfolio have been developed by Katara Hospitality from the 26

SEPTEMBER 2013

project stage to becoming a valuable asset.

While most of our international properties are currently undertaking major renovation under our direct supervision.

We have always worked closely with international hotel operators and each development has been a learning experience for us. This gave us depth of expertise and confidence to venture into becoming a trusted hotel operator eventually, while being able to deliver hospitality complexes that meet international standards.

For businesses (SMEs) looking into entering or expanding into this sector, are there any niche areas you can recommend - areas that haven’t been fully explored yet in the hospitality sector?

Supply of specialist services has always benefited from a wealth of opportunities for SMEs that are interested in penetrating the hospitality sector. However, when looking for partners in various projects, we always consider the expertise brought in by suppliers or consultants in fields related to our business areas.

With almost all neighbouring countries looking at tapping the hospitality sector, how do you maintain the competitive edge?

The tourist demand is responsive to the unique positioning of each market and its attractions. Qatar positions itself as a niche market destination.

At the World Travel Awards 2012, Doha was recognised as the World’s Leading Business Travel Destination while Qatar was nominated as World’s Leading Sports Tourism Destination. These are good examples of the strengths which differentiate us against other markets.

However, efforts are being deployed for enlarging the niche market of Qatar’s tourism. Qatar Foundation, Katara Cultural Village and Qatar Museum Authority are local organisations which are working actively towards establishing Qatar as regional cultural hub.

State-of-the-art medical facilities such as Sidra Medical and Research Centre or Aspetar provide world class niche medical services aimed at positioning Qatar as a top international medical destination.

As Qatar’s infrastructure develops at a fast pace, the entertainment offers diversifies every year. From high-end shopping malls or traditional souks, world class museums and cultural hubs, to parks and unique outdoor recreational facilities as well as an increasing portfolio of hotels and food and beverage concepts, Qatar has something to offer to everyone, be it a resident or a tourist.

What are your future local and international expansion plans?

We already have 25 properties operational or under development. In the last year, since we introduced the new Katara Hospitality brand, we have achieved major milestones in acquisition, investment, development and operations.

We completed the acquisition of Somerset West Bay Doha, the first of three assets being acquired from Barwa Real Estate, as well as signing new partnership agreements with the governments of the Republic of the Gambia and the Republic of the Maldives.

We have three new properties, adding 500 keys, on track for opening in 2013, complementing our 13 hotels now operating.

By 2016, our target is to have 30 properties under our portfolio, with another 30 by 2030.

As a mentor to SMEs if you had to impart some wisdom- what would that be?

Two things are critical: vision and focus.

Whether you are a USD 50 billion company or a USD 50,000 business, you need to have a clear sense of where you are going.

Then have the focus to make that vision happen. Don’t get distracted by wrong turnings – keep on the road to success.

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If you need an office all of the time, or part time, we can help. If you need an office occasionally we can help too, and should you need the ultimate in flexibility, our 5 business centres in Abu Dhabi and over 30 across the Middle East give you a working base wherever and whenever you need.

See how our flagship business centre opening soon in Sowwah Square can help your business.

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TRADE TALK Finance

Advantage Islamic finance While Islamic banking constitutes just under 2% of the global banking asset base, it represents a treasure trove of financial products that promise to fulfil the trading needs of the business community. In the second of a multi-part series, Ehsan Ahmed, Global Transaction Services and SME Head at Noor Islamic Bank PJSC explains how Islamic finance is a very viable instrument for international trade transactions.

W

ith Sharia compliant finance enjoying a CAGR in the range of 15 to 20% globally, there are good reasons why Islamic finance is resonating more and more with businesses, big and small. This has been even more so since the global economic crisis revealed pitfalls in the way conventional banks leveraged and distributed ‘profits’ based on assets that simply did not exist.

The lessons served as a wake-up call to the business community and underlined the sound fundamentals of Islamic finance and its structures. Although these structures serve the same commercial purpose and achieve similar results to that of conventional banking– the essential difference lay in the sound fundamentals of the Sharia that form the basis of Islamic finance.

Islamic finance requires that every financing transaction must be backed up by an underlying asset.

In other words, in the absence of a corresponding underlying asset, a transaction just cannot go ahead. This 28

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nips speculative activity in the very bud and introduces a dimension of safety and transparency - qualities that are increasingly useful in a global business environment that abounds with uncertainties.

It’s fair to ask why Sharia compliant financial structures are lagging behind their conventional counterparts, and if they indeed are safer? One can also argue that even in predominantly countries with Muslim populations such as the Gulf and Malaysia, Islamic banking enjoys just about 25% of the industry share. While these are valid observations, one must not forget that Islamic banking is still growing worldwide at a healthy rate of 15% to 20 % per annum.

Both Islamic banks as well as members of the business community need to make an effort to educate and learn about the advantages of Sharia compliant banking.

This is the key to benefiting from the growing range of products offered under this financial system. The gap in education that needs to be bridged is seen from

the fact one of the most commonly known instruments of Islamic finance is the ‘Sukuk’.

However, relevance of this is mainly for capital market transactions, whereas there are a lot of other financial structures that Islamic banks can offer to address commercial banking requirements of Corporate and SME entities, which the latter typically is not aware of. The onus is, thus, on the Islamic banks to educate the corporate client base on these solutions that can be availed at competitive terms to address various business needs.

To illustrate the above point, a Letter of Credit (LC) is a standard instrument used in international trade by businesses around the world. However, unless a corporate entity has a banking relationship with an Islamic bank, the differentiation and the relevance of a Murabaha LC versus a Wakala LC, most likely will not be apparent to them.

In most cases, there is a gap in customer understanding on how the Islamic structure and documentation will work and enable the client to get the same result as under a conventional banking solution.

Although the terminology, documentation and process flow, may differ from the conventional banking perspective, Islamic banks are able to succeed in securing and retaining clients as long as they remain focused on ensuring the end objective of the client is addressed. The efficiency with which one Islamic bank is able to achieve this and successfully deliver the solution, helps determine the level of differentiation the bank enjoys in the market vis-a-vis other players.

Besides educating customers about the broad range of Sharia compliant banking solutions available for the corporate businesses to benefit from, Islamic banks must also ensure that what they offer is competitive in terms of pricing and service delivery.

Islamic banks to their credit are surely making inroads in many markets, with more Sharia complaint banks springing up than conventional. Beyond domestic borders, there is a growing demand for faith-based banking in countries such as Russia, Sri Lanka, Nigeria, Senegal and Sudan. Moreover, all countries are faced with a need to access funding from

ABOUT Ehsaan Uddin Ahmed is Global Transaction Services and SME Head at Noor Islamic Bank PJSC, based in Dubai, UAE. He has 21 years of diverse professional experience at country and regional levels with various organisations.

He joined Noor Islamic Bank in 2007 to establish the transaction banking business in line with the new bank’s objectives of being a leading player in the Islamic financial services industry. He has a MBA in Finance from Imperial College London where he was a Britannia Scholar. He was also awarded the gold medal for top position in BSc (Hons) Mechanical Engineering from University of Engineering and Technology Lahore, Pakistan.

Islamic investors who are more open to lending under an Islamic structure. Despite these positive industry developments, it would be imprudent to assume that eventually all Muslims will bank with an Islamic bank, especially when the banking landscape – particularly in the GCC – has plenty of strong conventional financial institutions vying for customer loyalty. The UAE alone has 50+ conventional and Islamic banks operating in the market.

have good prospects of penetrating the SME segment successfully.

As Islamic banks continue to focus on broadening the suite of products and services, support from regulators will remain a critical success factor to ensure the industry thrives and grows from strength to strength.

Regulations that provide incentives for Islamic banks; and industry initiatives geared towards harmonising Sharia standards with respect to product structures and documentation, will

Both Islamic banks as well as members of the business community, need to make an effort to educate and learn about the advantages of Shariah compliant banking.

This is the key to benefiting from the growing range of products offered under this financial system.

Based on the principles on which Islamic banks operate, in particular they are well placed to respond to the needs of the SMEs – which constitute the backbone of any developing economy and are one of the key contributors to the trade flows of the country. Islamic banks that are able to develop innovative solutions to address the supply chain financing requirements under efficient Sharia compliant structures for the SMEs, tend to stand out from the pack. As long as traditional LC based trade requirements and open account structures are catered to efficiently and competitively, Islamic banks

go a long way in taking the Islamic banking industry to another level of maturity.

Within the GCC, as trade flows progressively improve post 2008 economic slow-down, there is plenty of space for more to be done by the Islamic banks. In particular, with Dubai’s aspiration to be global Islamic trade finance hub, the macro environment is fertile for Sharia-compliant industry to flourish and support the trading communities in UAE and neighbouring GCC markets. Islamic banks need to be nimble to avail this natural advantage presented by the conducive macro-economic, financial and regulatory environment.

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TRADE TALK Currencies

Money talks – IV In this month’s issue, Western Union Business Solutions looks at the EUR, the USD and the GBP to help you trade better.

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EUR Tiffany Burk, Senior European Market Analyst, Zurich The obvious topic for discussion in September is the German election scheduled to take place on the 22nd. A Merkel victory would offer investors the peace of mind that comes with knowing that leadership continuity is in place and that plans to move forward with a banking union and other initiatives to advance the Euro area are not in danger.

Chancellor Merkel has warned her supporters not to become too complacent though as exit polls continue to predict an easy victory.

Perhaps some nervousness just in front of the election weighs negatively on the Euro, but generally speaking, assuming the outcome

is as expected, the “event” will likely end up being a non-event. So what else is going to drive the Euro?

September always makes for an interesting month of trade. European traders/investors come back from their summer holidays, which should increase volumes. Higher volumes clash with position-taking going into the fourth quarter of the year. As a result, predicting where currencies head this month can be more difficult than usual.

The last thing to consider is what is happening elsewhere, namely China and the US. Although it is not considered to be a very accurate indicator, the treasury data published on long-term capital flows in the US suggested outflows have increased over the last five months. The outflow of capital in the US for the month of June was primarily driven by debt sales which amounted to USD 40.8 billion. This shift in activity likely reflects increased speculation that the

As traders become desensitised to upsetting EU headlines and as focus shifts towards growth and recovery, the Euro could continue to see gains assuming the outcome of the German elections is as expected, with a Merkel win.

There are three things to take into consideration when thinking about the medium-term outlook for the Euro. First, the bad news is old news: even if some of the old headlines resurface, the impact will be lessened as investors become immune to the scary headlines. Examples include a weak Portuguese government (as possible need of more bailout money increases), shaky Italian politics, bad loans at Spanish banks on the rise, and Greece needing another bailout and more.

The second possible consideration is maybe a bit too optimistic, but given the mind-set at the end of August, is at least worth exploring: second quarter gross domestic product (GDP) showed the Eurozone economy emerging from a recession that lasted for 18 months. While no one believes rapid growth lies ahead, there could be a period of sustained progress, albeit slow.

As a result, economic data could potentially see more of a positive impact on the Euro if it does confirm a sustainable upturn is developing.

Fed will taper its quantitative easing (QE) programme. How much of treasury sales actually come from China is anyone’s guess, but reserve diversification out of the USD is likely to provide ongoing support to the Euro.

As traders become desensitised to upsetting EU headlines and as focus shifts towards growth and recovery, the Euro could continue to see gains assuming the outcome of the German elections is as expected, with a Merkel win. Complementing Euro gains could be further Dollar weakness on the back of capital outflows if they remain as high as in the past five months.

Upcoming Critical Events September 2: EUR August manufacturing purchasing managers’ index (PMI) September 3: EUR July producers price index (PPI) September 4: EUR August services PMI September 4: EUR Q2 GDP 2nd estimate September 4: EUR July retail trade September 5: EUR European Central Bank SEPTEMBER 2013

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Monetary Policy Committee meeting September 12: EUR July industrial production September 13: EUR July trade balance September 16: EUR August final Harmonised Index of Consumer Prices September 27: EUR September Business Climate Index

EUR Economic Indicators Three-Month Deposit Rate: 0.25% Gross Domestic Product (annualised): -0.7% Inflation (annualised): 1.6% Unemployment: 12.1% Trade Balance: EUR +17.3 billion GBP: United Kingdom Joe Manimbo, Senior Market Analyst, Washington, DC

Sterling has been on quite a tear, but is it a sustainable one?

Britain’s currency enters September near multi-month highs against the greenback,

detracts from the Central Bank credibility can pose a key risk to a currency.

Much of the Pound’s outperformance has been the result of steady signs of improvement in UK economic data. But given the still-fragile shape of the Eurozone, a key trade partner, and the broader global economy, any recovery in Britain is likely to prove patchy and fraught with elevated risks to the downside.

Meanwhile, although better data from Britain has helped close the door to further central bank action over the short run, the door still remains ajar. By contrast, America’s central bank has made tentative plans to curtail stimulus before year-end, and end its unprecedented bond purchases by mid-2014, a more hawkish outlook that has provided durable support for the Dollar.

The outlook for global central bank policy alone may make it tougher on sterling to sustain its impressive recent winning streak.

But as long as investors have their doubts

With the jobless rate at 7.8%, the Bank of England (BOE) estimates that a rate hike might not happen until 2016.

in part as optimism in the recovery has been on the rise. But another source of its strength has been that many market players have not taken at face value a pledge by Britain’s central bank chief to hold off on a rate hike until unemployment falls substantially to at least 7%.

With the jobless rate at 7.8%, the Bank of England (BOE) estimates that a rate hike might not happen until 2016. However, many outside the BOE—and even one of the nine members on the inside—see scope for a shift toward tighter policy before the bank’s multi-year timeframe. With such bifurcated views on the road ahead for central bank policy, it does little to help newly seated governor Mark Carney get off to a credible start. And anything that 32

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about when the Fed might shift to a slower pace of providing monetary aid to the US economy, any scope for sterling downside should prove limited.

Upcoming Critical Events Sep 04: GB Aug Services PMI Sep 05: BoE Monetary Policy Announcement Sep 06: GB Jul Manufacturing Output Sep 11: GB Jul ILO Unemployment Sep 17: GB Aug Consumer Price Inflation

USD: United States Joe Manimbo, Senior Market Analyst, Washington, DC Investors may only have to wait days to see how the greenback fares in September, the month in which the Federal Reserve holds

a much-anticipated policy-setting meeting.

A broader look at the greenback shows it with as much upside potential as any of the world’s major currencies. Its central bank is soon expected to shift to a weaker pace of monetary support and thereby do less damage to the greenback’s appeal. But before the Fed moves to slow stimulus, the US economy needs to reach a firm enough footing.

With that in mind, investors will look to this month’s US jobs report—non-farm payrolls for August which is set for release on September 6th. A faster pace of monthly hiring would make a more compelling case for the Fed to dial back on firepower at the bank’s next meeting less than two weeks later on September 18th. If realised, yields on US Treasury would likely climb from already elevated levels, making the greenback a more alluring bet for investors.

But should August job growth fall short of forecasts, it would be seen as dealing a momentary setback to the Dollar’s broader uptrend. After all, the US economy is not seen as entirely out of the woods, due to government initiatives to cut spending and raise taxes to shrink the deficit. Still, other areas of the US economy have shown consistent strength, and many in the market suspect the Fed might save any change in policy for bankers’ final meeting of the year on December 17th–18th.

Less than inspiring US job growth in August would risk subjecting the Dollar to several more weeks of heightened volatility as it would tend to lead investors to push out forecasts for the Fed to reel in stimulus. But since the Fed is seen leading many of the world’s biggest central banks in normalising policy, any downside for the USD should prove mild.

Upcoming Critical Events Sep 03: US Aug ISM Manufacturing Index Sep 05: US Aug ISM Non-manufacturing Index Sep 06: US Aug Non-farm Payrolls Sep 13: US Aug Retail Sales Sep 18: FOMC Monetary Policy Announcement

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TRADE TALK STRATEGY

How to handle commodities?

Commodities are generally considered to be speculative investments. To a certain extent this is true but there are highly prudent, sensible ways in which investors can use commodities to reduce their long-term investment risks. In the Part II of the series, John Butler, CIO, Amphora, explore how this can be done in practice, with reference to some current attractive opportunities.

COMMODITIES FOR PROTECTION, DIVERSIFICATION AND OUTPERFORMANCE Commodities are not generally thought to be relatively low-risk investments. As raw materials, or downstream derivatives thereof, they are normally caught in the business cycle to a greater extent than the equity or bond markets. This is due to their nature: They 34

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do not represent a long-term stream of cash flows across one or more business cycles, as most securities do, but rather merely the near term cash flow that can be obtained through the disposal of a given commodity holding.

Therefore, it is also a stretch to consider commodities an ‘investment’ at all and, for many, buying or selling commodities is considered essentially pure speculation. Of course, if

a business is involved in the production or consumption of commodities as part of some productive process, then transacting in the commodities in question is hardly a form of speculation. Rather, it becomes an essential part of doing business and managing risk.

However, there is a fine line at times between ‘risk-management’ and ‘speculation’.

These activities use the same instruments, such as forward sales or purchases, or options to do the same. These instruments can be exchange-traded or over the counter. They can be short- or long-term in nature.

Indeed, it is rare that commodities business can hedge without slippage or basis, risk fully 100% of its production and/or consumption.

Almost invariably, either around the margins or perhaps to a much great extent, commodity businesses deliberately (or perhaps unwittingly) speculate on either rising or falling prices. They might believe that they understand their markets better than others and thus have superior information regarding future price trends. Or they might recognise price anomalies or subtle shifts in near-term supply or demand in various regions around the world and step in to arbitrage between the two, thereby extracting a spread. The risk management infrastructure and the speculation infrastructure are, in essence, one and the same.

As with nearly all businesses, commodity producers or consumers have some degree of operational flexibility. An oil producer is not required to produce to full capacity if it is not economically attractive to do so. The same is true for a miner, farmer, or any other production business. As for commodity consumers, if they believe that prices are unsustainably low, they can hoard supply and store it for future use.

Alternatively, if they sense that prices are more likely to decline, they can run down these stocks and operate their businesses in a just-in-time fashion as they go along.

Consider, however, what happens when there is a general expectation for rising prices, say due to the inflationary policies of a central bank. In this instance, commodity producers in general will scale back production, expecting better prices in future. Higher prices then become a self-fulfilling prophecy as supply is withheld from the marketplace. Alternatively, a general expectation of falling prices will lead producers to accelerate production or dump excess inventory on the market, thereby creating a self-fulfilling prophecy in the other direction.

Is this speculation? Or merely prudent business practice for the firms in question to maximise profits for their shareholders?

Quite obviously it is the latter. The fact is that commodity businesses tend to have strong ‘pricing power’ because the raw or downstream products that they produce tend to be essential across a large spectrum of industrial processes.

Not to exercise this pricing-power to its full extent is to fail to realise the full potential valueadded of their businesses.

At times of rising prices, commodity producers withholding supply from the market may be disparaged as ‘hoarders’, but the discussion above demonstrates that this is unfair. If economic policy officials create money above and beyond the amount that which is demanded by the economy then commodity producers are merely responding accordingly.

As we know, too much money chasing too few goods is what creates price inflation and, to quote Milton Friedman, inflation is “always and everywhere a monetary phenomenon.”

To disparage the ‘hoarders’ in this instance is merely to ‘shoot the messenger’ of the inflation, rather than the instigator, namely, the central bank.

FROM PROTECTION TO DIVERSIFICATION As is the case with commodity firms there is no reason why investors should not also adjust their commodities exposure to protect their wealth from a general increase or decrease in the price level. This can be done synthetically through the commodity futures markets of via the myriad commodity ETFs that now trade on major exchanges.

The question then becomes, however, how an investor should best go about acquiring a commodities exposure. Unlike with commodities firms with natural, direct exposure, that of investors is only indirect and synthetic.

The best approach, therefore, is to take maximum advantage of what is frequently considered the only ‘free-lunch’ in economics, namely, diversification. The good news here is that commodities are a rather diverse lot and with the exception of a general increase or decrease in the price level associated with monetary inflation or deflation, respectively, commodity prices tend not to be highly correlated with one another, barring a handful of exceptions for which there is a high degree of potential substitution.

By way of example, the correlations between crude oil, by far the most important globally traded industrial commodity, and industrial metals (e.g copper, aluminium, iron ore) are in the range of 50%-70%. The correlations between industrial metals and the precious metals gold and platinum are lower, in a range of 30%-50%.

Turning to agriculture, the correlations tend to be even lower, due primarily to the natural vagaries of weather patterns and other random factors that can have a large impact on production. Both grains and other soft commodities such as sugar or cotton have almost zero correlation to industrial commodities and no observable correlation to the business cycle. (There is a higher correlation between corn and crude oil due to widespread ethanol production.)

As the correlations across commodities tend to be relatively low, when combined into a ‘portfolio’ the realised volatility is much, much lower than their individual volatilities.

For an investor seeking an inflation hedge but

lacking any specific market knowledge about commodities, a well-diversified basket is the best approach.

How one diversifies the basket is critically important. While industrial commodities including crude oil and industrial metals may trade with the highest volumes, they all share a strong correlation to the business cycle and, from a defensive investors’ perspective, should be under- rather than over-weighted in a broad, diversified commodities basket.

All the above commodities, however, as real assets, cannot be printed or devalued in the way that a currency can. A general rise in the price level caused by monetary expansion normally erodes the value of bonds and cash, but not commodities. The 1970s are a classic example of a prolonged commodities outperformance resulting from a general increase in the price level over time.

As for stocks, while prices may not decline with inflation as with bonds, valuations tend to suffer. P/Es tend to decline and the equity risk premium tends to rise in an inflationary environment. Thus the 1970s was a decade in which commodities outperformed both stocks and bonds.

The greater the inflation the more likely it becomes that all commodity prices rise together, making it appear that the diversification benefits are declining, but as all investors know, diversification benefits are of their greatest value in a declining or sideways market, not in a rising one.

Of course, a general monetary deflation could lead to a general price decline for a diversified basket of commodities, but investors should ask themselves how likely they think that particular outcome is at present, with most major economies shouldering excessive debts and deliberately seeking higher rather than lower rates of inflation. Japan has become particularly aggressive of late in trying to create inflation but the list of countries actively intervening to weaken their currencies or at a minimum prevent them appreciating includes not only Japan but Switzerland, China, Korea, Taiwan, Malaysia, Thailand and, in future, quite possibly several others. Investors who are confident that they can pick the currency winners and losers as they go along SEPTEMBER 2013

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may have less need to hold commodities for protection against currency weakness, but those less certain should consider a strategic commodities holding, sensibly diversified as described above.

BEYOND DIVERSIFICATION: TAKING A VIEW ON SPECIFIC COMMODITIES While I believe all investors should consider the diversified approach, those interested in enhancing their returns from commodities can become more active by overweighting those commodities that appear relatively cheap and underweighting those that appear relatively expensive.

As with all economic goods, fundamental supply and demand are the ultimate determinants of price and large price swings not associated with a general price inflation tend to be self-correcting. For example, farmers tend to plant more as prices rise and to plant less as prices fall, moving prices back in the opposite direction over time.

There are many speculators in the commodities markets, however, who try to get ahead of such developments. Sometimes they succeed and sometimes they fail. Many tend to follow a popular trading style, say by incorporating new fundamental information more quickly than others; by following trends; by overweighting commodities that have a positive ‘roll-yield’—the difference in price between short-dated and long-dated contracts; or by responding to chart patterns that indicate possible shifts in the sentiment of the other speculators.

In theory, these trading styles can be applied to any market, not only to commodities. For investors, however, employing these popular trading styles can be dangerous as big, highfrequency speculators are highly likely to be the first-movers to capture any available short-term gains.

A better strategy for most investors, therefore, is to leave the high-frequency speculation to the speculators and to think a bit longer term. Commodities that are at multi-year low or high prices relative to others are almost always there, at least in part, due to the active participation of short-term speculators. But as the speculators drive the price to historical 36

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ABOUT John Butler is a founding partner and the CIO of Amphora, a commodity-focused hedge fund. Prior to founding his independent investment and advisory firm, he was Managing Director and Head of the Index Strategies Group at Deutsche Bank in London. Prior to joining DB in 2007, John was Managing Director and Head of Interest Rate Strategy at Lehman Brothers in London. He is the author of The Golden Revolution (John Wiley and Sons, 2012), and author and publisher of the popular Amphora Report investment newsletter. If you would like to subscribe to the newsletter, please mail john.butler@amphora-alpha.com

extremes, fundamental supply and demand naturally begins to shift.

As is the case with most businesses, when the price of a product falls to a multi-year low, profit margins almost invariably come under pressure and the rate of new investment declines. It can take a year or more but, eventually, this lack of new productive capacity limits the growth of supply, supporting prices. Unusually high prices tend to have the reverse effect over similarly long periods of time.

Speculators tend to be too impatient to wait for such fundamental trends to play out. They are universally under pressure to generate near-term, high-frequency returns.

Therefore, for investors who hold a diversified commodities basket as a strategic inflation hedge in any case, with a longer time-horizon than commodity speculators, it makes sense to over- or underweight specific commodities in the basket with a longer-term view that some degree of mean reversion is highly likely as businesses adjust capacity to the price signals as described above.

A FEW SPECIFIC OPPORTUNITIES FOR THE SECOND HALF OF 2013 As discussed in Part I of this series, I believe that the outlook for commodities for the remainder of 2013 is favourable, in part because prices have now declined quite dramatically relative to the prices of financial assets in general and also because of the threat of supply constraints following from recent currency devaluations and associated trade disputes.

However, there are handful of commodities that do appear overvalued at present, in part because they appear to have attracted large speculative interest. Among metals, palladium

appears unreasonably expensive versus both near-substitute platinum and also versus industrial metals such as copper or iron ore.

Among agricultural products, cotton has become quite expensive. Sugar, by contrast, has become inexpensive. In relative terms to other agricultural products it hasn’t been this cheap in a decade. A relative recovery in price thus appear likely over the medium term.

As with all investment decisions, some will work out better than others. Just as with diversification generally, when considering whether to underweight or overweight a given commodity in a basket, care should be taken not to concentrate too much risk.

For example, to underweight both copper and iron ore relative to a non-industrial commodity is really just to take a view on the business cycle, as both copper and iron ore are highly correlated to the cycle and thus to each other, whereas non-industrial commodities are not. For those trading more actively it is best to have a handful of positions that should not be meaningfully correlated with each other, if at all. Returning to some of the other commodities listed above, there is no reason to believe that the prices of palladium, cotton and sugar should be highly correlated with one another. A decision to over- and underweight these relative to a basket, therefore, should diversify rather than concentrate risk.

In the next part of this series, I will discuss a few useful tools for determining which commodities are most likely to be attracting unsustainable speculative interest, and which are rather less likely. By employing these tools, investors should be able to further enhance returns to commodity investments over the longer-term.

29th September 2013 | Grand Hyatt, Dubai, UAE

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TRADE TALK strategy

Competing in a crowded market

Almost three decades ago, many countries have sought to privatise nationally owned monopolies as well as liberalise their markets to promote efficiency and competition. This liberalisation means an increase in competition. Dr. Ashraf Mahate, Head, Market Intelligence, DED, tell us how to deal with too many players in our field.

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hese actions have led to a growth of new companies both domestic and foreign competing in the same space. This is not only the case for the select industries which were protected by the government but liberalisation has affected all sectors of industry. This trend is expected to continue as countries sign free trade agreements with partner nations which offers them market access and national treatment which implies that foreign companies should have the ability to establish unhindered presence in the country. Of course domestic companies should also have the ability to have the same rights in the partner country.

Such a liberalisation of markets implies that not only will greater competition take place in the domestic market but companies have the opportunity to expand into foreign markets.

An opening of markets is not a bad thing however it can lead to a crowding out of smaller

ABOUT Dr. Mahate received his doctorate from Cass City University Business School in London (UK). He read Economics at University College London, followed by a Masters in International Economics and Banking at the University of Wales in Cardiff. Dr. Mahate is a professional educator and received his training at the Institute of Education (University of London). He is a member of the Chartered Institute of Managers (UK) and a Member of the Institute of Commercial Management (UK). He is also a member of the Association of Certified Anti-Money Laundering Specialists (ACAMS). He can be reached at ashraf.mahate@dedc.gov.ae.

to define a target market segment as well the marketing message. Take for example a new entrant in the burger or diner market.

The obvious lessons from the well-known burger chains is that customers want better quality and customised products with fresh and in some cases organic or locally sourced products. Hence, one can see that new

The first thing that SMEs need to do is to select their ‘ground’ or market. The most obvious choice is to go for a market segment that larger companies are not interested in either because it is small, or complicated. companies leaving only larger firms to survive as they tend to benefit from economies of scale and have lower average costs. So the natural question that arises is what can smaller firms do in crowded markets? The first thing that SMEs need to do is to select their ‘ground’ or market. The most obvious choice is to go for a market segment that larger companies are not interested in either because it is small, or complicated. However, it is important to select a market segment that does not have a short ceiling for growth.

Second, an SME needs to learn from the weaknesses of larger companies which helps

entrants in this sector that offer fresh high quality burgers have been able to develop a market segment and have become successful despite the strength of the larger chains.

Therefore, the key for SMEs is to focus on the common weaknesses of the larger firms and then to develop a product line that meets the needs of the disappointed customer base.

Having said this, it is important to remember that once the SMEs product line becomes successful there is no reason to suppose that the larger firms cannot imitate and inch out the smaller firm. Therefore, the SME needs to ensure that it is in constant touch with its

customers as well as those of its competitors so as to innovate and to continuously make the product range relevant to its market segment.

There is nothing better than personalising customer experience so that each transaction is a memorable occurrence. This is especially important for an SME that is seeking to be a pioneer in an industry and in the process stand out against the competition. To deliver a customised service an SME needs to invest in technology so as to collect and utilising customer information. Of course it is important to note that customers are willing to provide information if they trust the firm and are assured that it will not be passed onto other firms.

Also, in delivering a customised service it needs to be within cultural norms and not to the point of being creepy. Simple ways of customising an experience is to call the customer by their name with the correct pronunciation. Use the information from past transactions to suggest or even deliver customised products. Customers feel special when the product has been customised for them however minor the change.

Take the case of a restaurant that records a customer’s gluten allergy and suggests meals that are gluten free without the customer having to tell them. Also, if the SEPTEMBER 2013

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restaurant knows from its database that its customers are allergic to gluten then it can use this information to develop appropriate products. In this way the restaurant can use its information effectively to bring in new customers without alienating existing ones.

The SME may have gained a head start against its larger competitors but to stay in pole position it needs to be creative especially as larger firms take note and new entrants come to the market. To be creative the SME needs to think out-of-the-box so as to find ways to develop its market share.

One of the simplest ways of being creative is to be innovative and to look into the future.

In doing so the SME needs to think of what the firm’s customers will demands in the future.

develop better ways of satisfying continuously changing customer needs.

SMEs need to break away from conventional thinking and focus on how they package their goods. Of course the price and quality of a product is important to consumer but study after study has shown that packaging matters!

Consumers positively value effective packaging and it does alter their buying behaviour as well as impacting on their satisfaction.

Studies have shown that packaging does not only perform the function of storing the product but actually communicates the intangible brand attributes such as luxury or value. In terms of satisfaction the packaging assists in helping the product to perform to the brand promise. Take the example of a

SMEs need to break away from conventional thinking and focus on how they package their goods. Of course the price and quality of a product is important to consumer but study after study has shown that packaging matters!

In many cases the customers themselves do not know how their lives and behaviours will change into the future. Therefore, the SME needs to be aware of economic trends, demographic changes, psychological and behaviour norms, impact of technology and so. In the case of the latter it does not mean that simply producing a mobile application will keep the customers loyal to the SME. There is more to meeting customer needs then jumping onto the mobile application bandwagon. Instead, the SME needs to understand how the activities and lives of the customers will change and then to make it easier and more convenient for its existing and future customers. As a result the SME will need to plan and build its own infrastructure to meet the needs of its future customers.

It is important for the SME to appreciate that new entrants will continue to enter the market even if it is crowded. Therefore, the SME cannot continue to produce the same products and rely on making them cheaper and faster. The SME needs to identify and 40

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flexible tomato ketchup packaging which allows is easy to open and dispense every last drop. This is a marked difference from the standard glass bottle where one needs to wait for a long time for the contents to flow out and large parts are wasted because it cannot be dispensed. Therefore, the packaging needs to work so that it adds value to the customer experience so that consumers will not consider another brand the next time they make a purchasing decision.

Learn from the best SMEs need to appreciate the limitations of their own resources and the fact that they are competing with larger firms who may have been in business for a long time. Therefore, there is a fairly decent probability that these firms are doing some things correctly. In other words existing firms may have optimised their production process so as to acquire new customers, enhance customer experience, and so on. This gives SMEs an excellent opportunity to learn what works from their

competitors without actually replicating their entire business model. The latter point is very important because simply copying others will mean that the SME will always be a step behind its competitors. However, if the SME analyses its competition and then understand why they made they do what they do it will prevent the SME from missing out on lucrative opportunities.

Understanding competitors is now so much easier with the emergence of social media. There are so many websites and blogs that talk about companies and two lines of discussions take place. First, a thread of discontent and second a success story.

When the SME studies both of these lines of discussion it can soon find that new products and differentiation can quickly be developed.

According various consumer behaviour surveys more than half of the buyers first carry out initial research on the Internet before making a purchase. Therefore it’s very important for an SME to have an online strategy that ensures that it has an effective and easy to navigate website. Also, the information on the website has to be relevant and up to date otherwise potential subscribers will simply move onto other sites. Consumer behaviour surveys also show that social media is also an integral decision-making tool for consumers hunting for new products. Therefore, it’s not only important to have a social media presence to make it effective. For instance a hotel chain in the USA asked its guests to post a review on TripAdvisor knowing that the website is very effective in impacting on consumer purchase decisions. The reviews also helped the hotel chain to know exactly where it was lacking so that improvements could be made.

Importantly, every good experience was shared by many new potential customers.

Even in a crowded market the SME should with some thought and research be able to crave a lucrative market segment without a growth ceiling. However, to maintain and grow its market share it needs to be innovative and stay ahead of the competitors.

As the old saying goes, “either differentiate or die” is as relevant today as ever.

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TRADE TALK Legal

Piercing the corporate veil Many business professionals establish their ventures under a corporate or limited liability structure in an effort to protect their personal assets from claims made by internal and/or external forces. Paul Saba, Senior Associate, Al Tamimi & Co., looks into how a company can be held liable for its actions.

U

nder the Kuwaiti law, in certain circumstances the ability to circumvent the protection provided by the corporate veil and to hold such owners, shareholders, directors and managers personally accountable and liable has been available since the passing of the Kuwait Companies Law No. 15 of 1960 (the “Old Law”).

Under the Old Law, the ability to “pierce the corporate veil” revolved around actions made by leaders of a company (i.e. managers, board members) including but not limited to cheating, abuse of power, violation of constitutive documents and mismanagement. The process for filing such claims and obtaining the information to hold them accountable, however, was limited in nature.

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ABOUT Paul joined the Al Tamimi Kuwait office as an Associate in 2011. He has focused his practice on corporate finance, commercial and labour related matters, both on the transactional and litigation aspects. In addition, Paul is also trained as a state-certified mediator and dispute resolution specialist in employment and commercial disputes. He is a US qualified lawyer and has been practicing law since 2006.

However, under the new Companies Law No. 25 of 2012 (the “New Law”), there are several utilities available for stakeholders to hold certain individuals such as board directors, shareholders, and managers accountable for their actions. For example, under a shareholding company, the general assembly of shareholders, under Article 234, may file a lawsuit against its board of directors, and even in the event of liquidation, the respective liquidator retains the same authority.

Furthermore, where the general assembly fails to file such a claim, Article 235 of the New Law provides a shareholder the ability to file a claim, in an individual capacity, on behalf of the company against the board.

Notwithstanding the above, in the event a shareholder sustains personal damage, the same Article provides him the ability to file a claim in a personal capacity against the board.

Although the aforementioned concepts are not uncommon under most contemporary jurisprudence, Chapter One of Book Thirteen (“Supervision and Inspection”) of the New Law (Articles 327 – 333) provides relevant stakeholders with expanded abilities to pierce the corporate veil.

For example, in the event the Ministry of Commerce and Industry (“MOCI”) holds an audit of a company either through its own volition (Article 327) or pursuant to a request made by shareholders/partners representing at least 5% of the capital

For those facing such an inspection or an audit, cooperation with the same has also become a fiduciary duty. Under Article 333, such personnel must grant access to the inspector of all respective records and documents, otherwise the penalties for failure to provide the same, under Article 335, may include imprisonment of not more than one year and a fine of not less than KWD 5,000 or more than KWD 10,000.

Ultimately, the intent of the New Law in holding leaders and those with fiduciary duties accountable is evidenced by the

For example, under a shareholding company, the general assembly of shareholders, under Article 234, may file a lawsuit against its board of directors, and even in the event of liquidation, the respective liquidator retains the same authority.

(Article 329), the Ministry may, under Article 328, invite the general assembly or partners’ assembly to convene to cure such violation within 15 days from the date of the meeting. In addition, in the event that a request for an audit is dismissed by the MOCI, under Article 331, the respective stakeholders may file a claim in the Court of First Instance to issue a writ of mandamus to conduct such audit by an expert.

enactment of the aforementioned articles.

Nevertheless, there are several other areas under the New Law where such areas are addressed and will be addressed in future articles. Furthermore, it should be viewed as a welcomed change under the law by providing enhanced risk management and protection to those seeking to conduct business in Kuwait and entrust individuals with its assets.

SEPTEMBER 2013

43

FOCUS INDUSTRY WATCH

Investing in Canada’s mining industry With one of the most successful and prosperous economies in the world today, Canada offers a destination of choice for investors in the mining sector. Canada, with its many competitive advantages and rock-solid economic fundamentals, should be one of the front runners on your short list of locations. We take a look at what opportunities exist for foreign investors in this dynamic sector.

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Figure 31: Exploration Budgets for the Top Ten Countries, 2012 Top Ten Countries’ Budgets Totalling USD13.2 billion; 64% of 2012 Worldwide Budgets Totalling USD 20.53 billion

Source: Metals Economics Group, Corporate Exploration Strategies 2012.

C

anada is open to foreign investment in its mining sector. According to the Metals Economics Groups, Canada was the intended destination for 16% of all worldwide exploration budgets in 2012, the highest rate in the world.

Approximately 800 global companies have budgeted over USD 3.2 billion of their planned exploration spending for projects in Canada, more than that planned for Australia, the US and Mexico.

According to H.E Arif Lalani, Canada’s Ambassador to the UAE, “Canada is a top destination for investment, particularly

in the mining sector, thanks to a clear regulatory regime, stable economy, talented workforce, competitive tax structure and sound banking system. Given our strategic location and commitment to free and open trade, I am convinced that foreign investors will continue to consider Canada as a priority in their growth strategy.”

Overwhelmingly, Canadian companies operate in a socially responsible manner and through this approach contribute to job creation and prosperity around the world. They recognise that a commitment to corporate social responsibility is a commitment to their own success. The Government of Canada encourages and expects all Canadian companies to respect all applicable laws and international standards, to operate transparently and in consultation with local communities, and to conduct their activities in a socially and environmentally responsible manner.

A wealth of opportunities.

Canada is geographically the second largest country in the world and currently produces some 60 minerals and metals, from more than 200 mines. The world’s leader in the production of potash, Canada ranks in the top five countries for the production of primary aluminum, cobalt, diamonds, nickel, platinum group metals, titanium concentrate, tungsten, and uranium.

Canada also has a large mineral-processing industry, with 30 non-ferrous metal smelters and refineries in six provinces. Its integrated smelters and refineries were built in proximity to world-class mines, ensuring the competitiveness of the processing industry which depends on the ability to secure reliable sources of feedstock from domestic mines.

Canada is a world leader in the extractive industries, being home to 52% of all mining projects worldwide. Canadian companies in SEPTEMBER 2013

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FOCUS INDUSTRY WATCH

the extractive sector have interests in more than 8,000 properties in 100 countries— representing 8.6% of Canada’s direct investment abroad. These companies create economic development and growth in the countries where they operate, including Canada.

It’s tax regimes for mining are among the most competitive in the world and reflect the conscious decision by government to encourage this industrial activity.

According to PriceWaterhouse Coopers, the continuing reductions of the corporate rate both federally and provincially, as well as reduced red tape, has dramatically improved Canada’s competitiveness when compared with other countries regarding corporate tax rates.

The Toronto Stock Exchange (TSX) is the world’s leading stock exchange for mining investment, handling 83% of the world’s mining equity transactions over the past five years. With the help of Canada’s stock exchanges (TSX and TSX-V), Canadian-listed companies are responsible for between one third and one half of all global equity raised for mineral development. In fact, almost 60% of the world’s publicly listed mining companies are listed in Canada. Canada’s standing as an open and stable market is 46

SEPTEMBER 2013

H.E Arif Lalani, Canada’s Ambassador to the UAE

supported by security regulators that impose disclosure standards on firms to provide timely and accurate reporting to investors, helping to ensure fair and efficient capital markets. In 2012, 70% of the equity capital raised globally for mining was raised in Canada (CAD10.3 billion out of a worldwide total of CAD14.8 billion equity).

With Canadian mining and metals companies planning expenditures of USD 136 billion in mining projects over the

next decade all across Canada, access to capital will continue to be a key argument in favour of Canada.

A unique feature of Canada’s tax regime is the flow-through shares (FTS). Flow-through shares enable a company to transfer eligible exploration and development expenses to investors. These expenses or deductions can be used by the investors to reduce their taxable income from Canadian sources.

Because the shares carry a tax deduction, they are sold at a premium compared to regular shares, enabling a junior company to raise relatively more funds to continue its exploration activities.

Businesses should also be attracted to Canada for its winning conditions for research and innovation. R&D capabilities in Canada are strong and affordable.

Canadian firms and research centres offer innovative technologies and approaches addressing critical present day challenges such as improving efficiencies, enhancing workplace health and safety, and ensuring environmental sustainability. Canada’s research and innovation advantage is soundly anchored across the country in world-class research institutions and public-private R&D networks where one can find vibrant cultures for research collaboration and technology transfer. Every day, researchers and scientists in Canada are advancing the frontiers of science and transforming that knowledge into commercial opportunities and profits.

The 2012 list of the top 100 corporate R&D spenders in Canada include familiar names such as Vale, Novelis, ArcelorMittal, and Rio Tinto among others. This is with good reason; Canada offers one of the most generous tax incentives regimes in the industrialised world for R&D performed in Canada.

The Government of Canada invites businesses to explore Canada’s many advantages and discover why investors from around the world are choosing Canada as a top business and investment destination.

Our global network of investment and trade professionals is available to assist. To learn more about Canada’s investment advantages, please visit www.investincanada.com.

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TRADE TALK Industry focus

The peril of being the “well-oiled” nation Amrita Sen, Chief Oil Analyst at Energy Aspects talks to us about the oil market in Kingdom of Saudi Arabia (KSA) and the challenges and opportunities in this industry.

Saudi: from supply to demand The importance of Saudi Arabia in the oil market is unparalleled, not simply because it holds the world’s largest reserves of conventional crude oil and is the largest oil exporter in the world, but more so because of its ability to maintain the role of a swing producer, a role which it has played for decades now. The Kingdom has, for several years, maintained spare capacity for emergencies, an extremely costly mechanism, but one that allows for some stability in the oil market given that the market has been subject to regular supply disruptions. Even though the available spare capacity, which was at nearly 7 mb/d in the mid-1980s, has shrunk to around 2 mb/d currently, the Kingdom’s flexibility to adjust output is unrivalled by any other OPEC member.

Saudi Arabia’s policy has been in the limelight lately, not least due to the uncertainties surrounding Iranian barrels.

The growth of both US and Iraqi production has raised various questions about whether Saudi Arabia can continue to exercise similar clout in the oil market as it has done in 48

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previous decades, especially at a time when its own domestic consumption is rising. We see the Kingdom’s response to new high cost producers (i.e. the US) as being markedly different from that towards new low cost producers, particularly if they are within OPEC (i.e. Iraq). While the reaction to the former may be to reduce investments in maintaining a sufficient spare capacity buffer, the response to the latter has been to refocus on market share.

Naturally, the impact on prices will be different too, with the former likely to eventually boost back end prices, given that the US, or for that matter any other country, is not likely to have the means to maintain spare capacity in the market, while the Kingdom’s response to Iraq risks lowering prices in the shorter term, as it tries to regain market share.

Maintaining spare capacity is costly…

Today, Saudi Arabia is the only country in the world with available spare capacity, and they are willing to bring it to market if there is an increase in demand for Saudi crude, thus helping to moderate the impact of shocks on

prices. Saudi Arabia has done this at various times in the past – during the Iran-Iraq war, when output from both countries was disrupted; during and after the first Gulf war, when output from Iraq and Kuwait was lost; in 2003, when civil strife in Venezuela and Nigeria curbed output from both countries; on the eve of the invasion of Iraq (which itself disrupted Iraqi output), and once again in 2008 when oil prices rose to USD 140 per barrel. Saudi Arabia continued to act as the swing producer recently as well, when all Libyan output was lost for over six months during the Arab Spring in 2011 and then again during 2012, when Western sanctions on

The Kingdom has, for several years, maintained spare capacity for emergencies, an extremely costly mechanism, but one that allows for some stability in the oil market given that the market has been subject to regular supply disruptions.

Iranian exports were implemented. Equally, Saudi Arabia has the ability and discipline to reduce production when oil prices have fallen too sharply, as they did through late 2008 and early 2009.

But maintaining such spare capacity comes at a cost. Keeping almost 2 mb/d of output available to be brought online within 30 days costs billions of Dollars. Throughout the last decade, the Kingdom invested in various

mega projects, starting with the 0.5 mb/d Qatif and 0.15 mb/d Safah project in 2004 followed by the 0.3 mb/d Haradah III field in 2006. In the second half of the decade, the Saudis brought online 0.5 mb/d AFK project in 2007, 0.25 mb/d Shaybah (Phase 1) and the 0.1 mb/d Nuayyim fields in 2008 and then the largest increment in production from 1.2 mb/d Khurais field in 2009, taking total capacity up to 12.5 mb/d. Preserving Saudi Arabia’s spare oil production capacity has been crucial to maintaining the Kingdom’s political and economic influence in the international oil market. According to Saudi Petroleum Minister Ali al-Naimi, it is that SEPTEMBER 2013

49

TRADE TALK Industry focus

spare capacity which “has been tapped to compensate for production disruptions and declining supply from other major suppliers, and is a cornerstone of the kingdom’s energy policy But the Kingdom’s objectives and priorities may be changing. In contrast to the last decade, in this decade, the only planned expansion is in the form of the 0.9 mb/d Manifa oil field, which will offset declines elsewhere, rather than adding to capacity. at a time when its domestic investment costs are soaring One of the biggest challenges facing Saudi Arabia is how to curb the growth of domestic energy consumption. This requires long-term structural changes such as reforming energy prices, introducing efficiency measures, and improving energy productivity, especially in the industrial sector and power generation.

Some economists have argued that if Saudi Arabia’s current energy-consumption growth rate of 7% a year continues unabated, within 20 years The Kingdom will burn the equivalent of around two-thirds its total current crude

ABOUT Amrita is the Chief Oil Analyst at Energy Aspects, a research consultancy. Her specialism is in energy commodities, particularly oil and oil products, and she has also covered coal and freight markets and investment flows into the commodities markets. Amrita holds an MPhil in Economics from Cambridge University, a BSc in Economics from the University of Warwick, and is pursuing a PhD at the School of Oriental and African Studies, University of London. She is a fellow at the Oxford Institute of Energy Studies and was formerly a chief oil analyst for Barclays Capital.

to diversify the country’s energy mix, for instance by using gas to fuel the country’s power and industrial sectors. The switch to gas is one of several measures the kingdom is taking to reduce oil demand, although the substantial impacts will not be visible till 2020. Saudi Arabia has also announced that it will adopt a wide-ranging solar strategy, outlining plans to invest USD 109 billion over the next 20 years in order to take advantage of its solar resources. This policy needs Saudi Arabia to accelerate the application of smart grids, the introduction of regulations

One of the biggest challenges facing Saudi Arabia is how to curb the growth of domestic energy consumption. This requires long-term structural changes such as reforming energy prices, introducing efficiency measures, and improving energy productivity, especially in the industrial sector and power generation. production capacity of 12.5 mb/d. In a recent interview, Prince Abdulaziz bin Salman, the Assistant Minister of Petroleum, pointed out that Saudi Arabia’s total consumption of crude and other types of oil liquids will almost double in 17 years to slightly exceed 8 mb/d, including 4 mb/d of crude and petroleum products and 4.2 mb/d of natural gas liquids. In absence of any expansion in capacity, this would constrain Saudi Arabia’s ability to stabilise the international oil market, with spare capacity used up to maintain export volumes.

The Kingdom is well aware of the challenge of rising domestic consumption.

Hence, billions of Dollars are being spent 50

SEPTEMBER 2013

to govern the grids and the development of associated systems and specifications.

Additionally, Saudi Arabia is seriously considering the introduction of nuclear as an option to counter the challenge as well as to diversify the industrial structure for the nation’s sustainable development.

Saudi Arabia has identified energy efficiency as a key national priority and sees renewable energy sources as supplementing existing sources. But implementing these measures comes at a hefty price. With social spending on the rise, the policy of maintaining costly crude oil spare capacity is likely to come under increasing scrutiny in the Kingdom.

All eyes are on the Saudi response The need to maintain or expand this spare capacity is being put further into question given the demand declines in the OECD and potential growth in non-OPEC supplies from Latin America (although these have disappointed significantly so far) but mostly given the hype surrounding US tight oils output and suggestions of the US overtaking the Saudis as the largest producer in the world and turning into a net exporter of crude. This is not the first time Saudi Arabia’s intent and ability to control the market has been questioned. During Russia’s ascendency in the late 1990s and early 2000s, the market constantly pitted the two against one another with any action taken by the Saudis interpreted as a direct response to Russian production growth. The fear extended to the belief that Russia would lead to the demise of Saudi Arabia as the world’s largest oil producer and the Kingdom would have to reduce output to accommodate Russia. Partly due to burgeoning demand from Asia and partly due to Russian production growth stalling, Saudi Arabia retained its important position in the oil market.

Today, the focus has shifted from Russia to the US and Iraq. The growth of shale production has propelled the US to the centre stage of world oil supplies, with the IEA recently claiming that it will overtake Saudi Arabia as the largest oil producer by 2020. At the same time, Iraq is seeking to grow its own production and gain market shares. In the next article we will consider the emergence of these two sources competition and different ways the Kingdom may respond to each of them.

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