Saudi Arabia is in the middle of an economic transformation. Long known as the oil capital of the world, the kingdom is now focusing its economic policies on manufacturing and other non-oil activities as it tries to move away from oil dependence and build on its other competitive advantages.
Economic planners first recognised the need for diversification back in the 1970s, when they recommended building industrial cities specifically tailored to the oil and petrochemical industries at Jubail and Yanbu. Additionally, the government founded the Saudi Basic Industries Corporation (Sabic) to build the kingdom's petrochemical base. Today, both industrial cities are well-known success stories and Sabic is a world leader in petrochemical production.
More recently, Saudi Arabia's seventh five-year plan in 2000 laid the groundwork for the kingdom's latest diversification initiative. However, it was not until the eighth five-year plan in 2006 that specific guidelines for the creation of a significant private sector and diversified economy were established. The plan outlines growth targets of 7.3% and 6.7% annually for the petrochemical and manufacturing sectors through 2024.
Manufacturing was the second fastest growing segment of the non-oil sector in 2007, recording a 6.5% increase. Last year, manufacturing, which includes petrochemicals, was predicted to grow 7.6%, according to Jadwa Investment, a Riyadh-based financial consultancy. The firm estimates the segment will grow a total of 9.4% from 2007 through 2010.
Getting more from hydrocarbons
Both domestic and overseas demand for Saudi goods is on the rise - the country's non-oil sector grew 5.8% in 2007, thanks in part to a boom in the non-oil hydrocarbons industry.
"The non-oil trade data illustrates that the diversification going on within the Saudi economy is focused on generating greater value-added from the kingdom's hydrocarbon reserves rather than developing unrelated industries," writes Brad Bourland, Jadwa Investment's chief economist.
With hydrocarbons leading Saudi Arabia's non-oil sector, Sabic is the undisputed leader. The company has three major petrochemical projects underway in Kayan, Sharq and Yansab, and is investing more than $12 billion in adding 20 million tonnes of petrochemical production capacity to the kingdom by 2010. If growth goes as planned, Sabic will have 75 million tonnes of petrochemical production capacity by the end of the decade.
Sabic is hardly alone in seeing opportunities in the petrochemical sector. National oil leader Saudi Aramco is currently building a $10 billion petrochemical plant on the Red Sea, called PetroRabigh, with Japan's Sumitomo Chemical.
"We are the most cost-effective production location in the world for the industries we are targeting," says Amr Al-Dabbagh, governor of the Saudi Arabian General Investment Authority (Sagia). He goes on to explain how, as the lowest cost location for targeted industries, including petrochemicals and plastics, he expects investment in the sectors in to increase.
Sagia is helping to diversify the kingdom's economy through its four economic cities - Jazan, King Abdullah, Economic and Prince AbdulAziz bin Mousaed - each of which are designed with specific competitive advantages that are in line with the sectors emphasised in Saudi Arabia's eighth five-year plan. Jazan will focus on heavy industry, including petrochemicals, King Abdullah on lighter industries, notably plastics, and Knowledge on the kingdom's nascent information technology sector.
Using its endowments
Petrochemicals and other hydrocarbon-derived products are not the only ones booming in Saudi Arabia. Other sectors, including mining and cement, are also posting significant gains. In 1997, the Saudi government split the General Authority for Petroleum and Minerals, or Petronic, in two. The oil operations continued while the company's mining operations were given to the newly formed government mining company Ma'aden. Imbued with the responsibility to grow Saudi Arabia's mining and mineral industry, the company set out to do just that.
"In the previous decades, most of the industrial mega projects in Saudi Arabia were oil and gas related," says Ma'aden president and CEO Abdullah Dabbagh. "To expand and diversify the economy, the government created Ma'aden in 1997 to enhance the country's non-oil mining capabilities as this was a very large and relatively untapped area that could be further developed."
Beginning with assets of $1.2 billion, Ma'aden now has a market capitalisation of approximately $2.9 billion. The company currently mines gold, silver, copper and zinc, and plans to expand mining operations into bauxite, phosphate and magnesite. Current major projects include a multi billion dollar diammonium phosphate fertiliser facility and an alumina refinery and aluminum smelter complex.
"There are a number of aluminum plants in operation or under construction in Dubai, Bahrain, Oman and Qatar," says Dabbagh. "But all of these facilities rely upon imported alumina. Ma'aden's project is unique in the Gulf as it will produce alumina from locally available bauxite. This creates security of supply for the smelter, which brings a major additional dimension into the picture for Ma'aden's project."
Cement is another booming industry in Saudi Arabia. Sticking to Sagia's plan to target industries the kingdom is most competitive in, the cement industry benefits from the country's sizeable limestone deposits and cheap energy. Cement comprises anywhere between 70% to 80% limestone and producing it requires large amounts of energy.
Fuelled by strong demand, the cement industry had an installed capacity of 38 million tonnes in 2007, according to Jadwa Investment. This is up 46% over 2006 and the industry plans to nearly double capacity to 70 million tonnes by 2013. In 2008, 7.8 million tonnes of new capacity was slated to come online.
A heterogeneous future
With its eighth five-year plan, Saudi Arabia has a solid blueprint for a diversified economy. Already, certain parts of the plan - investment incentives and privatisation initiatives - are being initiated around the country. Sagia leads the investment agenda while the Public Investment Fund, with the cooperation of the International Finance Corporation, is actively enabling privatisation by working with relevant government ministries and companies.
Issues still remain for the kingdom's diversification agenda. To continue to grow and diversify its economic base, Saudi Arabia needs equipment, know-how and human resources. Many companies in the kingdom, including Ma'aden, Sabic and Saudi Aramco, are forming joint ventures with foreign companies to help meet the expertise and labour gaps. For the equipment though, Saudi Arabia joins the queue of rapidly growing nations like China and India waiting for the world's equipment suppliers to fill their significant order backlogs.
Labour shortages and equipment shortfalls have not stopped Saudi yet. The current global economic crisis in many ways is aiding Saudi Arabia to speed up some of its investment projects. With projects on track, the kingdom appears poised to become the diverse global economic powerhouse it aspires to be.
This story was first published in a supplement on Saudi Arabia with the December issue of FinanceAsia.