Developing industrial clusters to improve Saudi Arabia's downstream segment

 

Economic planners in Saudi Arabia are working to nurture industrial growth by identifying sectors with high potential and developing clusters of companies and expertise within them. The National Industrial Clusters Development Programme (NICDP) has been established under the supervision of the Ministry of Commerce and Investment (MoCI), and the Ministry of Energy, Industry and Mineral Resources (MEIMR) to drive forward this approach. Four areas with potential for cluster development have been identified: pharmaceuticals and biotechnology; automotive; plastics and packaging; and minerals and metals processing. Each cluster will comprise businesses with common sources of raw materials, expertise and complementary outputs, although the four clusters will not necessarily be developed in specific geographical areas.

While proximity may be important for firms in the automotive industry, clusters including plastics and packaging are likely to grow around existing petrochemicals facilities in both the western port city of Yanbu and Jubail in the east, some 1500 km apart. There may also be opportunities for industries serving one or more clusters, as with the automotive industry requiring components made of metal and plastic, or pharmaceuticals firms requiring mineral raw materials and packaging.

Facilitating Growth

To encourage this integration initiative, the NICDP will act as an intermediary for private businesses and a range of key government agencies. These include the MoCI, MEIMR, the Saudi Industrial Property Authority (MODON), the Royal Commission for Jubail and Yanbu, Saudi Arabian General Investment Authority, Saudi Industrial Development Fund, the Saudi Public Investment Fund and the Human Resources Development Fund. The role of the NICDP will be to give investors clear instructions and data on each cluster, as well as facilitate a timely response to requests for government permits and funding.

Minerals & Metals

Valuable mineral deposits exist in many parts of the Kingdom, but Ras Al Khair in the Eastern Province has been declared its mining and minerals superhub, and in November 2016 King Salman bin Abdulaziz Al Saud formally inaugurated the port city as the centre of Saudi mining. Home to the Saudi Arabian Mining Company’s (Ma’aden) integrated complexes for aluminium and phosphate production, Ras Al Khair is served by a sea port and a 1400-km railway connecting it to mines in the interior. Announcing the inauguration, Khalid Al Falih, minister for energy, industry and mineral resources, told local media, “We are confident that the city will help establish Saudi Arabia’s mining sector on the global stage and also contribute to the generation of multiple downstream investment opportunities.”

According to MEIMR, $35bn has been invested in the Ras Al Khair Industrial City over 10 years, with its first facilities commencing operations in 2011. The complex is set to generate 12,000 direct jobs and has the potential to contribute $9bn annually to GDP. To attract investment the NICDP has highlighted a number of opportunities using aluminium, steel, copper and alloys, including plants to produce sheet metal, wire, rods, foil, tools, bearings, pumps, valves, castings and pipes for both domestic and international automotive and construction industries. Among new facilities being built in the cluster, Ma’aden is engaged in a seven-year project to build a new phosphate fertiliser plant that will add 3m tonnes per annum (tpa) to total output.

Automotive Cluster

Saudi National Automobiles Manufacturing (SNAM) is planning to manufacture two cars: the 2- or 2.4-litre engine SD-100, and its multipurpose vehicle variant, the SD-110. In February 2017 SNAM signed a cooperation agreement with Sadara Chemical Company (SCC), a $20bn joint venture with US-based Dow Chemical and Saudi Aramco, to build a 1-sq-km automobile manufacturing cluster in PlasChem Park, the 12-sq-km industrial park built adjacent to SCC’s petrochemicals plant in Jubail Industrial City. SNAM aims to provide space for downstream chemicals conversion companies supplied by SCC and other nearby facilities and to attract auto cluster tenants to the site including Tier-2 firms supplying subsystems, sub-assemblies and components, as well as Tier-3 firms supplying standard parts and materials. The SNAM facility will include workshops for welding, pressing, painting and assembly, as well as a logistics warehouse, a test track and an administration building. “In order to create a sustainable automotive industry ecosystem, SNAM researched local companies with operations related to the automotive industry in order to activate Tier-2 and Tier-3 suppliers who can do business with international Tier-1 suppliers,” Fahd Al Dohish, CEO of SNAM, said in a press release. “Another important aspect of SNAM’s plan is to utilise the local resources in manufacturing the automotive parts as much as possible.” In a related press release, Ziad Al Labban, CEO of SCC, told local media the partnership is expected to drive development of downstream manufacturing and catalyse investors to use the company’s specialist chemical products.

Increasing Production

The NICDP aims to produce 600,000 vehicles per year by 2025, manufacture 8m-10m tyres for home and overseas markets, and create a Saudi automotive supply chain with Tier-1 companies supplying systems and modules and Tier-2 and Tier-3 firms working in their respective fields. The cluster would be supported by industry services such as training, and research and development (R&D).

The Kingdom has various competitive advantages for the Kingdom as an automobile manufacturer, largely in terms of sourcing inputs locally. It can supply steel, aluminium, plastics, synthetic rubber for tyres and glass, as well as the space to build integrated facilities. The challenge will be to encourage the creation of smaller specialised engineering and fabrication firms to manufacture custom-made components. To this end, Saudi Arabia is looking to collaborate with international partners for these developments. For example, since 2012 Isuzu Motors has been building trucks at a factory supplied by MODON in Dammam Second Industrial City.

However, as in all clusters, growth should be undertaken strategically. “Adding products to our portfolio should not be done just for the sake of diversification,” Abdullah Al Garawi, president and CEO of Advanced Petrochemicals Company, told OBG. “As a country, we need to find the goods we excel in producing based on our resources, and look at what downstream possibilities exist based on those.”

Plastics & Packaging

According to Jadwa Investment, some 85% of plastic products – such as polymers produced by petrochemicals industries – are exported. Domestically, 10% is sold to local conversion companies. Through the NICDP, the government could potentially reduce costs and create more jobs by developing a plastics and packaging cluster to feed other industries being incubated. “Companies need to be flexible and ready to react quickly to cycles in the market, targeting the growth areas. In the case of plastics, shifting production can protect us from slowing construction activity,” Majed Al Sulaim, CEO and managing director of Arnon Plastic Industries, told OBG. The goal is to encourage integration between petrochemicals and plastics companies, as well as other clusters.

Saudi Arabia accounted for 67% of GCC plastic resins in 2016, according to the Gulf Petrochemicals and Chemicals Association (GPCA), and was the largest polymers consumer, using 61% of the 5m tonnes produced in the Gulf. Consumer packaging accounted for 44% of the demand for polymers in GCC countries in 2016. Between 2006 and 2016 Saudi Arabia’s polymers production capacity increased from 6.5m tpa to 18.2m tpa, a compound annual growth rate (CAGR) of 11%.

Plastics Market

The GPCA noted that engineering plastics were first introduced into the region, when commercial operations commenced at SCC in 2016, which drove the development of secondary and tertiary chemicals manufacturing. The polymers industry accounts for 39,300 jobs across the GCC, with a further 118,000 working in plastics processing. A wide range of products are manufactured, including glasses frames, window frames, car bumpers, flower pots, plastic cups, reusable plastic bags, milk bottles and toys. In 2016 some 3m tonnes of these products were consumed in the country, compared to 1.4m tonnes 10 years earlier, a CAGR of 7.6% and equivalent to 95 kg per person.

In 2016 GCC countries used 44% of the plastic produced for consumer packaging, 26% for construction and 13% for industrial packaging, and 2% for automotive manufacturing. Saudi Arabia is responsible for 65% of GCC polymers exports, valued at $16bn in 2016. The GPCA expected polyethylene terephthalate output to double between 2017 and 2022, reaching 1.6m tpa and supporting downstream industries. Additionally, the association identifies recycling as a potential growth industry. It calculates Saudi Arabia produces 1.3 kg of plastic waste per capita daily, comprising 5% of total solid waste. However, 1% of plastic waste is recycled, compared to 11% in the UAE, Oman and Kuwait.

Pharmaceuticals

In the health care sector, 40 business opportunities have been identified with a combined value of $20bn. These include R&D, vaccination, automation of health care systems and pharmaceuticals manufacturing development. With the support of the Ministry of Health, the pharmaceuticals and biotech cluster is aiming to develop a more diversified industry by attracting foreign direct investment to encourage the latest technologies, create new job opportunities for locals and see the Kingdom become a net exporter and leading innovator in medications.

“As targeted by Vision 2030, the health care sector presents clear opportunities for local-content development,” Hisham Saad Aljadhey, executive president of the Saudi Food and Drug Authority (SFDA), told OBG. “Local production of medical devices, for instance, can profitably be customised to the needs of the growing local market as well as pharmaceuticals. Especially with the manufacture of medicines, we have a comparative advantage given that a lot of active ingredients used for drugs are ultimately derived from petroleum products.”

The government is also promoting faster acceptance of medicines. “It used to take two years to register a drug in Saudi Arabia, compared with six months in Europe. With the implementation of new rules by the SFDA, a drug that has already been registered in advanced economies, such as the EU, will automatically be approved domestically through a process of bridging and commutation,” Mohammed Saud Al Badr, managing director of Saudi Chemical Company, told OBG.

Collaboration

In June 2016 GE Healthcare entered into a vaccine collaboration agreement with the NICDP, MEIMR, SaudiVax and King Saud University to enable vaccine self-sufficiency and pandemic preparedness. In addition, SaudiVax and its partner PnuVax are working with GE Healthcare on a feasibility study for a vaccine and monoclonal antibody manufacturing facility in Riyadh to foster a complete life sciences industry. The venture is expected to create 1500 new jobs.

At the same time, the partnered companies are working with King Saud University to create an innovative bioprocess education programme that will help produce highly skilled specialist scientists and technicians.

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The Report: Saudi Arabia 2018

Industry chapter from The Report: Saudi Arabia 2018

The Report: Saudi Arabia 2018

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