More than petrochemicals: Heavy industry and petrochemicals dominate, while other segments such as automotive and pharmaceuticals are becoming more prominent

The largest industrial power of the GCC states by far, Saudi Arabia is also one of the leading industrial powerhouses of the world in a number of key sectors. National industry is dominated by petrochemicals and the country ranks as the third-largest global producer of basic petrochemical ethylene, due in large part to the availability of extremely cheap natural gas feedstock.

State-backed Saudi companies, in partnership with foreign investors, are also moving to significantly boost other heavy industrial activity, through the construction of new large-scale projects and industrial cities in the metals and fertilisers segments in particular. As a result, the Kingdom is now also one of the largest producers of key fertilisers. The authorities are also hoping that downstream lighter manufacturing activities will expand on the back of the increasing availability of domestically produced raw materials, boosting local employment. There are increasing signs that such plans are coming to fruition, with several foreign firms currently considering major investments.

SECTOR GROWTH: Industrial activity has been growing rapidly in Saudi Arabia in recent years. After taking inflation into account, industrial output (referred to by the Central Department of Statistics and Information, CDSI, as manufacturing, but including heavy industry) excluding oil refining grew by 4.9% in 2012 and 4.7% in 2013. This followed two years of double-digit real annual industrial growth in 2010 and 2011. Industry accounted for 10.1% of GDP in 2013, or 7.7%, when refining is excluded from the figure, more or less unchanged from the two previous years. Despite such growth, the Kingdom still has a negative industrial trade balance. Manufacturer exports were worth SR131.59bn ($35.08bn) in 2012, according to data from the CDSI, representing 9.03% of total Saudi exports by value, in comparison to manufacturer imports of SR387.69bn ($103.35bn), or 67% of total imports.

However, industrial exports and industrial output more generally are set to grow substantially. Under the Kingdom’s National Industrial Strategy, ratified in 2009, the authorities aim to raise the contribution of industry (including heavy industry) to GDP to 20% by 2020, as part of wider efforts to diversify the economy away from its reliance on hydrocarbons production, as well as to increase industrial exports to 35% of total exports. Fahad Al Kaffary, the general manager of Falcon Company for Plastics Industry, told OBG, “Saudi Arabia has the potential to be a manufacturing hub thanks to government support, low input costs and the Kingdom’s strategic geographic location.” One of the main goals of the strategy is to improve job prospects for Saudi nationals, and the authorities are also targeting an increase in the contribution of industry to overall employment from 15% to 30%.

In order to achieve these goals the authorities established the industrial clusters initiative, which is overseen by the Ministry of Petroleum and Mineral Resources and the Ministry of Commerce and Industry; the programme aims to attract foreign investment in five key areas. These are the automotive sector, home appliances, minerals and metals processing, plastics and packaging, and solar energy products. The authorities also aim to raise the level of the Kingdom’s industrial technical know-how in a range of fields by attracting increased manufacturing foreign direct investment (FDI). “Partnering with foreign companies allows for knowledge transfer, helping to create a professional environment that encourages further development and improvement of local industry,” Mohammed Al Meshal, the CEO of the Saudi Food and Drug Authority, told OBG.

INDUSTRIAL WORKFORCE: Industry employed nearly 637,000 people in 2013, according to figures from the CDSI. As with many sectors in the Kingdom, the majority of employees in the sector are expatriates; Saudi nationals accounted for 23.9% of the industrial workforce in 2013. The government is seeking to increase this figure, and in 2011 the Kingdom introduced the Nitaqat programme, which sets mandatory minimum proportional quotas for Saudi workers in private sector firms based on factors such as company size and sector of activity. Companies that fail to meet their requirements are subject to administrative sanctions such as being barred from renewing employees’ work permits, obtaining visas for new workers and opening new branches. Under the programme, all companies with foreign workers have been divided into three different categories – red, yellow or green. Firms with an adequate number of Saudis employed come under the green category, and they get preferential treatment such as expedited services while handling foreign workers’ visas. “The colour system regulating visas has improved the environment for labour-intensive industries,” Loai Nassem, the CEO and founder of fashion company Lomar Thobe, told OBG.

Heavy industries such as refining and petrochemicals are less affected by Saudiisation initiatives as they tend to already employ high proportions of nationals. As a result, while the government is investing strongly in heavy industry, it is also working to expand downstream lighter manufacturing in sectors such as those targeted under the industrial cluster programme. Industrialists are also calling for increased on-the-job training in order to help boost Saudiisation. “Improving the skill level of the Saudi workforce goes beyond education. You’re not ready to work from day one, you have to learn and grow as an employee. There needs to be investment in the training of employees to help them accomplish this,” said Nasser Al Qahtani, group CEO of holding company Abdullatif Alissa Group.

Supporting local small and medium-sized enterprises (SMEs) also serve as another way of boosting local employment. “To solve employment issues, and to build a stable and diversified economy, you need to support SMEs. They are an important growth engine for any modern economy,” Abdullah Al Onezi, the CEO of the Saudi Paper Manufacturing Company, told OBG.

INDUSTRIAL CITIES: The Kingdom’s industrial strategy is heavily based on the development of so-called industrial cities, which are dedicated zones that provide ready-made infrastructure to tenants, including in some cases residential and commercial areas for workers. Prior to 2012 investors were free to build industrial facilities on appropriately zoned land anywhere in the Kingdom. However, since then they have been required to establish new facilities within the industrial cities only.

The Royal Commission for Jubail and Yanbu (RCJY) operates the largest two industrial cities in the Kingdom in terms of output by value. Jubail, the larger of the two, and Yanbu are together thought to account for around 12% of GDP and between them have attracted about $144bn of investment to date. The two cities are dominated by heavy industry, in particular petrochemicals and refining.

Jubail Industrial City, which alone is thought to account for around 7% of GDP, is currently being expanded under a project known as Jubail II, which began in 2006 and which will increase the size of the city by some 53 sq km (including a 17-sq-km fourth and final phase, work on which has yet to begin). The venture, which is due to be completed by 2024, is one of the largest construction and engineering projects in the world. RCJY has committed $3.8bn to developing the city’s infrastructure and total planned investment in industrial facilities to be located within it stands at around $80bn. Major projects in the new zone include the Saudi Aramco Total Refinery and Petrochemical Company’s (SATORP) refinery, which is part of the second phase of Jubail II and which has already begun production (see Energy chapter), and the Sadara petrochemicals joint venture between Dow Chemical and Saudi Aramco (see petrochemicals section), which is being built as part of the third phase of the project.

The RCJY is currently developing a new industrial city at Ras Al Khair on the Gulf coast in Eastern Province. The city will be focused on minerals and metals processing – in particular aluminium and phosphates – with a $4bn aluminium smelting complex currently under construction to be its centrepiece.

Plans for a new heavy-industry-focused industrial city that will not fall under the purview of the commission, Waad Al Shammal Mineral Industrial City, were announced in 2012. The centrepiece of the zone, which is near the northern town of Turaif close to the border with Jordan, will be a $7bn phosphate complex being built by the Saudi Arabian Mining Company (known as Ma’aden), Saudi Basic Industries Corporation (SABIC) and US-based Mosaic (see below).

IN THE ZONE: Another major operator of industrial cities in the Kingdom is the Saudi Industrial Property Authority (MODON). The authority was established in 2001 to take over the supervision of a number of existing industrial zones and since then has rapidly expanded the number and size of cities under its control, which generally focus more on lighter industry and manufacturing than the RCJY’s cities. MODON currently operates 32 industrial cities, including four or five of which are still in the initial phases of development. It also supervises six privately owned industrial cities. Together the cities under MODON’s purview cover a total of 163m sq metres of land and host around 5400 tenants. The size of the cities varies substantially, from 500,000 sq metres to 25m sq metres for completed cities; two planned cities (Sudair and Al Ahsa II) will be vastly bigger, at 260m sq km and 300m sq km, respectively. Initially most of MODON’s sites were established in and around large and medium-sized cities; however, it is now concentrating on less developed parts of the Kingdom in order to stimulate economic growth.

The authority previously focused on providing infrastructure and land, but has recently begun building ready-made factories for tenants, aimed at small and medium-sized enterprises. The factories are built to a single standard model and have 1500 sq metres of space including a 600-sq-metre production area. The authority aims to have completed 200 such factories by the end of 2014 and 1000 by the end of 2015.

The largest of the authority’s cities in terms of current production value is Riyadh Second Industrial City. The 300-sq-km Salwa Industrial City, also known as Al Ahsa II, when completed will be the biggest of the cities under MODON’s management. The zone, the first phase of which is due to be completed in late 2014, is located on the Gulf coast near the border with Qatar, and is intended to attract investment from both countries.

ECONOMIC CENTRES: The Kingdom also has four privately funded “economic cities” that contain industrial cities of their own, the development of which is being overseen by the Saudi Arabian General Investment Authority. The largest of these is King Abdullah Economic City (KAEC) on the Red Sea coast near Rabigh, which is being developed by real estate firm Emaar, The Economic City. KAEC includes a 63-sq-km industrial zone, known as the Industrial Valley, with a focus on fast-moving consumer goods, pharmaceuticals, plastics, construction materials and automotive manufacturing. Construction on KAEC began in 2006 and the three phases of its development are due to be completed by 2020. The development of infrastructure for the first phase of the industrial valley has been completed.

“The infrastructure of the industrial cities is generally good,” said Yousef Abdullah Al Motlaq, CEO of local manufacturing firm Alessa. However, he said there was an excessive focus on industrial infrastructure in such zones at the expense of other strategic needs. “The industrial cities only address physical requirements such as securing premises, which are not the main problems for industry,” he told OBG. “The country’s industrial strategy needs to focus more on issues such as training, the integration of local industries with each other, and ensuring that industrial investments bring real value to the country, protecting local manufacturing from dumping, which is going to kill many of the local industries if no serious actions are taken.”

FINANCING: A key source of funding for national industry is the Saudi Industrial Development Fund (SIDF), a finance institution under the control of the Ministry of Finance that provides medium- and long-term loans to companies undertaking industrial projects in the Kingdom. The fund finances itself through fees charged for evaluating loan applications and for consulting services that it provides to borrowers. At the end of 2013 the fund’s total commitments stood at SR112bn ($29.9bn), with SR6.68bn ($1.8bn) of loans having been committed to 120 new projects and the expansion of 24 existing projects during the course of 2013, according to SIDF, down from SR9.94bn ($2.7bn) in 2012. This drop in commitments was mainly attributed to the increasing number of applications received from smaller projects, especially in less developed areas, which stood at 60% of total projects approved in 2013.

The segment to have received the most funding from SIDF in 2013 was building materials and cement, on SR2.3bn ($613.18m), followed by the chemical industry on SR2.1bn ($560m). Makkah Province accounted for nearly half of the total value of loans approved in 2013, at SR2.93bn ($781.1m); however, over the past five years, the country’s oil-rich Eastern Province has attracted the most financing from the fund, at SR14.73bn ($3.9bn), equivalent to 40.1% of total SIDF funding of SR36.5bn ($9.7bn). The maximum loan available to individual projects in major cities is SR900m ($240m); this rises to SR1.2bn ($319.9m) for projects in less developed areas, with the fund providing financing to both Saudi and foreign-backed projects.

Industrialists say that financing from other sources is available. Further, in March 2014 the government approved the establishment by Saudi Aramco, SABIC and the Public Investment Fund (which is controlled by the Ministry of Finance) of a new industrial investment fund, the Saudi Arabian Company for Industrial Investment. The fund will have capital of SR2bn ($533m) and, according to the Saudi Press Agency, “will focus on conversion industries that rely on petrochemicals, plastics, fertilisers, steel, aluminium and basic industries.”

PETROCHEMICALS: Unsurprisingly in view of the Kingdom’s enormous hydrocarbons reserves, petrochemicals production represents the largest individual branch of Saudi industry. While the authorities are keen to develop other areas, petrochemicals remain a key focus. “We should not be ashamed of being very specialised in petroleum and petrochemical industries. We are blessed with comparative advantages in these areas and should utilise them,” Ahmed Al Ghannam, the director-general of the Saudi Export Programme, told OBG. As of end-2012 Saudi Arabia was the world’s third-largest producer of basic petrochemicals and plastics precursor material ethylene, on capacity of 13.16m tonnes per annum (tpa), behind China on 13.78m tpa and the US on 28.1m tpa, according to Oil and Gas Journal. Jubail Industrial City is the world’s largest petrochemicals cluster, and the Kingdom also hosts two of the world’s largest ethylene complexes, namely the Arabian Petrochemicals Company in Jubail in third place, with capacity of 2.25m tpa, and Yanbu Petrochemical Company in ninth place, with 1.71m tpa.

NATIONAL COMPANY: The largest player in the country’s petrochemicals industry is SABIC. The company describes itself as the largest non-oil firm in the Middle East; it is also the world’s largest petrochemicals firm, both by market capitalisation and in terms of ethylene production capacity at its wholly owned complexes. This latter figure stood at 13.39m tpa at the end of 2012, ahead of Dow Chemical in second position on 13.04m tpa, according to Oil and Gas Journal figures; the firm has a further 10.27m tpa of ethylene capacity at its partially owned sites. SABIC also describes itself as the world’s third-largest producer of basic plastics polyethylene (PE) and polypropylene (PP) and the world’s largest producer of several other petrochemicals including monoethylene glycol (MEG) – with production totalling 6.46m tonnes in 2012 – and methyl tertiary-butyl ether. The firm’s total production across all products stood at 61.1m tonnes in 2012, up from 58.6m tonnes in 2011 and 47.8m tonnes in 2008. This included just under 40m tonnes of chemicals, as well as 9.1m tonnes of polymers. The firm also has stakes in various metals and fertiliser outfits. The Saudi government holds a 70% stake in the company, which is also listed on the Saudi Stock Exchange; SABIC registered a total sales turnover of SR189bn ($50.4bn) in 2012 and profits of SR25bn ($6.7bn).

SABIC’s newest major petrochemicals complex, the Saudi Kayan complex located in Jubail (in which SABIC holds a 35% equity stake), came on-stream in 2011. The complex is one of the largest petrochemical facilities in the world, with 1.48m tpa of ethylene production capacity, 630,000 tpa of propylene capacity, 350,000 tpa of PP capacity, 400,000 tpa of high-density PE (HDPE) capacity, 300,000 tpa of low-density PE (LDPE) capacity, 566,000 tpa of MEG capacity, 550,000 tpa of ethylene oxide capacity and 260,000 tpa of polycarbonate capacity, among other products.

In addition to its Saudi facilities, SABIC also has operations abroad including a European subsidiary, SABIC Europe, with around 5m tpa of basic chemical production capacity and 2m tpa of polymers capacity. SABIC Europe was created as a result of the firm’s acquisition of DSM Petrochemicals in 2002, followed by that of Huntsman’s European chemicals business in 2006. In 2007 the firm also acquired GE Plastics for $11.6bn.

OIL GIANT: National oil, gas and refining company Saudi Aramco is also active in the petrochemicals industry and has ambitious expansion plans in the sector. In 2011 Saudi Aramco launched its so-called Accelerated Transformation Plan, which aims to transform the company into the top integrated energy and chemicals firm in the world by the end of the decade and one of the world’s top-three aromatics producers by 2018. In January 2014 Saudi Aramco’s CEO, Khalid Al Falih, said that the firm also intends to become one of the world’s top-three petrochemicals companies.

The firm produces petrochemicals at its Petro Rabigh joint venture with Sumitomo Chemicals, which in addition to making refined products also operates a 1. 3mtpa ethane cracker and has around 3m tpa of total petrochemicals production capacity, including 700,000 tpa of MEG capacity, 600,000 tpa of linear LDPE (LLDPE), 300,000 tpa of HDPE and 300,000 tpa of PP. The facility is also currently being expanded under a $7bn project known as Rabigh II, which includes construction of a new ethane cracker and aromatics complex and which will see it start to produce additional petrochemicals including paraxylene/benzene, methyl methacrylate monomer and ethylene propylene rubber in 2016.

Together with Dow Chemicals, Saudi Aramco is also working on the construction of a massive new petrochemicals complex in Jubail Industrial City II, known as Sadara, which is being built at an investment cost of around $19.3bn. The project, which Saudi Aramco describes as the largest petrochemicals complex to have ever been built in a single phase, will have a total production capacity of around 3m tpa, including around 1.5m tpa of ethylene output capacity and 400,000 tpa of propylene capacity, utilising a multi-feed cracker – the first in the Middle East – that will be able to use naphtha as feedstock as well as ethane. The complex will also produce numerous other petrochemicals, including LDPE, LLDPE, propylene glycol, amines and polyurethanes. The project is due to be completed in 2015 and to enter into full production in 2016. Dow and Saudi Aramco plan to launch an initial public offering for a stake of 30% in the project, though it is currently unclear when this will take place.

Other firms are also active in the sector. October 2012 saw the operational launch in Jubail of Saudi Polymers’ petrochemicals complex, a joint venture between privately owned Saudi firm National Petrochemical Company, which holds a 65% stake in the project, and Chevron Phillips (which holds the remaining 35%). The complex uses natural gas and propane as feedstock and has 1.22m tpa of ethylene production capacity, as well as 1.1m tpa of PE, 440,000 tpa of propylene, 400,000 tpa of PP and 200,000 tpa of polystyrene.

FEEDSTOCK ISSUES: Petrochemicals production in the Kingdom is largely based on the use of locally produced natural gas as feedstock, which is provided to producers for the effectively subsidised price of $0.75 per million British thermal units. This is the lowest price for gas feedstock in the world, giving the industry a substantial competitive advantage. However, several developments suggest this advantage may be somewhat reduced in coming years. For example, there has been recent speculation that the authorities might raise the price of gas to incentivise more efficient use of the commodity as well to encourage foreign energy firms to step up gas exploration, and in November 2013 the assistant minister for petroleum affairs, Prince Abdulaziz bin Salman, said that prices for petrochemicals firms were under review. The National Commercial Bank also issued a report suggesting that increasing global production of shale gas, in particular in the US, could push down international gas prices, which in turn could effectively reduce the comparative advantage held by Saudi petrochemicals producers.

However, such fears are likely overplayed to an extent. It is unclear if any change to domestic gas prices will actually occur, and given their extremely low current base, the Kingdom may be able to increase prices substantially without seriously undermining the industry’s competitiveness. As regards international gas prices, in December 2013 Saudi merchant bank Jadwa Investment issued a report arguing that US production of unconventional hydrocarbons will have a smaller impact on international markets than is widely believed, and that the shale gas boom will likely be comparatively short-lived. In the meantime local industry players are looking to take advantage of the trend; SABIC in October 2013 said it was in discussions with a number of potential partners as regards the use of shale gas as feedstock for expanding its petrochemicals output in the US. Nevertheless, in light of concerns that rising gas consumption for electricity generation could reduce the availability of ethane for petrochemicals production in the Kingdom, Sadara’s choice of a mixed-feed cracker that can use naphtha as a feedstock may be a sign of things to come. Saudi Aramco and Total are undertaking a feasibility study to examine increasing production of naphtha at their new SATORP refinery in Jubail and, according to media reports in September 2013, a decision to go ahead could see as many as six new naphtha-fed crackers constructed in the country, each with a production capacity of at least 2m tpa.

Furthermore, in March 2014 Saudi Petroleum and Mineral Resources Minister Ali Al Naimi said that SABIC plans to build a new petrochemicals facility in Yanbu that would use crude oil directly as a feedstock, without first refining it. Saudi Aramco has reportedly been carrying out research on how to achieve this for many years, and US oil firm ExxonMobil opened up the first petrochemicals facility to do so in Singapore in 2013.

BUILDING MATERIALS: The US Geological Survey puts 2012 cement production in the Kingdom at an estimated 43m tonnes, ranking Saudi Arabia as the 12th-largest cement producer in the world. Production has been growing rapidly over the last decade or so, from around 22m tonnes in 2002, and several major new factories have come on-stream in recent years. “Population growth, and government and private sector spending on mega-infrastructure projects are helping to drive the expansion of the building materials segment,” said Ali Al Ayed, director-general of SIDF. Population growth is currently running at around 2% a year. The government in 2011 announced plans to build 500,000 new housing units in order to address a shortage in the country, which should add to demand, though the initiative has been slow to get off the ground. Major construction and investment projects such as the various industrial and economic cities being built in the Kingdom are also helping to push up consumption levels. In order to avoid domestic shortages, and amid concerns about price rises, the government in recent years has repeatedly intervened in the sector by, for example, instructing cement producers to operate at full capacity and periodically putting in place export bans. “Reform efforts to decrease handling charges and adjust export tariffs could open significant potential for export of building and construction materials,” Khalid Al Amoudi, the vicechairman of Saudi Red Bricks, told OBG.

The largest cement producer in the Kingdom by output is Saudi Cement Company, with production of around 8.75m tpa in 2012. The firm operates two plants in Hofuf and Ain Dar, both of which are located in Eastern Province. Other prominent producers include Southern Province Cement Company and Yamama Cement Company. The sector has also attracted international investment in the form of French building materials major Lafarge’s stake in Al Safwa Cement Company, which was established in 2007 and which operates a 2m-tpa facility north of Jeddah.

METALS: Crude steel production stood at 5.2m tonnes in 2012 and 5.35m tonnes in 2013, according to the World Steel Association. Output has been increasing steadily over the long term, from 2.98m tonnes in 2000. The Kingdom is the largest producer of the commodity in the GCC. While the global steel industry is still suffering from over-supply, construction activity in Saudi Arabia is driving demand for the commodity, and the Kingdom relies to a significant degree on imports. Sharjeel Azhar, the CEO of Al Ittefaq Steel, told OBG, “Demand for steel and other construction materials is strong thanks to all the mega projects such as the new metros, which will sustain high demand for several years.”

SABIC is the major player in the national crude steel industry, via its wholly owned subsidiary Hadeed Saudi Iron and Steel Company, which describes itself as the leading steel producer in the region. The firm, which is based in Jubail Industrial City, has more than 3.3m tpa of long products production capacity and 2.2m tpa of flat products capacity. Recent developments in the sector include the inauguration in January 2014 of a new 600,000-tpa joint venture factory in Jubail by ArcelorMittal, the world’s largest steel-maker, and its local partner Al Tanmiah Company for Industrial and Commercial Investment. The plant, which was built at an investment cost of more than $1bn, will produce seamless tubular products and pipelines.

In the aluminium sector, Ma’aden and Alcoa World Alumina and Chemicals (a joint venture between American firm Alcoa and Australia’s Alumina) are currently building an integrated aluminium complex in Ras Al Khair industrial city, at a capital investment cost of $10.4bn. Ma’aden has a 74.9% stake in the project, which it says will be the largest vertically integrated aluminium complex in the world, with Alcoa holding the remaining equity. The complex includes a 740,000-tpa aluminium smelter that began producing metal in 2012 and that has single-handedly brought the Kingdom into the ranks of the top 20 aluminium-producing countries. The refinery will be fed by a 1.8m-tpa alumina refinery due to enter into operation by the end of 2014; in the meantime the smelter is being fed by imported alumina. The refinery in turn will use bauxite extracted from a 4m-tpa new mine at Al Baitha in Qassim Province that is due to begin production in the second quarter of 2014; a newly constructed railway line will transport the bauxite from Al Baitha to Ras Al Khair. An aluminium rolling mill is also under construction and will begin operations towards the end of 2014. The mill will produce sheet aluminium for use in the food-canning, automotive and construction industries. The new complex is part of Alcoa’s strategy to reorient its aluminium production capacity towards the Middle East to take advantage of lower electricity costs.

OUTLOOK: Heavy industry and petrochemicals are set to retain their dominance in Saudi industry for the foreseeable future, with several new large projects due to come on-stream in the coming years. However, these projects will also expand the domestic availability of raw materials for downstream manufacturing, and there are increasing signs of interest from major foreign investors in a range of lighter, less traditional industrial segments. Whether or not expanding activity will see industry’s share of GDP rise in line with diversification targets will depend to a large extent on oil prices, and the authorities will also face challenges in turning industrial growth into jobs for nationals. However, industrial output appears set to increase substantially in absolute terms, and to become increasingly diversified, in coming years.

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