Strategy

Despite its competitive advantage in the form of low-cost feedstock, subsidised energy and plentiful mineral reserves, Saudi Arabia has been slow to develop its industrial base. Historically, this was mainly due to an overdependence on oil production, but since the 1970s there has been a concerted effort by the government to promote industrial diversification to create jobs and reduce reliance on crude.

This policy has accelerated over the past decade as the jobs issue becomes more critical. The vast wave of new petrochemicals capacity built since 2005 has been aimed at using the kingdom’s gas reserves to increase its global competitiveness across the production value chain. More recently, the focus has turned to using the same low-cost gas feedstock to act as a catalyst for aluminium, fertiliser and steel production, while the development of a mining industry is also taking shape.

Riyadh is seeking to develop downstream manufacturing clusters around metals and plastics production as a further means of diversifying its economy. However, this is likely to prove far more difficult for the government to achieve due to a lack of an inherent competitive advantage for these industries in the kingdom.

With more than 50 per cent of nationals under the age of 25, the government realises it is facing a demographic time bomb if more jobs are not created. The kingdom’s economic backbone, the upstream oil and petrochemicals industry, is not labour-intensive enough to supply the jobs required. Research by Saudi Arabian General Investment Authority (Sagia) shows that base petrochemicals production employs about 0.5 people for every $1m of investment. Plastic resin and plastic component manufacturing, on the other hand, employ 1.4 and 13.8 people respectively for the same investment.

Within this framework, Riyadh has targeted the development of five specific industrial clusters as a means of meeting its industrial diversification objectives. These are: mining and metals; automotive parts; plastics and packaging; home appliances; and solar energy.

The organisation tasked with overseeing the cluster strategy is the National Industrial Cluster Development Programme (NICDP). It acts as a facilitator to attract foreign and local investors to build their businesses in the clusters.

By 2020, the NICDP aims to achieve the following targets: expand manufacturing from 11 per cent to 20 per cent of GDP; double industrial employment from 15 per cent to 30 per cent; increase industrial exports from 18 per cent to 35 per cent of total exports; double the proportion of technology-based manufactured products from 30 per cent to 60 per cent; and increase economic ‘value-added’ by 8 per cent a year.

In the mid-2000s, Riyadh launched an initiative to expand industrial output through the development of several new economic cities across the kingdom. Away from the established industrial centres of Jubail, Yanbu and Ras al-Khair, the responsibility for developing these cities falls to the Saudi Industrial Property Authority (Modon) and Sagia.

Sub-sectors

Steel production is an important segment of the kingdom’s industrial sector. The energy-intensive industry has prospered through cheap electricity and a fast-growing domestic and regional construction market.

According to the World Steel Association, Saudi Arabia produced more than 5.3 million tonnes of steel in 2013, up from 5.2 million tonnes in 2012. This represents about half of current demand in the kingdom. However, due to a lack of gas feedstock the steel plant project sector has stalled over the past 12 months.

A $3bn integrated steel plant was planned by the local Rajhi Steel at King Abdullah Economic City. In early 2013, the scheme was put on hold due to budget issues and was subsequently cancelled due to not being economically viable.

Saudi Arabia has been a late entrant into the aluminium sector. While all its neighbours, apart from Kuwait, have primary aluminium production, Riyadh for many years preferred to focus on other industrial sectors. This is set to change over the next five years as the kingdom has commissioned one of the world’s largest integrated aluminium projects at Ras al-Khair on the Gulf coast.

Sponsored by a joint venture of Saudi Arabian Mining Company (Maaden) and the US’ Alcoa, the complex involves the construction of a 740,000-tonne-a-year (t/y) smelter and a 380,000-t/y rolling mill, which should both be fully operational by the end of 2014. These will be followed about a year later by the commissioning of a 1.8 million-t/y alumina refinery, the first in the region.

The entire project will cost more than $10bn and underscores the kingdom’s commitment to developing new industries and diversifying the economy. This is underlined by the fact Riyadh intends to use much of the smelter’s output and production from the rolling mill to provide feedstock in the form of aluminium components for downstream industries. Further expansion of the smelter is likely to be initiated in 2015-16, with a probable doubling of capacity.

The same railway that links the aluminium complex at Ras al-Khair with bauxite deposits in the north of the kingdom also connects a commissioned world-scale diammonium phosphate (DAP) and mono-ammonium phosphate fertiliser complex with phosphate ore deposits at Al-Jalamid near the Jordanian border.

The $5bn complex, which opened in June 2011, was developed by Maaden (70 per cent) in joint venture with Saudi Basic Industries Corporation (Sabic; 30 per cent). It comprises a phosphoric acid plant, a sulphuric acid plant, an ammonium plant and a DAP granulation facility. With a capacity of 3 million t/y of DAP fertiliser and 400,000 t/y of excess ammonia, it produces almost 20 per cent of the world’s DAP fertiliser.

Cement is the oldest and most established industrial sector in the kingdom, and enjoys the distinction of being largely dominated by the private sector, with a large number of cement firms listed.

Domestic production has climbed substantially over the past nine years. Output rose by 4 per cent in 2013 to 55.6 million tonnes, compared with 53.5 million tonnes in 2012. The increase has been in response to growth in demand from the local projects market.

Outlook

Saudi Arabia’s industrial expansion is somewhat limited by the amount of gas it can afford to allocate to competing markets.

To make up for the cancelled Rajhi scheme, Sabic is planning to build two world-scale steel plants. One will be constructed at Jubail in the Eastern Province, with a capacity of 1.5 million t/y, while the other will be located at Rabigh on the Red Sea coast and will have a capacity of 1 million t/y. Both plants are in the study phase and neither is expected to progress significantly this year.

In fertilisers, building on Ras al-Khair’s success, Maaden is working on a significant expansion of its phosphate activities by exploiting a second major phosphate resource to supply phosphoric acid for the fertiliser, food and animal feed industries.

The $7bn Waad al-Shamal project involves developing the Al-Khabra phosphate deposit to produce 1.5 million t/y of phosphate ore, which would then be converted to phosphoric acid for local and international industrial use. The engineering, procurement and construction contracts have been awarded for the scheme, which will be the largest of its type in the world, and construction has started at the site.

Saudi Arabia is also preparing to expand into industries outside the high-volume metals, cement and fertiliser sectors. One sector is polysilicon, with the kingdom’s first plant under construction and three more planned, which will have a total capacity of more than 26,000 t/y.

Polysilicon production requires extensive capital expenditure, which explains why there has not been a massive wave of projects. The schemes that are being initiated are also proceeding at a much slower pace in comparison to similar-sized projects in manufacturing sectors such as petrochemicals.

The kingdom hopes an unspecified quantity of semi-conductor wafer polysilicon can also be produced. Semi-conductor wafers are used in high-end electrical goods, such as computers and mobile phones. The aim is for the kingdom to become a leading exporter of wafers, while meeting rising local demand from its ambitious solar power programme.

In the automotive sector, Riyadh aims to produce 500,000 vehicles a year by 2030. The strategy is to attract vehicle assembly lines that will form the foundation for the sector. These will become customers for key supply industries that, in turn, will be fed by hundreds of small and medium suppliers.

The kingdom already has two small truck assembly plants, based on kits supplied by Sweden’s Volvo and Germany’s Mercedes Benz. In December 2012, it was revealed that Jaguar Land Rover, the UK automotive company owned by India’s Tata Motors, is considering making cars in Saudi Arabia.