The development of heavy industry in the Middle East is one of the most encouraging trends of the past 50 years.

Today the region boasts a well developed manufacturing base that produces 6 per cent of the world’s aluminium, 1.5 per cent of its steel, 15 per cent of its base petrochemicals and up to 20 per cent of its fertilisers.

This success has not come overnight. The Gulf’s first venture downstream from the oil and gas industry was the Kuwait Chemical Fertiliser Company, established as far back as 1964. But it was not until the 1970s, with the setting up of chemicals giant Saudi Basic Industries Corporation (Sabic) and aluminium producers Dubai Aluminium Company (Dubal) and Aluminium Bahrain (Alba), that downstream industries really started coming into their own.

Over the past 10 years, that downstream investment has begun to gain momentum. In 1990, the Middle East produced 7 million tonnes a year (t/y) of ethylene and derivatives. By 2005, this figure had jumped to almost 30 million t/y.

“Rising stock markets, long-term high oil prices, a strong fiscal outlook, an inward bias towards spending and investment and megaprojects everywhere are all factors that have stimulated demand,” says Hisham al-Hmili, general commercial manager at Saudi Iron & Steel Company (Hadeed).

In economic terms, downstream investment makes perfect sense for most Middle East energy producers. With an abundance of ethane-rich natural gas, the region has a huge competitive advantage over Europe or Asia. The price of feedstock gives local petrochemicals producers savings of as much as 70 per cent on primary production. Gas can also be monetised by using it for aluminium and steel production, where energy requirements take up to 30 per cent of the overall project cost.

Given these natural benefits, it may seem strange that it took so long for the downstream sector to develop. But 50 years ago, regional governments preferred to direct capital spending back into oil field developments, which promised easy returns. Most gas found in local oil fields was simply flared off. However, the oil price slump of the mid-1980s served to remind governments of the dangers of oil dependency. Wary of similar fallouts in future, a new generation of leadership has continued to diversify, aided by the strong recovery in oil prices.

This has resulted in an unprecedented raft of developments over the past five years. These include multi-billion-dollar petrochemicals complexes at Yanbu, Rabigh and Abu Dhabi. Purpose-built industrial cities such as Jubail have blossomed. Dubal and Alba are soon to be joined by aluminium smelters in Oman, Qatar and Saudi Arabia.

This is only the beginning.

According to MEED Projects estimates, more than $150,000 million will be invested in heavy industry over the next five years. The Gulf’s ethylene capacity is set to more than double to 30 million t/y by 2010.

One company in particular stands out. “Our total production will rise from about 47 million t/y in 2005 to 75 million t/y in 2010 and 130 million t/y by 2020,” says Abdullah al- Abdulgader, manager of mega-projects for Sabic, which aims to be the world’s largest chemicals company. “The petrochemicals industry centre of gravity is moving to this part of the world and the kingdom is the first choice for locating any petrochemical industry. In 2015, Saudi Arabia will account for 15 per cent of world production.”

Until now, most ventures have focused on bulk chemicals and raw products. But while profitable, they do little to maximise job creation opportunities. Base petrochemicals production employs just one person for every $2 million invested. Plastic component manufacturing, on the other hand, employs 13.8 people for the same outlay.

The labour element is critical. With huge numbers of the regional population entering the job market each year, states are prioritising the development of labour-intensive industries. But there is an added incentive. Most raw materials are being exported to the fast-growing nations of East Asia, where they are finished and sold into the retail market. These same products end up back in the Middle East in the shape of car parts and plastic water bottles. By going down the value chain, the hope is that producers can get a slice of this business and cut their import bills in the process.

Riyadh plans to develop four specific industrial centres, focused on appliances, automotive components, metal processing and construction. Other governments have adopted similar strategies. Muscat has invested huge political and economic capital in Sohar port and the surrounding industrial city. Oil-poor Bahrain was one of the first to head downstream to provide job opportunities to its nationals. This ethos is now deeply ingrained. “We have a commitment to secure jobs for Bahraini nationals and to contribute to the Bahraini economy and society,” says Adel Hamad Abdulrahman, chief executive of the Gulf Aluminium Rolling Mill Company, one of the region’s biggest aluminium processors.

There is another reason for going down the value chain. The rapid growth of the past five years has placed a considerable strain on gas resources. Allocations of ethane are increasingly limited and some projects, like the Saudi Arabian Mining Company (Maaden) aluminium smelter, are having to burn oil for their energy needs. If industrial development is to continue in the next 50 years, it will have to be further downstream.

The other likely trend will be consolidation of producers and feedstock supply sources. As Abdullah al- Hagbani, secretary-general of the Gulf Petrochemicals & Chemicals Association, says: “[In 50 years there will be] one market, one gas grid system, common railways, no boundaries and one giant petrochemical company throughout the Middle East.”

It will not be easy. With the absence of a large local market for products and a limited manufacturing base, companies will find it hard to compete globally. But labour and raw materials are cheap, and the location is right. If governments can provide the incentive and the infrastructure, then there is no reason why the Middle East cannot become a real manufacturing superpower.