At the Saudi Downstream 2011 conference, held at the kingdom’s giant Yanbu Industrial City in March, one of the dignitaries in attendance was Prince Faisal bin Turki al-Faisal.

After a panel discussion had ended, the prince broke from the usual protocol for senior officials at such events of being seen but not heard and asked to be given a microphone.

In front of hundreds of astonished delegates, the prince launched a scathing attack on the slow progress made by the kingdom’s petrochemicals industry in Saudisation programmes and in the sector moving further downstream.

“I have never witnessed anything like it in the kingdom before,” one of the delegates said. “But it was a good indication of the kind of pressure the royal family find themselves under now.”

Growing discontent in Saudi Arabia

Although the recent protests in Saudi Arabia have been confined to the Shia minority in the Eastern Province, there is a growing sense of discontent and frustration with the lack of opportunities in the kingdom.

The average age in Saudi Arabia is 24.9 years, and with about 47 per cent of the population under the age of 18, much needs to be done to ensure employment for young people when they leave school, college or university.

To achieve this, the authorities are aware they must to use the kingdom’s vast hydrocarbons endowment as a catalyst to fund and fuel plans for diversifying the economy. Developing a downstream industry is crucial.

“The kingdom’s growth has started with our natural resources and this continues to be the foundation for our economy and industries for many years to come,” Azzam Shalabi, president of the National Industrial Clusters Development Programme (NICDP) said at the conference.

Of all the major Middle Eastern economies, the plans for [Saudi Arabia’s industrial sector] are the most advanced

Saudi-based engineer

“We are expanding the exploitation of these resources and continue to add value through primary industries that produce basic materials and now more through conversion industries.” The NICDP was set up in 2007 to ensure that clusters of downstream industries were formed in the kingdom’s industrial cities.

“Despite what Prince Faisal said, he surely knows there is a plan in place that will turn oil into base chemicals that will then be used in the kingdom’s industrial sector,” says an engineer working for an international company in the kingdom. “Of all the major Middle Eastern economies, the plans for Saudi Arabia are the most advanced.”

The NICDP’s main remit is to promote five major industrial sectors: metals and minerals; automotive; plastics and packaging; consumer appliances; and construction materials, including solar energy products. Although progress may have been slow initially, the foundation for a strong industrial base is now being realised.

The kingdom’s metals and minerals sector has been identified by the government as essential for job creation as well as providing raw materials for other sectors, including construction, automotive and electronics.

After years of little or no activity, there are now various metals projects either under construction or seeking finance in a sign that real progress is finally being made in developing the kingdom’s downstream sector. The highest-profile scheme is the development of a minerals city at Ras al-Zour in the Eastern Province.

Saudi Arabian Mining Company (Maaden) and the US’ Alcoa are developing an integrated aluminium complex at Ras al-Zour. The first phase of the project involves construction of a 740,000 tonne-a-year (t/y) smelter alongside a 380,000 t/y rolling mill with completion due in 2013.

Industrial projects under way in Saudi Arabia

The smelter and rolling mill will be followed a year later by a 1.8 million t/y alumina refinery that will be fed by a 4 million t/y bauxite mine to be developed in Al-Baitha.

The rolling mill will produce automotive body sheets, can stock and building sheets.

In another tie-up, with Saudi Basic Industries Corp (Sabic), Maaden is exploiting its large phosphate reserves to produce about 3.6 million tonnes a year of fertilisers at Ras al-Zour.

Steel is another key material for the conversion industry and the kingdom’s steel sector is also starting to develop new capacity after several years of relative inactivity.

According to regional projects tracker MEED Projects, more than $2bn of steel projects are being executed in Saudi Arabia. This includes a $630m seamless tube mill being built by Luxembourg’s ArcelorMittal and the local Bin Jarallah Group.

In March, MEED reported that Al-Rajhi Steel was looking to finance a $3bn integrated steel complex with a direct reduced iron plant as well as a steel shop, billet caster and rolling mill at the King Abdullah Economic City north of Jeddah on the west coast. Much of the steel produced will be turned into sheet and seamless pipes for automotive parts, as well as plate and larger pipes for the oil and gas industry and marine vessel construction. 

“I am noticing a marked increase in activity in Saudi Arabia,” says a Middle East-based steel source. “More companies are now starting to secure gas allocations. If you do manage to get gas, then it would be crazy not to build a fully integrated complex.” 

Essential materials for manufacturing

Other non-ferrous and high-value metals, such as copper and zinc, are also being developed. Such metals are essential as raw materials especially in automotive and electronic consumer goods manufacturing – sectors that could become major employers in the kingdom.

Although the petrochemicals industry will long be the dominant downstream sector, Riyadh is keen to develop an automotive industry and aims to produce 500,000 vehicles a year within 15 years. 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.

To put the scale of the plan into perspective, Saudi Arabia has been building trucks for the past 30 years and its current production stands at 5,000 a year. To reach 500,000 vehicles in 15 years will require huge effort.

In February, an agreement was signed with Japan’s Isuzu Motors that will see the company assemble 25,000 heavy, medium and light trucks at a plant in Dammam Industrial City. The first production is due at the end of 2012 with full capacity expected by 2017. About 40 per cent of output is planned to be exported.

Discussions are also taking place with other automotive manufacturers to start operations in Saudi Arabia, specifically sedan and SUV assembly.

The kingdom is keen to follow similar models developed in China and Eastern Europe, where major vehicle production plants are followed by multi-product factories that produce different components for vehicles.

A solution to the economies of scale problems that some start-ups suffer from would be to enable the lines to produce components for various manufacturers. The NICDP has said it is talking to manufacturers of under-the-hood products and small automotive parts and is confident several plants will be on stream by 2013.

The Saudi government has indicated it would be willing to offer incentives to foreign car manufacturers to draw them to the kingdom.

Establishing electronic consumer goods manufacturing and solar products sectors pose the most challenges due to the nature of their production. However, they also offer opportunities for locals to develop skills and experience in highly technical sectors.

Three polysilicon projects are planned with a capacity of 12,000 t/y of solar grade polysilicon and the kingdom hopes an unspecified quantity of semiconductor wafer polysilicon can also be produced. Semiconductor wafers are used in high-end electrical goods, such as computers and mobile phones. The aim is for the kingdom to become a leader exporter of wafers.

The kingdom’s plastics and packaging industry is developing rapidly, with the sector growing by 6-9 per cent a year over the past five years. Almost 2 million t/y of polymers are now processed by 800 firms in Saudi Arabia into packaging and construction materials.

To accommodate such major industrialisation plans, Riyadh has created scores of industrial cities across the country. As well as Yanbu and Jubail, other cities have been built in Riyadh, Jeddah and even as far south as Jizan. For the state, it is important impoverished areas, such as Jizan, are represented. Situated close to the border with Yemen, the area has long been associated with Islamic fundamentalism and the radicalisation of young unemployed people.

Saudi Arabia invests in education

It is not yet clear how the $36bn stimulus package recently released by King Abdullah will be used to promote job creation in the kingdom. But what is clear is that if Saudi Arabia wants its young people to forge careers in sectors that require technical skills, it needs to ensure they receive the correct education.

“It is an excellent idea to diversify the economy and move further downstream,” says a source from a major petrochemical firm. “But all these investments will only be worth it if locals are trained to the correct levels, because smelting aluminium or making high-specification automobiles is not easy.” 

The lack of employment opportunities, especially for young people, is a major source of discontent that needs to be addressed. Riyadh is hoping its industrial diversification plans will go some way to alleviating that.