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The Saudi Iron and Steel Company (Hadeed) plant

The Saudi Iron and Steel Company (Hadeed) plant



Non-oil projects lead the way

The changing oil scenario means there has to be no let-up in the strategy to facilitate investments in non-oil ventures and broaden the kingdom’s industrial base

February 2015

As oil prices stay low, investments in industrial clusters will play a key role in Saudi Arabia’s diversification strategy and help the non-oil economy, business analysts agree.

A sector that could intensify diversification is plastics with the kingdom aiming for a rank among the top 10 global exporters.

“One of the prevailing trends across the region is the focus on optimising petrochemical integration to support the economic diversification programmes in the GCC,” said Dr Abdulwahab Al Sadoun, secretary-general at Gulf Petrochemicals and Chemicals Association (GPCA).

“With the current low oil prices, this shift towards plastic processing has the potential to be a game changer for the region. It will not only drive increased exports but also support local industries that generate new jobs and add higher value to the local economies,” he added.

Dr Al Sadoun was commenting on a new report released by GPCA and the international consultancy firm Nexant. Among the points it made was that plastics exports accounted for 35 per cent of Saudi non-oil export revenues, the largest non-oil contribution to the kingdom’s economy.

The oil price slide has slashed Saudi Arabia’s state revenues but will not affect GDP growth directly unless the volume of oil output changes, a Reuters survey showed.

GDP in the oil sector shrank 2.3 per cent year-on-year in the third quarter of 2014 but was flat in the fourth quarter. Growth of non-oil GDP slowed sharply, however, to 3.7 per cent from 6.4 per cent.

Jason Tuvey, Middle East economist at London-based Capital Economics, was quoted in the press as saying non-oil GDP may have been hit by the Saudi government easing off on spending as oil revenues declined, and by a moderately negative impact on consumer sentiment from lower oil prices.

A Sipchem petrochemicals plant

A Sipchem petrochemicals plant

However, he notes that the government’s 2015 budget projects a slight rise of state spending in nominal terms, and Riyadh has huge fiscal reserves which it can use to stimulate the economy. So analysts do not expect any further, sharp slowdown in GDP growth. Tuvey expects GDP to grow around 2 per cent in 2015.

Torbjorn Soltvedt, principal Mena analyst at energy consultancy Verisk Maplecroft, was also quoted as saying: “The pace of diversification has been relatively slow although the drive to boost non-oil sectors is gaining momentum … Even if the ambitious targets set in the National Industrial Strategy 2020 are not met within the next five years, it is clear that the size of the industrial sector will increase markedly by 2020.”

Ratings agency Standard & Poors commented: “The economy is undiversified and vulnerable to a sharp and sustained decline in global prices, despite the government’s policy to promote non-hydrocarbon private sector growth.” But it notes that the kingdom’s economy is supported by its very strong fiscal and external positions of as much as $775 billion which could provide ample buffer to withstand external shocks including a drop in global oil prices.

Spearheaded by the government’s investment and diversification plan, Saudi Arabia’s non-oil economy will maintain its positive growth trajectory and post increases of 5 per cent in 2015 and 2016, according to the National Bank of Kuwait Economic Update.

It cited initiatives in the real estate and SME sectors that the kingdom has taken to diversify the productive base. In the case of real estates, the government is keen to increase both the supply and affordability of housing for nationals. Homeownership levels of around 36 per cent are relatively low by international standards.

The report also highlighted that attention is turning towards infrastructure investments which will grow considerably. High profile projects coming up include the Riyadh and Makkah metros, worth $23 billion and $7 billion respectively, the King Abdul-Aziz International Airport expansion, costing $4 billion, the $3.3-billion Shuqaiq power plant and the $3.5-billion Kudai Towers.

 

SABIC UNFAZED

A drop in Q4 2014 profits of Saudi Basic Industries Corporation (Sabic) following the onset of low oil prices has strengthened its determination to push ahead with plans to build investments even with low oil prices. Its chief executive officer Mohammed Al Mady said petrochemicals demand continues to be good. The company plans to diversify from products that are closely linked to crude to protect itself from oil volatility.

The kingdom’s downstream will be enriched with nearly $28 billion worth of petrochemical plants coming online this year. One of them is Sadara, a $19.3 billion joint venture between Saudi Aramco and Dow Chemical of the US which will produce 3 million tonnes of product per year.

 

THE MANUFACTURING EDGE

Manufacturing, an outcome of the diversification initiative, will only keep expanding. Ma’aden, for instance, has made progress in creating capacity for primary aluminium and rolling mill products. Ma’aden is a good example of the industrialisation process moving to sectors beyond petrochemicals and plastics.

The kingdom’s IT spirit is also being applauded. International Data Corporation (IDC) says IT spending in Saudi Arabia is growing at the fastest rate across the whole Central Europe, Middle East and Africa (Cema) region.

Continuous GDP growth, an improved business environment and more foreign direct investment is driving development in a number of different manufacturing sub-sectors with software and IT services among the fastest growing fields, said Martin Kuban, lead research analyst at IDC Manufacturing Insights – Software, Cema.

“Manufacturing in technology and engineering-oriented value chains will be driven by emerging small and medium businesses, mostly established in industrial zones surrounding big cities. Many of these hubs will emerge as centres of innovation and excellence, closely tied to newly developed research and development facilities,” observed Kuban.

 

RENEWABLES

One of the disappointments of recent weeks has been the announcement that Saudi Arabia is delaying by eight years its target to complete its clean-energy programme including $109 billion in solar power.

Riyadh has said it needs more time to determine the technologies it should use.

The plan was to have 41 gigawatts of solar power and another 21 gigawatts of geothermal and wind power within two decades. Currently, a fraction of 1 per cent of the country’s energy supply comes from renewables.




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