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WEEKLY NEWSLETTER
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Saudi Arabia
Index
The government has played an instrumental role in developing
the manufacturing sector by directly establishing industrial
plants, mainly in the basic industries sector, such as
petrochemical, steel, and other large manufacturing enterprises.
Also, it has developed manufacturing through direct loans, mainly
by the SIDF and through industrial subsidies, offset programs,
set-asides, preferential buying programs, and tariffs. In the
1980s, the bulk of private manufacturing investment was directed
to plants that manufactured goods for the construction industry.
With the decline of construction in the mid-1980s, there has been
a shift to other light manufacturing including food processing,
furniture making, and other consumer goods. This trend
accelerated in the early 1990s.
Partly because of private sector reluctance to invest in
manufacturing and partly because of growing oil revenues, the
government was involved early in the 1960s in some basic
industries. In the late 1960s, Petromin established a steel-
rolling mill in Jiddah using imported billets, a urea fertilizer
plant in Ad Dammam with 49 percent private Saudi capital, and a
sulfuric acid plant in the same location. In the early 1970s, as
oil revenues grew, a coordinated plan emerged to collect and
distribute gas that was flared to two yet-unbuilt industrial
sites where it could be used in basic industries. The two sites
selected were Al Jubayl and Yanbu.
In 1975 the Royal Commission for Al Jubayl and Yanbu was
created. The commission was given authority to plan, construct,
manage, and operate the infrastructure needed to support the
basic industries the government intended to build and to satisfy
the community needs of the work force employed in these
industries. The commission was also to promote investment in
secondary and supporting industries, to develop effective city
government, and to train Saudis to take over as many jobs as
possible. The commission received an independent budget to
facilitate its work.
By 1990 there were sixteen primary industries, forty-six
secondary enterprises, and approximately 100 support and light
industrial units at Al Jubayl. Yanbu had attracted five primary
industrial plants, twenty-five secondary plants, and seventy-five
support and light units in 1990. Al Jubayl benefited from the
massive petrochemical projects of the Saudi Basic Industries
Corporation (Sabic), but both saw substantial growth during the
1980s. Nonetheless, both locations suffered from overcapacity;
for example, initial population projections called for 58,000
residents by 1985 in Al Jubayl, but by 1987 total residents
barely reached 40,000. Revised forecasts estimated that there was
substantial room for growth during the 1990s, and that no major
capacity expansion would be necessary until the year 2000.
With the establishment of Sabic in 1976, the government
undertook a major effort to create a domestic petrochemical
industry that was designed to augment oil export earnings and to
use abundantly available domestic resources, particularly
associated gas supplies. The investments have been guided by a
two-phase strategy. The first phase (1976-87) included a number
of large capital-intensive and export-oriented petrochemical
projects that have been completed. Its aim was to produce bulk
products such as ethylene, polyethylene, melamine, methanol, and
downstream products including derivatives of ethylene. Moreover,
during this period, Sabic undertook the construction of plants to
produce fertilizers (urea, sulfuric acid, and melamine), metals
(steel rods and bars), supporting industrial products (nitrogen),
and intermediate petrochemical products (vinyl chloride monomer,
polyvinyl chloride, and MTBE). Sabic also acquired shares in two
Saudi aluminum companies and expanded overseas by investing in a
Bahraini petrochemical complex.
During the first phase, financing by joint-venture partners
and funding from the government's Public Investment Fund (PIF)
provided the bulk of support for these projects. Domestic and
regional private sector participation was also allowed after 30
percent of the equity capital of Sabic (approximately SR3
billion) was sold to residents of Saudi Arabia and other GCC
countries. In 1987 Sabic split each share into ten shares to
mobilize investments from smaller investors.
In 1992 Sabic owned, either outright or with a minimum 50
percent stake, fifteen major industrial enterprises. Total output
capacity was 13 million tons of various petrochemicals per year,
up from 11.9 million tons per year in 1990 and 9.5 million tons
per year in 1989. Although total sales have continued to rise,
weaker international prices depressed profits during the late
1980s and early 1990s. During 1991 Sabic registered net profits
of US$613 million. About 95 percent of Sabic's sales were
exported; total exports approached US$4 billion per annum. Its
success in rapidly increasing exports and capturing an
international market share have made Sabic's petrochemical
exports subject to nondiscriminatory restraint in both Europe and
Japan, its main export markets. Both the EC and Japan have
applied quantitative restrictions to Saudi exports. Moreover,
urea exports from Saudi Arabia were subject to antidumping duties
in the EEC, which no longer permitted preferential treatment
under its General System of Preferences.
Future development plans, part of Sabic's second phase, were
designed to maintain Saudi Arabia's 1992 international market
share and raise domestic petrochemical capacity by 40 percent. By
1993 Sabic hoped to increase total petrochemical capacity to 20
million tons per year. Projects underway included the Eastern
Petrochemical Company (Sharq), an equal-share joint venture with
Japan's Mitsubishi Gas Company, which was planning a major
increase in its capacity to produce ethylene glycol. The
expansion program aimed to raise production to 660,000 tons per
year from the 1991 level of 450,000 tons per year. Sharq also
intended to increase its polyethylene production from 140,000
tons per year to 270,000 tons per year. Ibn Zahr, the Saudi-
European Petrochemical Company, a joint venture in which Sabic
had a 70 percent share and Finland's Neste, Italy's Eco Fuel, and
the Arabian Petroleum Investment Corporation (Apicorp--owned by
the Organization of Arab Petroleum Exporting Countries) each had
10 percent, intended to raise the output of MTBE from 550,000
tons per year. The company's polypropylene plant was to be
expanded as well. The National Methanol Company (Ibn Sina)
planned to double methanol production from the 640,000 tons
annually in 1991 to 1.2 million tons. This plant was also
expected to increase capacity of MTBE to 500,000 tons per year
and possibly to 700,000 tons per year. The National Plastics
Company (Ibn Hayyan), a joint venture with the South Korean Lucky
Group (15 percent), planned to expand output of polyvinyl
chloride from 200,000 tons to 300,000 tons per year. The National
Industrial Gases Company was engaged in 1991 in doubling nitrogen
production capacity from 219,000 tons per year to 438,000 tons
per year, whereas oxygen production capacity was to increase from
438,000 tons per year to 876,000 tons per year. The Saudi Arabian
Fertilizer Company completed a 500,000-tons-per-year anhydrous
ammonia plant and a 600,000-tons-per-year granulated urea plant
in 1992, and was expected to undertake further expansion
throughout the 1990s. Because the available gas-based feedstock
(ethane and methane) would be insufficient to meet requirements
of the second phase, Sabic has invested in two flexible feedstock
crackers with a total combined capacity of about 1 million tons.
The crackers help reduce dependence on ethane and methane and
allow the use of naphtha, liquefied petroleum gas, or propane as
feedstock.
In Sabic's second-phase financing plans, retained profits and
limited borrowing from the PIF, SIDF, and domestic commercial
banks were expected to provide partial funding. Nonetheless,
Sabic hoped to raise almost 30 percent of the planned US$3.5
billion to US$4 billion on the international market through
syndicated borrowing. For example, Sharq's expansion plans called
for approximately US$600 million in foreign borrowing, and Ibn
Zahr was expected to raise US$500 million from foreign capital
markets.
The private sector's role in industrialization has been
largely restricted to light and medium-sized manufacturing units.
However, some larger merchant families had established larger-
scale chemical, secondary-stage petrochemical, and car or truck
assembly plants. By 1981 Saudi Arabia had approximately 1,200
industrial plants of all sizes. At the end of the 1980s, this
figure had doubled to about 2,000 units and had risen to 2,100 by
1991. Most private manufacturing concerns in the 1980s produced
construction materials including cement, insulation materials,
pipes, bricks, and wood products. Judging from data available
from the Ministry of Industry and Electricity, there has been a
marked shift from this sort of production to downstream
chemicals, food processing, and metals, machinery, and equipment
manufacturing. The annual number of new licenses issued to
companies in the chemical, rubber, and plastics sector rose from
seven per year in 1987 to fifteen in 1990. Although this number
constituted at most 20 percent of all licenses granted, the size
of the firms was growing, judging from their authorized capital,
which grew from 42 percent of total new investment planned to 90
percent. Trailing well behind this sector was the food-processing
sector, which saw a rise in number of licenses between 1987 and
1990, but the volume of authorized capital declined, indicating
smaller individual companies and more widespread participation.
Metals and machinery manufacturing followed a pattern similar to
chemical companies, with both the number of units and authorized
capital growing during the four-year period.
The patterns of Saudi private manufacturing investment have
conformed to government investments. Incentives offered to
private businesses included interest-free loans from SIDF of up
to 50 percent of the cost an industrial project, repayable within
fifteen years. Exemptions from tariff duties on imported
equipment, raw materials, spare parts, and other industrial
inputs; land leases at significantly reduced prices;
discriminatory buying practices by government agencies; and
significant import protection were some of the other incentives
provided.
Data as of December 1992
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