Middle East: The Next Level of Growth
Huge investments in competitive logistics infrastructure could make the Middle East the center of a booming region
Having It All - The Middle East seems to have everything it takes to become one of the most dynamic economic regions in the world: The oil-rich Gulf States have median GDPs per capita higher than that of the United States.
With Qatar and Kuwait, two of the 10 nations with the world's highest GDPs per capita are located in the region. Saudi Arabia alone possesses about one-fifth of the world's proven oil reserves, ranks as the largest exporter of petroleum, and plays a leading role in OPEC.
But the region offers much more than just its feedstock advantage: The Gulf states have undertaken successful efforts toward economic diversification. The industrial structure has diversified in recent years and shifted from the pure production and export of crude oil and gas and the refining of petroleum toward basic petrochemicals like fertilizers and plastics. Under the buzzword of "downstream diversification," the petrochemical industry has reached the next level of development.
Two major events mark milestones in this development: In 2007 the world's biggest chemical company by market value, SABIC bought General Electric's plastics unit. At the time, the $11.6 billion acquisition was the largest transaction of a Middle Eastern company ever and skyrocketed SABIC into the top league of international plastics manufacturers. Just a couple of years later, another milestone was announced and even topped the acquisition in terms of its financial value:
The foundation of the Sadara Chemical Company, a joint venture between Dow and the state oil company Saudi Aramco. The two companies approved the formation of a joint venture to build and operate a world-scale, fully integrated chemicals complex in Jubail Industrial City in Saudi Arabia. The total investments for the project, including third- party investments, are supposed to sum up to a total amount of approximately $20 billion. The complex will be one of the world's largest integrated chemical facilities, and the largest ever built in one single phase.
The project will not only set benchmarks in terms of investments, it will also broaden the range of products from the Middle East and lift the product portfolio to the next level downstream: It will possess flexible cracking capabilities and produce over three million metric tons of high value-added chemical products and performance plastics, capitalizing on rapidly growing markets in energy, transportation, infrastructure and consumer products.
But the Gulf region is not only about to become one of the leading global hubs for the global chemical industry. Another example from Saudi Arabia: In order to develop industrial estates and technology zones all over the Kingdom, the Saudi government founded Modon, the Industrial Property Authority. The goal is to create a wide range of industrial estates and technology zones all over Saudi Arabia - from advanced petrochemicals and new material technology zone, energy and environment technology, life sciences and biotechnology, to information and communication technology.
The government of Saudi Arabia has been proactively promoting the setup and growth of downstream industries through various initiatives like the National Industrial Development Cluster Program, Plaschem Park in Jubail, the Mineral City in Ras Al Kahir and the North Promise City.
The National Industrial Development Cluster program is an government agency supervised by Ministry of Commerce and Industry and Ministry of Petroleum and Mineral Resources with the objective to lead the development of five-fast growing, export orientated industrial sectors like, Automotive, Minerals & Metals Industry, Solar energy, Plastics & Packaging, and Home Appliances. They act as the expert facilitator helping investors to build their businesses and thrive.
They also take a lead role in setting up the anchor project in each of the clusters mentioned above. The $2.5 billion Aluminum Flat Rolling investment, a JV between Ma'aden and Alcoa, is one of the first achievements of the cluster program and they have been instrumental in bringing other projects like Steel Flat Rolling and truck manufacturer Isuzu to the Kingdom of Saudi Arabia.
Plaschem Park in Jubail is a world class, globally competitive industrial cluster dedicated for downstream petrochemical and plastic conversion products. It is a combined initiative of the Royal Commission of Jubail & Yanbu, industries like Sadara and SABIC and Government bodies like the Ministry of Petroleum and Minerals or the National Cluster Program. The initial plan is to develop an area of 7 km2 in Jubail 2nd industrial city near to the Sadara complex. The park will host a wide range of products which will carter to construction, automotive, packaging, electronics, Textile, Paints and Solvents industries in future.
The Ras-Al Khair Mineral City is which 60kms away to the North of Jubail, is currently under development and will be host to the Aluminum Joint Venture complex of Ma'aden and Alcoa, a port and many other mineral downstream industries once it is fully developed. The new city, RAKMIC (Ras Al Khair Mineral Industrial City), is planned to exploit the mineral deposits of phosphate and bauxite found within Saudi Arabia.
Several major industrial plants are under construction in Ras Al-Khair at present, including a di-ammonium phosphate (DAP) plant, an aluminum smelter, an alumina refinery, ammonium plant and facilities to produce phosphoric and sulphuric acid. The mineral city is expected to attract Aluminum downstream industries in the extrusion, forging, casting and sheet applications. It is expected to create 7,600 direct industrial jobs through Ma'aden and Downstream industries.
In February, 2012, the council of ministers approved to build a new industrial city on the Northern Border Province centered around the mining industry, called ‘ North Promise City' based on the promise by King Abdullah, to the people of Northern Border Province to share the prosperity and Development.
The city will cover 290 km2 and will have industrial and utilities infrastructure designed to attract investors in downstream industries. An additional 150 km2 adjoining the proposed industrial city in the Um Waal area has been allocated to set up projects of Ma'aden's phosphate industries. The city will be designed to work in close co-operation with Ras Al Khair.
The new city will be linked to the new North-South Railway line that extends from the Jordanian border to Riyadh. The rail link will be designed for both passengers and industrial freight wagons, and will also provide links with Ras Al-Khair. The Saudi Port Authorities will also establish three new wharfs in the Ras Al Khair Port to serve the project.
United Arab Emirates
Another example from outside the Kingdom: The United Arab Emirates (UAE) have reduced the portion of GDP based on oil and gas output to only 25 % by following a distinguished strategy to further strengthen the country as a regional center for innovation and entrepreneurship.
The region is not only becoming more and more interesting as a producer of raw materials and finished goods, but also as a consumer market. The extended area is one of the most dynamic worldwide: The Middle East as a pivotal point of three continents can serve a population of 1.5 billion people from Pakistan to the Maghreb states and from Turkey to Central Africa - with specially designed food and consumer goods for the Muslim world.
This marketing area will create an enormous demand for third-party services and products such as logistics, packaging or distribution. And there will be a shift in demand: With 50% of the region's population being under the age of 30, health issues confronting the region's booming population are an important issue and will result in a stronger demand for pharmaceuticals.
Drivers Of Evolution
There are three main drivers advantaging the evolution of the area:
The feedstock advantage:
Due to its feedstock advantage, the Gulf region has been able to develop from an export region of raw materials to an export region of value-add products. As the example of Sadara shows the region will export more and more high value-added chemical products and performance plastics, aiming at the fastest-growing markets in the world in energy, transportation, infrastructure and consumer products - not primarily at the established markets. The planned exports from Sadara include about 45% to Asia, 25% to the Middle East and only 10% to Europe. The feedstock will be supplied from the Saudi Aramco Total Refining and Petrochemical Company's (SATROP) refinery. The raw materials will also be sourced from local refineries.
The talent advantage:
The size of the Saudi labor force for example has risen from 1.2 million in the late 1960s to 3.2 million 40 years later. And it is still increasing by an average annual rate of more than 3%. Especially the skilled labor has grown: The student enrollment has increased from 0.6 million to almost five million - this means an average annual growth of 7%. The government is supporting this development by sponsoring the Human Resources Fund, which provides for the training of operators and technicians in selected institutes in Saudi Arabia. Forecasts show that by 2020, there will be around five million more people of working age in Saudi Arabia with a further seven million by 2035.
The geographical advantage:
As a region, the GCC has established as a global logistics hub due to its strategic location between Asia, Africa and Europe. Fueled by the rapid growth of emerging markets in Asia, India and Northern Africa its position as a global transit hub will lead to continuously increasing volumes of finished goods and raw materials being transported through the region. The greater area including the periphery of the Gulf states with a radius of around 1,000 km is also becoming a huge potential marketing area with a Muslim population of 1.5 billion people.
According to the Pew Research Center's Forum on Religion & Public Life, the world's Muslim population is expected to increase by about 35% in the next 20 years, rising from 1.6 billion in 2010 to 2.2 billion by 2030. Globally, the Muslim population is forecast to grow at about twice the rate of the non-Muslim population over the next two decades. The GCC states have the chance to establish as providers of special Muslim consumer products like halal food or halal cosmetic products. The potential extended consumer base might soon make up a quarter of the world's total projected population.
What Does This Mean for Supply Chain Management?
Efficient supply chains and the necessary logistics infrastructure are the most important success factors for the sustainable growth of the region. The cost of Middle Eastern production might be competitive, but in many cases the supply chain structures still are not. Historically the infrastructure in the petrochemical sector is most advanced.
But new products and new customer call for more advanced logistics infrastructure. An example: Currently Saudi-Arabia possesses 4,232 km of pipelines for oil, 2,846 km of pipelines for gas and 1,183 km of pipelines for liquid petroleum gas. The total length of the national Railways amounts to a total of only 1,378 km.
The rapidly growing pharmaceutical sector is currently constrained by a lack of infrastructure. Many international pharmaceutical companies depend on logistics service providers to be able to serve the fast-growing markets but are often reluctant to take the risks involved in investing in logistics. On the one hand this provides huge opportunities for specialized logistics providers in the region. On the other hand providers depend on governmental investments.
And huge investments have been made, for example in shipping terminals like the Khalifa bin Salman Port in Bahrain, Jebel Ali in the UAE or Jeddah Islamic Port in Saudi Arabia. As far as the rail is concerned, the $7 billion Saudi Landbridge will create a new freight and passenger link between the Red Sea and the Arabian Gulf and connect Jeddah with Riyadh. The Landbridge is part of a 4,000 km increase in track. The Gulf-wide Union railway (a $25 billion project) plans to connect the six member states of the GCC along the Arabian Gulf coastline from Kuwait City to Muscat in Oman, via Saudi Arabia. As a side effect it will offer a strategic alternative for the shipping route through the politically sensitive Strait of Hormuz.
In May2011, the Saudi Railway Company (SAR) has completed the construction of a 1,392-km-long railway line from Northern Border Province to Ras Al-Khair Seaport. The railway line links the phosphate mines in Hazm Al-Jalameed in the Northern Border Province to the manufacturing area in Raz Al-Khair, passing through Jouf, Hail, Qassim and into the Eastern Province. Emirates SkyCargo, the freight arm of Dubai-based airline Emirates, has become market leader in the air cargo industry in India - a market with tremendous opportunity for cargo growth, with pharmaceuticals, telecom and automotive industry as biggest recipients.
In short: Not only is the economy in the Middle East developing and diversifying with enormous speed, the region is also about to become the center of one of the most dynamic marketing areas in the world. The main obstacle currently lies in the lack of competitive logistics infrastructure. If the region is able to solve this challenge, the growth perspectives of the area lie far behind the boundaries of the Gulf region.
Camelot Management Consultants AG
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