Changing World - With its bounty of oil reserves, Saudi Arabia has established itself as a major player in the worldwide petrochemicals market. The country's largest public company, SABIC, has joined the ranks of the world's top 10 chemical companies, thanks largely in part to its secure access to affordable feedstock.

However, the country knows that its feedstock advantage is a finite one; with the Saudi Downstream Initiative, it hopes to compete higher in the value chain through specialty and performance chemicals.

Brandi Schuster asked Dr. Josef Packowski, Managing Partner at Camelot Management Consultants and Abdusalam Al-Mazro, CEO of Al-Mazro Consulting and Camelot's regional partner about the initiative and the prospects for foreign companies looking to invest in Saudi Arabia.

CHEManager Europe: The Saudi government supports the building of a global chemicals hub massively through the "Saudi Downstream Initiative." What are the drivers of this initiative?

Dr. Josef Packowski: In the market outlook "Arabic Spring," Camelot has analyzed the four phases of economic development of Saudi Arabia: In the early 1980s the Kingdom developed an integrated strategy for petrochemicals mostly based on the associated natural gas. Then, until the millennium, the oil price boomed and led to an increased ethane production. This is why the manufacturing complexes increasingly based on mixed feedstocks.

In the third phase, other countries followed the Saudi example until the available ethane was almost fully utilized. The limited availability of natural gas resulted in oil and naphtha as remaining base for the chemical production.

The current fourth phase is marked by downstream diversification towards specialty and performance chemicals in order to profit from higher parts of the value chain. The changeover to naphtha offers a broader chemical base. This strategy is backed up by massive governmental support: With an estimated investment volume of $170 billion over the next five years, the Gulf region is about to become one of the leading global hubs for the global chemical industry.

Does Saudi Arabia have the work force to handle this expansion?

Abdusalam Al-Mazro: Besides the economic reasons, the Saudi Downstream Initiative is also meant as a reaction to the demographic development: The size of the Saudi labor force has risen from 1.2 million in the late 1960s to 3.2 million 40 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 Kingdom is rapidly building human resources for a knowledge-based economy that is less dependent on oil. But of course all these highly-qualified people must be provided with highly-qualified jobs.

Which role does the Gulf Petrochemicals & Chemicals Association (GPCA) play for the global chemical industry?

Dr. Josef Packowski: The GPCA was the first trade association in the Gulf region. Camelot has been an associated member since the foundation in 2006 next to few other companies from abroad like BASF or Linde. The founding members include SABIC, Tasnee, Qapco, QVC, Borouge, GPIC, PIC and Equate. Today the members of the GPCA represent a significant share of the non-oil GDP of the Gulf region as major providers of jobs and the source of vital raw material for a wide range of downstream industries.

For Camelot, the annual GPCA Forum is one of the most important events in the industry - with representatives from almost all leading global chemical companies participating. This year the forum will make a clear statement on growth: In contrast to almost all other regions of the world the GCC region is still growing. The message is that petrochemicals growth and the investment climate in the region remain very attractive.

How is the evolution of the GCC economies changing the global chemical industry?

Abdusalam Al-Mazro: The global chemical value chain is changing dramatically right now. More and more of the established chemical companies are entering the Gulf states through partnerships with the new local players. These partnerships are not just locally active; they are expanding and diversifying their activities to growth markets like the Asia-Pacific region or new industries.

Just take a look at two of the GPCA mebers: Borouge, a leading provider of plastics solutions, was created as a venture between the Abu Dhabi National Oil Company (ADNOC), one of the world's major oil and gas companies, and Austria based company Borealis, a leading provider of chemical and innovative plastics solutions.

In 2010 Borouge tripled its annual production capacity in Abu Dhabi to two million tons and an additional 2.5 million tons per year will be introduced by mid-2014 to create the world's largest integrated polyolefins plant. But Borouge is not just a regional player: The company is also investing in plants and logistics hubs in Asia.

Or take Tasnee, the National Industrialization Company as an example for diversification. The company was founded 1985 as the first Saudi Joint-stock company wholly owned by the private sector. Tasnee has invested selectively in many diversified downstream industries since its establishment. Today the company erects, manages, operates and owns petrochemical, chemical, plastic, engineering, and metal projects.

How open is Saudi Arabia to 100 % foreign investment? Chemical companies setting up in the region would be up against tough competition - 70 % of SABIC's shares are owned by the Saudi government and private-sector shareholders are from Saudi Arabia and the GCC.

Abdusalam Al-Mazro: There were some hurdles for foreign investors in the past - from financing through national banks to working their way through the responsible government institutions and finding the right local resources. But the government is aware that the feedstock advantage needs to be offered to both Saudi companies as well as to international investors willing to build specialty chemical businesses in Saudi Arabia - otherwise national support will translate into blocking international investments and job creation.

Saudi Arabia has seen a number of improvements to its competitiveness in recent years, which have resulted in a solid institutional framework, efficient markets and sophisticated businesses: The Kingdom is ranked 17th in the Global Competiveness Report by World Bank Group and second in the region. In the report "Ease of Doing Business 2011" published by the World Bank Group, Saudi Arabia has landed on rank 11. In categories like "starting a business," "construction permits" or "flexibility of employing workers," Saudi Arabia has outperformed the OECD average.

Dr. Josef Packowski: To secure future growth and thus to be able to create the amount of jobs needed the region depends on international and local manufacturing firms participating in the transformation process. The investment environment reflects traditions of open market, led by private enterprise and with investment laws that allow 100 % foreign ownership of industrial firms and properties.

There are no restrictions on foreign exchange and repatriation of capital and profits. However, the recent announcement of a $20 billion joint venture by Dow Chemical to build one of the world's largest integrated chemical facilities with the world's largest oil company, Saudi Aramco, shows once again that joint ventures still are the easiest way to enter this huge market.

In light of the fact that oil-supplies are finite, it is clear that the Middle East must also find other areas of revenue in order to secure long-term growth. What specific measures are taken to boost investments outside the petrochemical industry in the region?

Abdusalam Al-Mazro: The government is encouraging foreign investors and the country's own private sector to become involved in the economic development. Therefore the Saudi Industrial Property Authority called MODON, was founded in 2001. MODON is a government organization responsible for the development and supervision of industrial estates and technology zones all over the Kingdom.

The projects currently implemented range from an advanced petrochemicals and new material technology zone, an energy and environment technology zone, a life sciences and biotechnology zone, to an information and communication technology zone. The 20 industrial cities enabled by MODON spread on a total area of approximately 280 million m2 and employ more than 300,000 workers.

Which industries will be developed in the near future and how?

Dr. Josef Packowski: The industries in Saudi Arabia have a strong base that was developed from oil to resource intensive industries in the first step and then to more manufacturing value added. Currently, manufacturing only contributes to 12 % of the Saudi GDP. But the government is determined to diversify the economy and increase the manufacturing contribution of the GDP to 20 % by 2020. Therefore the government launched a number of initiatives like the National Industrial Strategy.

Abdusalam Al-Mazro: For example, the National Industrial Clusters Development Program: This initiative was founded with the clear mission to nurture and grow export-oriented products from manufacturing clusters that can be sustainable and competitive in the long run. The program is focusing on five clusters: Minerals & Metals, Automotive, Plastics & Packaging, Home Appliances and Solar Energy.

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