Kingdom, China Economies Complementary
Kingdom, China Economies Complementary
Jawaher Al-Sudairy
Friday 14 December 2007 (05 Dhul Hijjah 1428)
The emerging links between Saudi Arabia and China increasingly point to a very strong bond between them. Examining some of the synergies between the two markets, an impressive web of interdependent trends, gives a clear illustration of how the two economies complement each other.
The mining industry in Saudi Arabia has received much attention in the past few years, and rightfully so. Saudi Arabia, like its neighboring Gulf states, is committed to diversifying its national income away from oil. With its cheap energy reserves, abundant natural resources and a pressing need to create jobs for its fast-growing young population, the Kingdom is making determined plans to turn mining into a core industry. Saudi Arabia aims to compete internationally as a lead supplier of metals and minerals, such as aluminum, phosphate and steels. The production cost for these energy-intensive industries in the oil capital of the world is notably competitive, with estimates pointing to as much as 30 percent margins on market price. The Kingdom is looking out and looking east for international players to participate in developing its reserves, while at the same time transferring their know-how and expertise.
Simultaneously, China is on a quest to secure foreign supplies of natural resources. Rapid urbanization and expansion projects are translating into soaring demands for oil and other commodities, such as copper, nickel, iron ore and most relevantly aluminum. China comes second after the US in oil consumption, and has surpassed all as the biggest aluminum consumer and producer in the world. Just last year, China alone accounted for at least a quarter of global demand for aluminum. The Chinese government is committed to building up strategic reserves of minerals, and has urged companies such as Chalco, its aluminum producer, to secure raw materials overseas. Africa has already proved itself to be a lucrative market for the Chinese, and so will the Gulf.
Only this year, China National Machinery Industry Corp. (Sinomach), and China Nonferrous Metal Industries (NFC) signed a deal with Saudi-based Western Way for Industrial Development Co. (WWIDC) to invest in a $4 billion aluminum complex and a power plant to be built in Jizan Economic City. The aluminum smelter is projected to produce 1.6 million metric tons of alumina and 700,000 tons of aluminum annually. And there is more. One of the largest vertically integrated phosphate mining, fertilizer and chemical manufacturers in China is bidding for the Maaden phosphate beneficiation plant tender in Al-Jalamid, one of the world’s largest, underdeveloped reserves of phosphate. Maaden plans to use the exploited phosphate concentrate from Al-Jalamid to produce diammonium phosphate (DAP) fertilizers in Ras Azzur, which will also become a major export.
For China, investment in metal and mineral production in Saudi Arabia is not only cost effective but also fulfills its need to conserve energy. The relationship between the two is taking on new shapes. It has clearly moved far beyond oil trade and will continue to evolve as China keeps its sight set on forthcoming opportunities.
The mining projects present immediate demands for transportation links and port upgrades. Taking the concentrates from the mines in Al-Jalamid to the processing plants in Ras Azzur and the finished minerals to the export markets (either to China or elsewhere) will require a 1,500 kilometer railway running all the way from the north of Saudi Arabia down to the Eastern Province. The Saudi Ministry of Transportation plans several railway and port contracts and Chinese players have put their bids in.
Already China Railway 18th Bureau has been approved, for the second contract (CRW 200) of the North-South Railway. The award, earlier this year, was worth $524 million. The first contract was awarded to Saudi Bin Laden, and the third to a consortium consisting of Al-Rashid Trading & Contracting and Mitsui (Japan).
Two other Chinese construction companies were short-listed for the project. Many others are bidding (and winning) contracts all over the Kingdom. China Harbor Engineering Company was awarded the contract to build a container terminal at Jeddah Islamic Port and China Civil Engineering Construction Company is establishing itself in the Kingdom.
Saudi enterprises are aiming to meet the demand and many have come to China and Hong Kong in search of Chinese partners with manufacturing experience in construction material. Al-Turki Group is taking the lead, venturing strongly in East Asia and has already set up shop in Shanghai.
Asia’s Big Apple has had its share of Saudi action this year. Unlike the mainland, Hong Kong’s economy is very much service driven and is engaging in completely different business activities with Saudi Arabia. Rather than industrial development, Hong Kong is exploring opportunities in finance, construction, utilities, telecom and transport.
As a financial center, and a gateway to the mainland, Hong Kong attracts many visitors looking to explore the Chinese market and the Far East as a whole. One prominent visitor in 2007 was Prince Alwaleed bin Talal, who is now not only a shareholder in the Bank of China through Citigroup but also an active investor in the Asian leisure market.
Hong Kong witnessed another headliner this year, Maan Abdul Wahed Al-Sanea, who purchased a 3.1 percent stake in HSBC (worth 3.3 billion sterling pound) making him the second-biggest shareholder in the world’s biggest bank.
Hong Kong hedge funds and venture capital firms are making their own visits to the Gulf. Delegations arrived in Riyadh and Jeddah over the last two years, the most recent of which was headed by Frederick Ma, secretary for Hong Kong Financial Services and the Treasury. These delegations are eager to penetrate the Saudi market and offer their services as experts on mainland China.
In telecoms, Hong Kong PCCW, along with two other consortia — Bahrain Telecommunications and Verizon Communications of the US — were approved to operate Saudi Arabia’s new fixed-line network in April this year. No estimates have been announced of the total license price, but according to initial reports Batelco bid $133 million, which indicates that it was a very high premium. PCCW is currently setting up its presence in the Kingdom as a joint venture partner with Saudi Arabia’s Integrated Telecom Company (ITC).
Aside from Saudi Aramco’s oil refinery in Fujian and SABIC’s Ethylene plant in Tianjin and petrochemical project in Dalian, Saudi Arabia has yet to make itself felt in the Chinese market. Ajlan ibn Abdulaziz Aljalan & Brother got a stake in cotton spinning project in Xinjiang and Saudi Economic & Development Co. (SEDCO) acquired shares in a marble factory.
Investing in sectors that depend on the consumption of minerals imported from Saudi Arabia should be one consideration. China is already developing its aerospace industry, which relies heavily on aluminum. It has accumulated good expertise in building aircraft and is a strong supplier of hardware and engine parts to international brands such as Boeing. China is expanding its knowledge and adopting international production and management standards to compete internationally.
China’s direction remains relevant to Saudi Arabia, which is also building its own aerospace industry.
Saudi Arabia has announced plans to set up an aerospace industrial site, the objective of which is to develop an engineering and production footprint in the Kingdom that will result in original equipment manufacturing and provide a platform for aerospace exports. Collaborating with China, both as an investor and host for Chinese manufacturing facilities, should prove to be of mutual long-term benefit for the two countries.
Another opportunity for Saudi Arabia to consider is the newly launched Chinese sovereign funds mandated to invest in global financial markets.
The National Council for Social Security Fund (NCSSF) and China Investment Corp (CIC) are joining Chinese commercial banks in their hunt for deals outside China. The Chinese government is encouraging the outflow of capital in order to spread risk away from the local market, gain revenue and support Chinese projects abroad. Saudi Arabia should target these funds and engage them in the local financial market. Another option is for the Kingdom to propose a bilateral investment program with China.
The Sino-Saudi relationship may be a marriage of convenience of sorts, but it could develop into one made in heaven.
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Investment by Saudis in China Grows
Javid Hassan
Saudi investments have been flowing into China on three levels — industrial ventures, refinery joint ventures and investment in the capital market.
The low cost in China of both production and skilled manpower, together with mounting energy needs, have always acted as a magnet for institutional investors from the Kingdom. Even private sector entrepreneurs have been quick to capitalize on its natural resources, especially cotton, for converting it into finished textiles for which there is a growing market back home.
In July this year, a leading Saudi clothing company launched a $50 million cotton spinning project in Shihezi, in China’s northwest Xinjiang province. Ajlan ibn Abdulaziz Al-Ajlan & Bros, a leading Saudi garment manufacturer, set up a 160,000-spindle project. It goes into operation next June, according to Tageldin Saad, Ajlan’s CEO in China.
The project is expected to net 650 million yuan ($88 million) in annual sales revenues. Before the project in Xinjiang, Ajlan had invested $200 million in its five subsidiaries in east China’s Suzhou and Shandong, Tageldin said. Xinjiang, China’s largest cotton base, produced two million tons of cotton last year, while Shihezi’s output was 300,000 tons.
Referring to the Kingdom’s institutional investment in the energy sector, Li Yan Lin, Economic and Commercial Counselor at the Chinese Embassy, told Arab News that China Petroleum & Chemical Corporation (Sinopec) signed the long planned contract in March this year with Saudi Aramco and the US major ExxonMobil for a $3.6 billion refinery project in southern China’s Fujian province. The refinery, located in Quanzhou, will have a crude refining capacity of 240,000 barrels a day and is expected to be operational in early 2009, Lin said.
A separate contract was signed by Sinopec, Exxon and Saudi Aramco for a retail joint venture to manage and operate around 750 filling stations and a network of terminals in Fujian.
China urgently needs new refineries, with many of its existing plants operating at more than 90 percent of their capacity to meet the growing demand for gasoline, diesel and other oil products.
Investment in new refining capacity has been constrained by government-imposed limits on retail prices of oil products, which has left the refining businesses of Sinopec and PetroChina Co. (PTR) operating at a loss in recent years.
However, the government has repeatedly signaled its intention to bring its domestic oil products prices in line with the international market. State media have said that China introduced a new pricing mechanism at the start of this year that links the domestic price of oil products to a basket of benchmark crudes, namely Brent, Dubai and Minas.
Signing of the contracts took place less than a month after the National Development and Reform Commission, China’s economic planning agency, said on its website that the Fujian refinery project had been approved.
Sinopec will own 50 percent of the refining joint venture, with ExxonMobil and Saudi Aramco holding 25 percent each. According to Lin, the refinery will primarily process sour Arabian crude supplied by Saudi Aramco.
The joint venture also involves the construction of an ethylene steam cracker with a capacity of 800,000 metric tons a year, a polyethylene unit with a capacity of 800,000 tons a year, a polypropylene unit with a capacity of 400,000 tons a year and an aromatics complex to produce 700,000 tons a year of paraxylene. Support facilities including power generators and a berth capable of handling tankers with a capacity of 300,000 deadweight tons will also be built.
According to a statement released by the joint venture partners, “The signing of the two joint venture contracts marks significant milestones in the development of China’s first fully integrated Sino-foreign projects that involve refining, petrochemicals and fuels and chemicals marketing.” For the filling stations joint venture, Sinopec will hold 55 percent of the shares, with ExxonMobil and Saudi Aramco owning 22.5 percent each.
Sinopec, ExxonMobil and Saudi Aramco held an inaugural ceremony in March this year at the Great Hall of the People in Beijing to mark formal government approval of contracts and granting of business licenses for their two joint ventures in Fujian province -- Fujian Refining & Petrochemical Company as well as Sinopec SenMei (Fujian) Petroleum Company. The former will be owned by Fujian Petrochemical Company Limited (50 percent), ExxonMobil China Petroleum and Petrochemical Company Limited (25 percent) and Saudi Aramco Sino Company (25 percent).
Saudi Aramco is also planning a second refinery investment in China, acquiring a 25-percent stake in Sinopec’s planned $1.2-billion refinery at the port city of Qingdao, in the province of Shandong. Under the deal Aramco will supply 80 percent of the refinery’s oil needs. The first phase, with a 10-million ton annual processing capacity, was due to come on stream at the end of the year. However, it has been delayed by at least nine months and the deal with Aramco has not yet been finalized.
Saudi investors, along with some from Kuwait, are also reported to be involved in a third refinery project in Guangzhou, in Guangdong province. The project will involve a total investment of $8 billion.
Saudi investment in China’s capital market is also growing. Al-Azizia Commercial Investment Corporation (ACIC) and a group of Saudi investors signed an agreement last year for a strategic offer for $2 billion in the Bank of China, the second largest state-owned bank in China and one of the largest banks in Asia. Saudi investors included Kingdom Holding Company, which acquired $1.2 billion worth of shares in BOC. Other investors were Ma’an ibn Abdulwahid Al Sanie (chairman, Saad Group), Muhaidib Group, Olayan Saudi Investment Company, Bahamdan Holding Group and Amwal Al Khaleej Commercial Investment Company.
“China is among the top five leading global economies,” said KHC’s Chairman Prince Alwaleed ibn Talal at the time. “We are pleased with this historic offer in line with King Abdullah’s initiative and hope it will be one of many to come.” In the event the consortium was allocated an equity stake of $300 million.
This was seen as a historic move. The $2-billion offer would have represented a 2.7 percent stake in BOC common equity. “It was the first of its kind,” said Ahmed Halawani, CEO of ACIC. “It came in line with the royal initiative to develop and strengthen commercial and business relations with the People’s Republic of China which was the major highlight of the Custodian of the Two Holy Mosques, King Abdullah’s visit to China and the Chinese president’s visit to the Kingdom last year.”
Halawani also said that the offer affirmed the consortium members’ belief in the importance of diversifying geographical investments into in a country such as China that has an economy reflecting sustainable growth and visibility.
This steady flow of Saudi funds into the Chinese economy not only underlines the strength of bilateral relations but also recognizes the geopolitical compulsions behind the dynamics of the “Look East” policy.
Zamil: From Strength to Strength
Michel Cousins, Arab News
Most people around the world think that all Saudi exports are measured in barrels. It is remarkable how few realize that there is more to the Saudi economy than oil, let alone that Saudi products are becoming known worldwide. Even more remarkable, many in the Kingdom are unaware of it as well. They may know something about Saudi petrochemical production and exports — but air-conditioners, pipes, steel and cement? They are exported, along with a growing number of other products.
Nor is the Kingdom’s growing manufacturing clout limited to the domestic arena. “How many people know that a lot of Saudi companies have gone beyond the frontiers and set up elsewhere?” asks Abdul Rahman Al-Zamil, whose own Zamil group now manufactures in several countries. “Amiantit is in Europe and Latin America. We are in Vietnam and India, Saudi Basic Industries Corp. (SABIC) is all over the world.”
Of the Top 100 Saudi companies, 20 percent are now international operations, he says. “Some have gone international by themselves, some have done so in partnership with other companies.” The Saudi private sector cannot be compared to that anywhere else in the Middle East, he says. It is a remarkable success story. It is far more dynamic, far more globally focused.
That is because, thanks to its managerial skills and professionalism, it is dominant in its own market. Saudi plants can stand up to the best foreign competition, he says. The Japanese, the Americans, the Europeans never thought that Saudi Arabia would be the major manufacturing base it has become. “Despite their brand appeal, foreign products are unable to compete with Saudi products in the domestic market,” he says. Saudi business has learned not just to survive but to flourish — and, says Al-Zamil who is also chairman of the Saudi Export Development Center, look to the wider world markets.
The Zamil group is itself a prime example of Saudi entrepreneurial flair, of “a local company gone international,” as Al-Zamil puts it.
A trip to Vietnam is proof of that. Landing at Hanoi airport one of the first things one sees, even while taxiing to the terminal, is a factory next the airport bearing the Zamil logo.
Zamil Steel saw the opportunities in Vietnam at the beginning of the 1990s when the country was in the first stage of industrialization. That led to the setting up of a representative office in Ho Chi Minh City in 1993 and then, in 1997, Zamil Steel Vietnam was established to manufacture pre-engineered steel buildings for use as factories, warehouses, workshops, showrooms, hangars, schools, sports halls, supermarkets, office buildings, car parking sheds — virtually anything that required one-, two- or even three-story buildings. Today, Zamil Steel dominates the steel structure industry in Vietnam and from there exports to Japan, China, Korea and Southeast Asia. A second plant near Ho Chi Minh City (formerly Saigon) opens next year. The company is probably the leading steel supplier in the region, according to Al-Zamil — and highly appreciated too. When there were floods in Vietnam a few months ago, “Zamil Steel buildings were left standing; others were damaged,” he said. So far it has sold thousands of steel buildings and the names of its customers read like a list of global super-industries: Bechtel, Procter & Gamble, General Electric, Coca-Cola, Pepsi Cola, Toyota, Nestle, BMW, Mitsui, Mitsubishi, Sanyo, Toshiba, Shell, LG, DaimlerChrysler and many more.
Whether it is in Egypt (where Zamil Steel also manufactures and plans further expansion), the UAE (further expansion also planned), India (there is a new steel buildings plant near Mumbai) or China (a new plant is planned), there is an aggressive, “go-get” ethos driving Zamil’s international presence. The aim is to go where Zamil can dominate the market. “We will build plant in any market where we can dominate,” he says.
Within the Kingdom, Zamil is mostly known for air-conditioning, steel and glass, activities mostly coming under Zamil Industrial Investment Company, listed on the Tadawul. There are several other operations within the wider group, however: Plastics, IT, construction and architectural materials, the National Power Company, Zamil Travel, industrial maintenance, coatings, partitions, foodstuffs. But, as with the rest of the country, the future is seen in hydrocarbon. “Zamil has made a strategic decision to concentrate on downstream,” Al-Zamil told Arab News. Zamil is already a founder shareholder in Saudi International Petrochemical Company (now publicly listed) and in Sahara Petrochemicals (established in 2004); the chairman of both is Abdul Aziz Al-Zamil. Both are involved in mega developments in Eastern Region. Another Zamil move into petrochemicals is the joint venture with Huntsman for a world-scale ethyleneamines manufacturing facility in Jubail, to be operational in 2009. A contract was signed earlier this month with California-based Jacobs Engineering for the development of the new complex. The Zamil Group has also just signed an agreement with Connecticut-based Chemtura Corporation to study the construction of a joint venture aluminum alkyls plant at Jubail.
Al-Zamil is bullish about both the group’s achievements and Saudi Arabia’s. Both have been “incredible,” he says. Petrochemical companies are queuing up to set up shop in the country; it will, he believes, become the dominant force worldwide in petrochemicals. Likewise, the group, which once had to rely on foreign technologies has developed its own and has established research centers in the UAE, Jordan, Egypt and India. It is a face of Saudi enterprise not just at home but abroad as well. Some of that success may be due to the Aramco-inspired work ethic; even in Riyadh the noticeably unpretentious company offices testify to a lean, no-nonsense approach, where business comes first. It is a business that is going from strength to strength.
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