In an effort to diversify its oil-fueled economy and trim its bloated unemployment rolls, Saudi Arabia is moving aggressively to develop a significant plastic product manufacturing industry.
Two separate projects, just 20 miles apart on the Red Sea coast, are targeting foreign investors who wish to set up operations to convert plastic resins into value-added finished products, primarily for export to Europe. And these appear to be only the first of several such projects.
The petroleum sector accounts for roughly 75 percent of Saudi Arabia's budget revenues and about 45 percent of its gross domestic product. But an estimated 15-25 percent of its working-age population is unemployed, and the government urgently wants to create skilled jobs for its people. To help, the country is creating six economic cities, designed to attract foreign investment and leverage its advantageous, low-cost base for oil, natural gas and related feedstocks into finished products.
Plastics play a key role in many of the types of products most desired by the Saudi government. The kingdom is targeting various industrial clusters for development and support. Among them are automotive, construction, metals processing, appliances and flexible packaging.
A government Web site at www.saudiclusters.com offers this about the latter segment:
``Current packaging producers within Saudi Arabia are focused on local consumption. They are small plants with smaller line sizes, which makes them less competitive in the export market.
``The flexible packaging cluster will develop a strategy and anchor projects to create highly efficient export-oriented competitors in Saudi Arabia,'' the Web site said.
At the Townsend Emerging Markets in the Plastics Industry conference, held June 19-20 in Houston, Abdulaziz Al-Duailej, president of AMD Consulting of Riyadh, provided some context for these initiatives.
Al-Duailej said Saudi Arabia accounts for about 650 of the 3,000 or so plastics processors in the Middle East and North Africa region, which is home to about 300 million people. Per-capita consumption of plastics in that region ranges from 22 pounds to more than 121 pounds, in Saudi Arabia.
``As recently as 2005, 85 percent of [Saudi Arabia's] resin consumption was in three cities - Jeddah, Riyadh and Dammam - and only about 10 percent of plants were joint ventures,'' Al-Duailej said in a June 19 presentation. ``This is all changing, and changing very rapidly now.''
Al-Duailej predicts ``an explosion of JVs with the West - from both resin producers and large converters.'' One result, he suggests, will be a dramatic increase in the export of converted plastic products from the Gulf region. At present, Saudis consume about 90 percent of the plastic products they manufacture, with only 10 percent destined for export.
The Saudi government is flinging open the door to foreign investment, largely via these economic cities, each of which will offer free-trade-zone benefits to those who participate.
Also, several resin producers will enter that market and some 15 billion pounds of additional resin capacity will come on stream in the Middle East and Africa between 2006 and 2011.
The resulting cutthroat competition will drive down materials costs even further, helping to spur plastics processing industry development, according to Al-Duailej, who is the Mideast partner of Houston's Townsend Polymer Services & Information. He is also a board member of the Saudi National Plastics Committee.
The massive new King Abdullah Economic City, near Rabigh on the kingdom's west coast, is a centerpiece of the government's initiative. The KAEC, as it's known, plans to devote 14,826 acres, a little more than 23 square miles, to developing a ``Plastics Valley'' full of processors and related industries.
But one needs to go only about 20 miles north up the Red Sea coast to an area near the town of Rabigh to find Rabigh Refining & Petrochemical Co., which is due to start up next year. PetroRabigh, as it's known, is a $10 billion joint venture between the state-owned Saudi Aramco, the world's largest oil company, and Japan's Sumitomo Chemical Co. Ltd.
An initiative dubbed the Rabigh Conversion Industrial Park has set aside an adjacent 593 acres, or just under 1 square mile, for plastics processing and related product assembly, according to Teruhiko Tsumura, managing director of London Research International Ltd., which is helping to market the Rabigh CIP.
In a June 26 telephone interview from his office in Kent, England, Tsumura said the plan is to begin construction of facilities for tenants early next year, and complete the project during 2008's fourth quarter. He said a couple of companies - that he declined to identify - already are very close to committing to leases.
The Rabigh CIP hosted a seminar in New York in mid-June designed to attract the attention of investors. It was the second of five such seminars, with another due to take place Oct. 25 in Dusseldorf, Germany, during the K 2007 plastics trade show.
Both industrial parks aim to woo tenants with aggressive government incentives and a long list of manufacturer-friendly support services. Both, for example, intend to include government assistance to help tenants with worker education and training. Rabigh CIP's sponsors also will provide a technical center that offers help in such areas as applications development.
Low worker wages is another draw. The Rabigh CIP Web site notes: ``At present, there are no laws prescribing a minimum wage in Saudi Arabia. The average wage among the manufacturing workers is approximately twice as much as that in China and less than one-tenth of that in Germany and the United Kingdom.''
And, of course, easy access to cheap resins and energy is paramount. The PetroRabigh complex is scheduled to start delivering various grades of polyolefin materials to users during the fourth quarter of 2008. Saudi natural gas already costs about one-tenth that in the United States, electricity will be offered at 3.2 cents per kilowatt hour, and state-of-the-art materials handling, shipping and warehousing are part of any package.
Tsumura spelled out a few of the specific incentives for foreign investors in Rabigh CIP, including:
* Full ownership of their investment projects.
* Ability to carry forward financial losses indefinitely and write them off at the time of tax settlement once the company begins showing a profit.
* Reduced ceiling - to 20 percent from 45 percent - for corporate tax rates on profits above 100,000 Saudi riyals (about $26,700).
* No personal income tax.
* Ability to repatriate fully capital, profits and dividends.
* Access to industrial loans on favorable terms, etc.
The much larger Plastics Valley in the King Abdullah Economic City will be similarly competitive. The Saudi government is making sure there are many reasons for foreign investors to come set up plastics processing operations in the kingdom.
And while the Middle East clearly plans to cut into some of the plastic product export action currently dominated by the Chinese, not everyone is convinced it will have a significant impact on a global scale.
During a question-and-answer session at Townsend's Houston conference, company founder and economist Phillip Townsend offered this view:
``Even if the Middle East does everything right for the next five years [as regards developing plastic product manufacturing and export capabilities], it would do nothing but slightly slow down the China express.''