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Copyright 2007 The McGraw-Hill Companies, Inc.

Saudi Arabia
Industrial ambitions
WITH
ENTRY INTO THE SPACE FOR

SAUDI

WTO, A DIVERSIFIED PRIVATE SECTOR HAS OPENED A NEW ECONOMIC ARABIA. THE PETROCHEMICAL INDUSTRY OFFERS GREAT INVESTMENT
AND FINANCIAL SERVICES.

OPPORTUNITIES WHILE CREATING SYNERGIES WITH METALLURGICAL PLANTS

Saudi Arabia is booming again. At the beginning of this year, economists at the Saudi American Bank (Samba) estimated that since 2002 the Saudi economy has almost doubled in size to $348 billion. But this time around, the outperformance has a broader base than volatile oil and gas prices, and economic growth is more multifaceted. Although in absolute terms hydrocarbon production remains the bedrock of the Saudi economy, the non-oil private sector is now its fastest growing segment, with expansion of 6.3% in 2006, well above its 10-year average. In the same year, non-oil industry in general was the fastest growing sector at 10.1%, driven by increased petrochemical and metal production as investment poured into these two energy-based industries to take advantage of low feedstock prices.

In the 2007 forecast presentation on the banks website, Samba economists added that they expected an acceleration of the non-oil growth rate to a multi-year high of over 7%, and believe this will be a pivotal year, the year in which the boom moves from being an oil revenue story to one of broad-based private sector growth. This private sector dynamism is no accident: it is testimony to a series of ve-year modernization plans that have been implemented since 1970 by the late King Fahd and by King Abdullah. The plans have successfully paved the way for the emergence of a diversied, industrialized country, which in December, 2005 was able to win entry into the WTO club of open economies.
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Reecting the transformation brought about by those plans, it is private and foreign investment that will increasingly drive the economic growth of Saudi Arabia and will meet the key policy goal of creating more employment for Saudi nationals. King Abdullah, in his State of the Kingdom address in April, said that due to the importance of investment in national development, we are planning to continue our support for the private sector to become a strategic partner in economic development. We are also planning to remove all obstacles facing Saudi and foreign investors so that they can benet, whenever possible, from the proportional privileges in the Saudi economy. A series of so-called mega projects are the poster boys for the diversication process. Four days after his address, King Abdullah announced the launch of over $31 billion of development and infrastructure projects, including the $7.5 billion King Abdullah Financial District in Riyadh, which will be the largest nancial center in the Middle East.

cals, chemicals, metals and metallurgy, as well as its services business, which includes the marketing and distributing of its petrochemical products and other sectors such as automotive batteries and carton packaging. Growth across the companies in which Tasnee has equity stakes has been explosive in recent years; its chemicals unit Cristal has achieved record production levels of titanium dioxide (a pigment used in many industries), Rassas has doubled its capacity for recycling batteries for their lead, and Battariat has expanded its production to two million batteries per year. Net prot for Tasnee rose 17% to $99 million for the 2005/2006 scal year. Al-Qurtas pays tribute to the legacy of the successive ve-year plans on the physical and social infrastructure of Saudi Arabia. There was a very strong vision that industrialization is the way for growth in Saudi Arabia, Al-Qurtas says. Utilities are highly reliable and highly competitive. We are second to none in terms of the ability to supply products at very competitive logistics costs due to the excellent port facilities and the roads network in Saudi

A view of Riyadh

The most spectacular mega projects are six new economic cities, whose agship is the $26.7 billion King Abdullah Economic City on the Red Sea. These projects will be largely nanced by the private sector. In April 2007, the Council of Saudi Chambers of Commerce and Industry estimated that the private sector had a role of nearly 70% in these mega projects. WTO accession is also stimulating diversication and foreign investment. The Saudi Arabian General Investment Authority (SAGIA) licensed 1,389 joint and foreign projects in 2006 with a total value of over $67 billion, up 25% compared to 2005. According to its website, SAGIA plans to attract foreign and joint investment exceeding $80 billion during 2007. Over the last decades, the ve-year development plans of King Fahd and King Abdullah have gradually shifted focus, from building up the countrys infrastructure in the 1970s, to encouraging an industrial base away from oil in the 1980s, to stimulating the private sector in the 1990s and now. Much of the focus of the current eighth plan is on increasing foreign investment. Moayyed Bin Issa Al-Qurtas is the CEO of Tasnee, formerly the National Industrialization Company, a pioneer in the diversication of Saudi Arabias economy over the last twenty years, and the rst industrial private joint stock company in the kingdom. Since its establishment in 1985, Tasnee has focused on building up several core industrial areas in Saudi Arabia: petrochemiBusinessWeek

Arabia, and the links that we have with the rest of the world. It is very critical to produce competitively, but it is almost equally critical to be able to supply competitively, says Al-Qurtas. The petrochemical sector is one of the most attractive segments in the economy for private and foreign capital, precisely because it is hard to beat Saudi Arabia in terms of competitively priced supply of feedstock. The WTO allowed the kingdom to maintain its feedstock prices at low levels and did not require them to rise to meet global prices. Saudi Arabia can now work within the WTO to cut global tariffs on its petrochemical exports. In 2006 Tasnee fully acquired its majority-owned subsidiary Tasnee Petrochemicals in order to accelerate growth in this sector. We have competitive advantages in a number of areas, AlQurtas says, production and logistics costs, the ability to be very competitive producers. There are very substantial advantages for international companies to invest in Saudi Arabia. This intense industrial activity by Tasnee and other private sector players in Saudi Arabia is having a knock-on effect on other sectors of the economy, notably on banking. Samba, the second largest bank in the Middle East, is providing a total of $370 million in nancing for the establishment of the Saudi Ethylene and Polyethylene Company (SEPC), a petrochemical joint venture between Tasnees affiliate NIPC, the Sahara Petrochemical Company and Netherlands-based Basell Polyolens.

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Eisa Al-Eisa, Managing Director and CEO of Samba Financial Group, said in a press release for the SEPC agreement that the philosophy adopted by Samba is to support the private sector efforts of driving economic growth and diversifying sources of income. These are bonanza times for banks in Saudi Arabia, driven mainly by the nancing opportunities provided by this process of industrial diversication and by the mega projects. We are very excited about the large number of major projects, Al-Eisa says. Our estimate is that there are about 40 major projects in different stages of implementation that currently total $283 billion in costs. This offers excellent opportunities for us to participate in the nancial engineering and the actual nancing of many of these projects. There will be IPOs, bonds, syndicated loans, and project nance structures associated with them. Although in 2006 the Saudi stock market fell over 50% after equity valuations had reached excessive levels and it has been sluggish this year, the appetite for IPOs of Saudi industrial companies seems to be returning. Samba is currently preparing what will be one of the largest ever IPOs in the region the $1.8 billion IPO of the Saudi Kayan Petrochemical Company, an ambitious project which is coming to market in order to raise capital for a giant 4 million ton specialized petrochemical complex in the industrial city of Jubail. In a statement on the Samba website, Al-Eisa said he expected an unprecedented level of subscription for Saudi Kayan, which is selling 45% of its capital. Samba is well positioned to capitalize on current opportunities. Due to its scale, it has the balance sheet strength to be a major participant in much of the nancing, and it has an extensive track record in managing and underwriting Saudi IPOs in key industrial

Making room for industrial plants at Jubail

sectors. In 2006, it managed the $525 million Yansab Petrochemicals IPO, which had close to 9 million subscribers. This mega project will produce 1.3 million tons of ethylene per year, adding 15% to the kingdoms current capacity. Samba has also been involved in raising nancing for other key sectors, notably transport and communications, which is the second fastest growing segment in the economy. Samba managed the 2004 IPO of Etihad Etisalat, the telecommunications operator that broke the monopoly of Saudi Telecom. We expected two million sub-

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SAUDI ARABIA Industry

scribers, but received over four million, and we managed it well, Al-Eisa says. The exibility and resilience of our management and execution processes were crucial given the surge in volumes, and were critical to the success of that IPO. Early indications are that Sambas experiences with mass oversubscription will be key to the mammoth Saudi Kayan offering. But with entry to the WTO, Samba is now facing new competitive challenges. There are currently 10 new foreign banks in different stages of establishing a presence in Saudi Arabia, Al-Eisa says, and new domestic banks are starting up as well, so the landscape is becoming more competitive.

company specializes in porcelain and ceramic tiles of various designs and shapes for use on walls and oors, and it also manufactures electric water heaters and sanitary ware for bathrooms. Saad Ibrahim Al-Mojel is the US-educated Chairman of Saudi Ceramics, and manages the Almojel Group of Companies, which includes steel, building materials, plastics, amusement parks and fast food restaurants. The WTO is challenging, Al-Mojel says. We have to nd new markets as we grow and as we compete with imports coming to this country. It helps us to achieve maximum capacity of production which allows us to lower our unit costs. It is not healthy

The petrochemical sector is one of the most attractive segments in the economy for private and foreign capital, precisely because it is hard to beat Saudi Arabia in terms of competitively priced supply of feedstock.
In the period running up to WTO accession, Saudi Arabia cut tariffs aggressively and it has now opened key sectors to foreign participation, including telecommunications, banking, insurance, wholesale and retail trade, as well as air and train transport, although oil production remains on a negative list. But while the mega projects grab the headlines, it is smaller scale, fast-growing rms, such as Saudi Ceramics Company, which are in the vanguard of the Saudi economy as they adjust to WTO membership. The company, which is 30 years old and has a workforce of over 1,700, is rapidly expanding and aims to have a total capacity of 32 million square meters by 2008, from around 23 million now. In addition to investing in new capacity, it is also investing in higher quality products as it looks to expand to new export markets. The for our industrial companies to focus only on their own market; they should develop outside. What we are trying to do is to expand the range of products that we are selling abroad. General Manager Abdul Karim A Nae acknowledges that the company couldnt provide the quality of European tiles or the low prices of the Chinese, but we provide value for money. We have to make good quality for a reasonable price. Saudi Ceramics is also actively seeking partnerships with foreign companies in the sector who want to distribute their products in this increasingly attractive market using their own brands. If you are a foreigner coming here you cannot just go to a contractor to build, Al-Mojel says, you have to have somebody who can help you. We have the expertise, we know the system of the local market. For all of Saudi Arabias burgeoning private sector, WTO entry means that quality and competitiveness must increase, new international markets be found, and foreign partners sought to create new business at home. For the country as a whole, that is all translating into faster, more diversied growth. Saudi membership in WTO clearly presents more opportunities than challenges, Al-Eisa at Samba says. For the country, it means higher rates of economic growth, stronger inows of foreign investment, and stronger trade ows. With barriers to trade and investment falling, industrial growth surging, and new cities rising from the sand, WTO accession has placed the seal on Saudi Arabias return to its historical position at the heart of the regional economy. Our culture is extremely open, Al-Mojel at Saudi Ceramics says. We have been used to trading for thousands of years, and anybody who goes from Asia to Europe has to cross us, either by sky, or land or sea. We are the crossroads.

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Explosive Growth at Saudi Chemical

EXPLOSIVES MANUFACTURER SAUDI CHEMICAL COMPANY IS PLAYING A KEY ROLE IN THE DEVELOPMENT OF THE KINGDOMS OIL AND GAS SECTOR, AND IS EXPANDING INTO NEW LINES OF BUSINESS
The industrialization of the Saudi Arabian economy is being spearheaded by a range of private sector companies which are seizing the opportunities provided by the governments development plans. The Saudi Chemical Company, an explosives manufacturer founded in 1972, is supporting the expansion of the countrys oil, gas and mining industries while also diversifying into the growing pharmaceutical and distribution sectors. The history of Saudi Chemical mirrors the economic trends of Saudi Arabia over the last three decades. Initially a joint venture with an international partner, Swedens Nitro Nobel, and importing its products, it gradually switched to local manufacturing for all its production lines. In 1985 it became a wholly Saudi company, with foreign partners continuing to provide technical support. Then came the conversion to a joint stock company in 1998, followed by a stock market listing in 2001. As a public company, Saudi Chemical is now responding to shareholder demands by expanding into new growth businesses. Managing Director Fahad S. Al Jarbou says that the company was established to serve domestic demand for civil explosives during the boom in construction and infrastructure in Saudi Arabia in the 1970s. Until the establishment of Saudi Chemical, all explosives were imported into the country; it was soon realized that there was a need for local manufacturing of civil explosives, to cut down on shipping and transporting dangerous explosive materials on our long roads, says Al Jarbou. Al Jarbou has had a diversied career in several key sectors in the Saudi economy since graduating in applied electrical engineering from King Fahad University in Dharhan. In 1995 he became Managing Director and member of the board of the Saudi Chemical Company, following a period of running the family business and management roles in the steel and cement industries. Throughout its 35 years of operations in the explosives sector, Saudi Chemical has been characterized by its commitment to safety and to quality. In our business, especially in civil explosives, there is no room for ignorance or error, says Al Jarbou. The companys international heritage is evident in this safety and quality culture. All our facilities were designed according to the highest Swedish standards for explosives facilities, Al-Jarbou adds, and all operations and handling of explosives are done according to strict procedures. Annual safety audits carried out by international companies help to keep standards high. The companys other international relationships also allow it to maintain product quality: it sources its raw materials from the highest quality suppliers worldwide, and it adheres to strict manufacturing procedures. This commitment to quality and safety was crowned in 2002 with the award of ISO 9001:2000 certication by BSI. Mining is currently a key strategic sector for the diversication of the kingdoms economy, and Al Jarbou expects Saudi Chemical to play a major role in this area. Mining is about to take off as a major resource in our economy, and as the only manufacturer of civil explosives in Saudi Arabia we are well positioned to provide the best service to this industry with a great deal of condence, he says. Our three factories in the three main regions, and a 35-year experience in this eld will make us a rst and best choice as partners. We cannot see ourselves outside the game. The oil and gas sector is another growth area for the company. In 2004, Saudi Chemical started producing the advanced Enviroseis seismic explosive under license from Austin International. Enviroseis is approved by Saudi Aramco for use in its seismic oil and gas exploration projects. It is more environmentally friendly and can be used in areas that are unsuitable for exploration with traditional explosives. Since listing on the stock market, Saudi Chemical has also accelerated the pace of its diversication into other areas, particularly in retail and distribution. It has expanded into the pharmaceutical sector with the acquisition of Sitco Pharma, the largest pharmaceutical distributor in the kingdom, representing major multinationals including AstraZeneca, GSK, Sano-Aventis and Eli Lilly. Its been one of the best things we did, Al Jarbou says. It immediately boosted the size of the company, the volume of sales, its international reputation. Growth is the name of the game and public companies cannot stand still. And that growth is paying in nancial results. In 2006, net prot rose by 35% to $39 million. Al Jarbou says that Saudi Chemical is now discussing acquiring a retail pharmaceutical business, and a company which distributes major perfume brands. The retail company we plan to acquire is one of the best retail chains in the Eastern Province and they are going to expand to the other regions. They are very well positioned in the market and they have up-scale pharmacies. As part of its growth strategy, the company is also investing in a third subsidiary, Petro Hunt Middle East Ltd. While perfumes and seismic explosives may seem unlikely partners, it is testimony to the strength and depth of the local economy that Saudi Chemical can now nd business opportunities in both sectors and others.
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Jubail accounts for nearly half of total foreign investment in Saudi Arabia

The Expansion of Two Cities

OF

JUBAIL AND YANBU HAVE BEEN AT THE FOREFRONT OF THE INDUSTRIALIZATION SAUDI ARABIA FOR OVER THIRTY YEARS. A MULTI-BILLION DOLLAR EXPANSION PROGRAM IS NOW BEING IMPLEMENTED IN BOTH CITIES.
expansion is now complete; three more phases are planned, until completion in 2022. For its part, Yanbu II is expected to be completed by 2019. Although it is over a thousand kilometers from the oil elds of the Eastern Province, Yanbu is, like Jubail, a hub for petrochemical industry, with pipelines across the kingdom conveying cheap crude oil and natural gas liquids for use as fuel and feedstock. Yanbu is also located close to large mineral deposits. In addition to Yanbu-II, a new airport is being built for the city. Talal Ali Al Shair, Group President of ber glass manufacturer Shairco, is a Yanbu veteran. In 1979, Shairco was the rst private sector company in the city. Al Shair compares the economic growth then with what he sees now: The boom in the 1970s was mainly in the infrastructure sector, and a lot of it was built for Jubail and Yanbu. The boom now is in downstream industries. Its a different boom, with a different type of investment, and people can benet a lot more than in the previous boom. Shairco specializes in ber glass products for airports, industry, architecture, domestic uses, and the marine and automotive elds, but also participates in a range of other industrial companies, manufacturing polypropylene fabrics, toners for printing, solvents and precious metals. Jubail and Yanbu will expand by attracting investors who believe in the clustering concept, Al Shair predicts. A project that makes sense on its own makes more sense when it is put together with others in one cluster: economies of scale improve nancial capability. Shairco is a part-owner of Cristal, which is typical of the new breed of export-oriented Saudi companies in these two cities. From
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While Riyadh is the administrative and political capital of Saudi Arabia, and the vast desert provinces of the east and southeast are home to its oil wealth, it is the two coastal cities of Jubail and Yanbu that form the countrys industrial heart. Jubail on the Arabian Gulf and Yanbu on the Red Sea have driven the industrialization of the kingdom since 1975, and it is here where the current surge in local and foreign investment in the non-oil economy is most evident. Jubail accounts for nearly half of total foreign investment in Saudi Arabia, and it now produces around 7% of all world petrochemicals. In 2005, Foreign Direct Investment magazine named it the city in the Middle East with the most economic potential. According to the Royal Commission for Jubail and Yanbu, which has managed the development of the two cities, Jubails non-petroleum share of gross national product is 11.5%, and about 70% of the kingdoms non-petroleum exports come from Jubail. The two cities have leveraged their natural advantages of cheap energy and their strategic locations near key shipping lanes to Asia and Europe, beneting from over three decades of sustained investment in infrastructure. This infrastructure, combined with attractive nancial incentives to invest, such as tax exemptions and inexpensive rent, have turned the two cites into the Saudi capitals for heavy industry and have provided employment to over 100,000 workers. Jubail and Yanbu are now entering a new stage of industrial expansion with the construction of Jubail II and Yanbu II. The Jubail II expansion is being managed by Bechtel and will add a second industrial area to the city, housing 22 primary industries and providing at least 55,000 new jobs. Phase I of the

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its facilities in Yanbu, Cristal produces titanium oxide, a pigment that is widely used in many global industries. In order to meet demand, Cristal recently increased its plant capacity from 70,000 tons to 100,000 tons and is in the process of expanding it further, almost doubling to 180,000 tons. Al Shair says that new Cristal facilities will form part of a planned industrial complex in Yanbu which will export minerals, petrochemicals, fertilizers and metals such as zinc, titanium and aluminium. Also a shareholder in Cristal, Tasnee is focusing heavily on the petrochemical sector. In 2004 it inaugurated its rst complex for the production of propylene and polypropylene in Jubail, and it is currently constructing a $2.5 billion petrochemical plant. The plant, being built in a joint venture with Netherlandsbased Basell, will consist of an ethylene cracker of one million tons per year capacity, and two polyethylene plants with capacity of 400,000 tons each. Production is expected to start in 2008. Moayyed Bin Issa Al-Qurtas, CEO of Tasnee, says: The project is proceeding very well. We closed the nancing, and the cracker and the utilities are over 50% completed already. Petrochemical exports have spearheaded the industrial development of Jubail and Yanbu after the Saudi government opened up the industry to private sector investment in 1995. WTO accession is accelerating this trend by promising better access to global markets and lower tariffs for petrochemicals produced using cheap Saudi feedstock. An example of the potential of the sector, the massive $5 billion Yansab petrochemical plant, to be located in Yanbu-II, will produce 1.3 million tons of ethylene per year, adding around 15% to the kingdoms total production capacity.

Maraq manages the supply of water and power at Jubail and Yanbu

In Jubail, Sipchem, the Saudi International Petrochemical Company is now implementing an aggressive expansion program in the city. The Sipchem site occupies over one million square meters and currently produces one million tons of methanol per year and 75,000 tons of butanediol. In 2006 it started construction of its $250 million facilities for higher value acetyl products, with commercial operations due to start in 2009. Ahmad A. Al-Ohali, President of Sipchem, said the acetyl investment represents phase two of the companys program for producing petrochemicals of increasingly higher value. Phase three of this program would be an investment of close to $9 billion in eighteen polyoeln plants in Jubail. At that stage, Al-Ohali says, Sipchem should be one of the top three players in the Gulf in petrochemicals, with production of 5 million tons; Sipchem would be an active player in the international market and we would expand our marketing reach and capabilities outside the Middle East. In order to raise nance for the expansion in Jubail, in 2006 Sipchem shareholders sold 30% of capital in an IPO. With the growth plan of the company, the chemical requirements are increasing exponentially, so you reach a point where no matter how strong your shareholders are, you are better off taking your company public, Al-Ohali explains. But in spite of this rapid industrial growth, the corporate culture at Sipchem has a strongly environmental avor. The company employs clean production technology to manufacture its petrochemicals, and Al-Ohali says that from day one we have been committed to the safety and well being not only of the employees of the company, but also the community around us, including the environment. We have established very strict policies, procedures and guidelines not to make any shortcuts in any safety or environment related issues. Al-Ohali is in no doubt as to the competitive advantages in the petrochemical sector of Saudi Arabia in general and of Jubail and Yanbu in particular: Feedstock availability and price are probably the biggest advantages by far, and the infrastructure in Saudi Arabia is incredible, especially in Jubail and Yanbu. A key part of that infrastructure is now managed by Maraq, the privately-owned power and water utility company for the two cities, which started operations in 2003. One of the weak areas in the past for Jubail and Yanbu had been the level of service provided by the publicly-owned utilities. The urgent need for more efficient services, with better supply and more competitive pricing, led to the establishment of a private operator to manage this sector. Power and water supply has a crucial role in the process of industrialization, and Maraq is now making major investments to ensure that new demand from Jubail II and Yanbu II can be met. In December, 2006, the company awarded a consortium led by Suez

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Energy International a $3.4 billion contract to build, operate and transfer a 2,750 MW and 800,000 m3/day Independent Water and Power Project (IWPP), located in Jubail. The IWPP should come on line in July, 2009. The Maraq project represents approximately 10% of the current total installed capacity in Saudi Arabia of 29,000 MW, which is planned to increase to 60,000 MW by 2020 to meet rapidly increasing energy demand. A large part of the power and water supplied by the Maraq IWPP will go towards meeting the demands of Jubails industries. Maraq is also studying how to increase its power generation and water production capacities at Yanbu. We are a key player in this area we are providing all these new industries with services like electricity, water, seawater cooling, sanitary wastewater, and industrial wastewater. The diversication of the economy is very important, and Maraq has to participate. We are going to support our end user which is the industry, so that they can expand more and more, says Abdul Rahman S. Abahusain, VP of Finance at Maraq. As well as ensuring supply, a main focus for the company is on minimizing costs to end users: Maraq has been established to provide our end users with their required services and maintain the reliability and stability of these services with competitiveness, Abahusain adds.

Ahmad Al-Ohali, President of Sipchem

The company has set up a major customer relations division in order to register customer feedback and for Maraq itself to suggest possible improvements to customers, which is a major innovation in the Saudi utility sector. Abahusain says that in the last year there has been a big improvement. The trend is going up and our customers are appreciating what we are doing right now and they are happy with that. One of the dening characteristics of the Saudi private sector is a keen sense of its wider national responsibilities. In the industrial cities of Jubail and Yanbu, this is reected in Tasnees commitment to industrialization, in the environmental and safety culture of Sipchem, and in Maraqs customer-centered approach. At Shairco, Talal Ali Al Shair has a special interest in improving prospects for Saudi youth by giving them more opportunities for vocational training. In Yanbu, I was able to gather eight or nine different industries together to create a cooperative training center. We attract young Saudis for specic training - welders, creative steel painters, carpenters, auto mechanics, and its working beautifully. This encouraged us to get involved in projects that will be able to upgrade the education system, especially at the vocational level. Im glad its happening, proudly concludes Al Shair.
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Chemanol: Downstream Creativity

A
SPECIALIST IN METHANOL-BASED PETROCHEMICALS,

CHEMANOL

IS RAPIDLY

EXPANDING ITS CAPACITY AND DIVERSIFYING ITS PRODUCT RANGE. IT WILL NOW PRODUCE ITS OWN METHANOL, LEVERAGING THE NATURAL RESOURCES OF

SAUDI ARABIA

FOR

ITS COMPETITIVE ADVANTAGE

In the mid 1980s, a new breed of Saudi entrepreneurs saw that there was high potential for using Saudi Arabias vast natural resources more effectively. Simply selling oil and gas was not enough; there would be much greater opportunities for growth and for wealth creation by moving up the oil and gas value chain and Mazen K. Allahiq Alnaimi Founder and Managing Director of Chemanol investing in the petrochemicals segment. With this idea, diversifying its product portfolio, started to produce hexamine, Mazen K. Allahiq Alnaimi founded SFCCL, the Saudi Formaldehyde which is used in a range of industries, including rubber, pharmaChemical Company Limited. ceuticals, and mining. In this period, the company almost trebled Alnaimis founding concept was supported by leading its revenues. investors from Saudi Arabia and other GCC countries such as Al In 1998 it expanded its capacity even more, diversifying into Zamil Holdings and Y.B.A. Kanoo of Saudi Arabia, Mazrui Holdthe emerging areas of resins and super plasticizers and doubled ings of UAE and Mohammed Jalal & Sons of Bahrain. Other its revenues again. All told, Chemanol has now implemented 19 investors included businessmen Fahad Al-Nasi of Kuwait and projects of capacity expansion and product diversication in just Mohammed Al Mana of Qatar. 17 years. Vision does not endure without growth, Alnaimi Recently renamed Chemanol, the company is rapidly becomargues, our story to date has been one of proving the concept, ing a world class producer of methanol-based products such as expanding the capacities, growing the markets and diversifying formaldehyde, methyl amines and derivatives. Based in the induswhenever possible. trial city of Jubail, Chemanol is investing heavily in expanding Chemanol is now investing $400 million in expanding and existing facilities and adding capacity for growth. It will begin progrowing new production capacity to add new products. By duction of methanol for its own use to accelerate its drive into 2008, revenues will have doubled again, and Alnaimi forecasts international markets with competitive, high value and environthat his company will have production capacity of 1 million tons mentally friendly products. by 2010. This expansion will result in Chemanol becoming one My vision is to create value from natural gas, not just burn it of the worlds largest producers of methanol derivatives like or sell it as methanol, Alnaimi explains. Our new name Cheformaldehyde and amines. manol is taken from Chemicals from Methanol. It strongly underIn addition to this downstream expanlines our vision of leveraging natural gas sion, a key part of the transformation of resources by using methanol for downthe company will also involve a process of stream products that add value to the backward integration, as Alnaimi explains: industry, the country and our customers. Instead of buying methanol, we will proFormaldehyde is the core business of duce it at a lower cost. This will provide us Chemanol. The company produces around with long term competitive cost advan400,000 tons annually of formaldehyde and tages for our current products and our derivatives and exports to over 45 countries; new products. We have begun implementits 26 specialty products are used in 27 ing our future. industries. It is a major supplier to the global In this highly globalized industry, interoil eld, textiles, paper, leather and rubber national partnerships are one of the key industries, which all use formaldehyde in factors for ensuring sustained success. their end products Our mission is to make Going into partnership with a Swedish company for the producproducts that touch your life in ways unseen, Alnaimi says. tion of pentaerythritol, a basic raw material for paints and coating Chemanol has come a long way since work began on conproducts, Chemanol is able produce the substance more efficientstructing one small plant back in early 1991, when the Persian ly, while its Swedish partner markets the products. Gulf War was raging, and when there were no privately owned As in all successful business partnerships, this arrangement companies in the petrochemicals industry in Saudi Arabia. I was gears the strengths of each partner to the benet of both. We ying where no-one had own before, Alnaimi recalls. The story since then has been one of constant strategic move- currently have many partnering arrangements for technology, licensing, and off-take agreements with companies outside Saudi ment: growth of Chemanols installed capacity, and growth into Arabia. We examine all propositions that have synergies with our new markets and new products. Between 1993 and 1995, vision and with the attributes of our business. says Alnaimi. Chemanol doubled its formaldehyde capacity and, as a way of
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Waking up to the bustle of business in Al Khobar

Eastern Possibilities
THE EASTERN PROVINCE IS NO LONGER JUST A LAND OF OIL, GAS, DESERTS AND INDUSTRIALIZATION IS ACCELERATING IN THE MAJOR CITIES,
LED BY SOME OF DATE PALMS.

SAUDI ARABIAS

FASTEST GROWING CONGLOMERATES.

remaining 51%. Metal production should begin in the rst quarter of 2011. Maaden will also construct a 3 million tons per year, $3.5 billion diammonium phosphate (DAP) plant at Ras Al Zour, which will be the largest single production site in the world and which will create 1,400 jobs. Production is scheduled to begin in 2010, and at maximum capacity the site will account for around 10% of global DAP trade. The main missing piece in the infrastructure that will support these mammoth projects fell into place in April when the Saudi Finance Minister awarded contracts to Saudi, German, Chinese, Japanese and Australian companies to construct a $1.9 billion, 1,765 km rail link that will bring the raw materials of bauxite and phosphate from Saudi deposits to the complexes at Ras Al Zour. Special port facilities for exports of aluminum and fertilizers will be built to serve the surging markets of Asia and elsewhere. From his vantage point at the head of over forty companies Al Turki at Rawabi Holding has witnessed a process of steady change in Saudi Arabia and in the Eastern Province. Rawabi has been operating in Saudi Arabia and the Middle East for over thirty years. Through its fully owned subsidiary Rawabi Trading and Contracting (RTC), it offers specialized services to the oil and gas and petrochemical industries. Rawabi has activities in an increasingly wide range of sectors, including construction, utilities, power and electrical, telecommunications and IT, freight forwarding, marine, trading and manufacturing. Fully owned subsidiary Rawabi Telecommunications & Software provides technology for voice and data communications, and Rawabi also has a stake in DigitalSkys, which specializes in
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The largest region in Saudi Arabia, the Eastern Province is home to the massive oil and gas resources that provide the bulk of the kingdoms wealth. But in recent years the capital of the province, Dammam, as well as the cities of Al Khobar and Dhahran, headquarters of giant oil producer Saudi Aramco, have seen the emergence of an increasingly diversied industrial base. The province is home to some of Saudi Arabias largest conglomerates, and there is now much more to its prosperity than the mammoth oil elds and the famous date palms of the ancient oasis towns. Our main income in the past has denitely been oil, says Abdul Aziz A. Al Turki, President of Rawabi Holding, but at the same time, the vision of our government is to diversify and to industrialize. That is why today you see the petrochemical industries here are massive. Two facilities that are being constructed at Ras Al Zour by Maaden, the Saudi Arabian Mining Company, will lead to the Eastern Province becoming a major force in the rapidly expanding world aluminum and fertilizer markets. Because of the low energy and feedstock prices in Saudi Arabia, Maaden will be one of the worlds lowest cost producers of these materials. The aluminum complex will consist of a smelter with capacity of 720,000 tons per year, a renery of 1.6 million tons per year, and a 1400 MW power plant. Maaden estimates that the aluminum project will provide up to 12,000 jobs, will stimulate related downstream industries to the tune of $740 million per year, and will increase the kingdoms gross domestic product by $30 billion over twenty-ve years. In April it was announced that Canadian aluminum giant Alcan would hold a 49% stake in the $7 billion mine-to-metal project, with Maaden holding the

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providing wireless connectivity. This area is the heart of the oil industry, says Al Turki, but there are other opportunities. We are concentrating on IT; there are new things in the market, new things internationally and we want to be a part of that. Ahmad Al-Ohali, president of Sipchem, the Saudi International Petrochemical Company, says that for his industry the main competitive advantages of the Eastern Province, apart from the availability of cheap feedstock, is its strategic global location. Though its industrial complex is in Jubail, Sipchem keeps offices in Al Khobar, proting from the raw materials and port facilities of the province. Our market is in China, in Asia, in Europe, says Al-Ohali. It is true you have to ship both ways, but at the same time you are in the center, between Asia and Europe, so compared to the Americans or the Asians who have to cross oceans, that gives us some advantages. Like the Eastern Province itself, the Khalid Ali Al Turki & Sons Group has progressively diversied into different areas. In its early years, during the petrodollar-fueled infrastructure boom of the 1970s and early 80s, the group focused on the construction and oil and gas sectors and then went on to participate in other industries such as petrochemicals, utilities, high technology and telecommunications. Saudi Readymix, its concrete subsidiary based in Al Khobar, has experienced explosive growth in recent years. In 2006 it responded rapidly to demand for high quality ready mixed concrete in Saudi Arabia, producing over 3 million cubic meters of the material. Capital investment in 2006 exceeded $35 million, and investments in new capacity are continuing in 2007 to meet the growth in demand. As part of a ve-year growth plan, Saudi Readymix is looking to increase its production volume of concrete and related products by 25% annually, beginning in 2007.

Oil and petrochemicals have long been the Eastern Province's foremost products.

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We have the vision of leading the production of concrete in the Middle East, Rami Al Turki, Executive Director of the group says. We are aggressively pursuing acquisitions and organic growth. Also, we are beginning to explore adjacent markets in the GCC and the Middle East. The idea is to continue to expand and be a leader in our divisions. The Khalid Ali Al Turki Group also has a major interest in the environment and in the environmental services sector. This is a sector we felt very excited about, Rami Al Turki says. It is an emerging area globally, especially in the developed world. We are looking to start as a consultancy, but we will also get into environmental services, the water and waste water treatment sectors. We have to diversify to develop the countrys economy, Rami Al Turki adds, but at the same time continue to focus in the areas we know best. Building materials, oil and gas, ready mix concrete, the environment and development are the areas where we have a very strong understanding, and we are trying to strengthen our position in consumer-related areas such as telecom, ICT, and in IT. What are the challenges now facing industry in the Eastern Province? Al-Ohali at Sipchem says that WTO accession in December 2005 is opening new markets, but is also placing new demands on Saudi companies: There will be more pressure on us to sharpen our pencils, to improve our operations and performance. Rami Al Turki shares that perspective. He says that with WTO membership its going to be the survival of the ttest, and we are going to be forced to improve services. The WTO forces companies to be much more focused on customer service and to deliver. Abdul Aziz A. Al Turki at Rawabi Holding thinks another major challenge will be on the human side to ensure that there is a pool of well trained young Saudis available to ll the jobs created by the expansion and the diversication of the Eastern Province.

Companies face the challenge of balancing growth with care for the environment.

The challenge now is training, Al-Turki says, because jobs are here for a long time to come. This boom is going to last ve or six years. The way the government is looking at future infrastructure, there will be a tremendous amount of work opportunities. The difficulty we face here, like any other company, is to nd the right people. Thats a view echoed by the Khalid Ali Al Turki Group. We need to do more in terms of training and development for Saudis, Rami Al Turki says. I think that labor is a very big area for reform, and corporate laws are another. These areas are very important for any business and they are being addressed.

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Unexpected synergies
ABDULAZIZ ABDULHADI AL QAHTANI
IS AT THE HEAD OF A DIVERSIFIED CONGLOMERATE THAT RANGES FROM OIL AND GAS SERVICES TO SALT MINES.

HE

BELIEVES

THAT THE DYNAMISM OF THE PRIVATE SECTOR IS PROVING TO BE THE BACKBONE OF THE

SAUDI

ECONOMY.

The desert sands of Saudi Arabia hold more treasures than just oil and gas. The kingdom is also home to vast resources of salt, which is not only a vital ingredient in dining tables across the world, but also a key basic material in a wide range of industries, including the booming petrochemicals sector. Since 1995, Gulf Salt Co. Limited, in the Eastern Province of Saudi Arabia, has been extracting salt from its 3 million square meter mine by the sea. It then gets transported 50 kilometers to its renery, where it is treated and puried for a number of varying end uses, including table, food grade, industrial and crude washed salt. The high purity salt that the company produces is used in a range of applications, such as in drilling mud for the oil sector, as a raw material in the caustic soda industry, in water treatment, water softening and conditioning, in tanneries and iron and aluminum smelters. Abdulaziz Abdulhadi Al Qahtani is the Chairman of the Abdulhadi A. Al Qahtani Sons Group, which is an investor in this completely Saudi run joint venture. In a lot of petrochemicalbased industries, such as methanol, ethanol, polymers, the main feedstock is salt. We produce industrial salt to be delivered to other industries, Al Qahtani explains. We also produce heavy salts at a high rate, which we export to neighboring countries and Europe. And we have food salt, which is used in date farms and the cheese industry. The Al Qahtani Group is making a major entry into the Saudi mining and minerals sector. Consolidated Mining Co. is a joint venture with Bateman Engineering which provides specialist technologies in the mining and minerals processing sectors. Arabian Minerals & Chemicals is a US-Saudi joint venture that supplies uids for drilling to customers including Saudi Aramco, and which has manufacturing capacity of uids such as barite and bentonite of over 150,000 tons per year. Al Qahtani believes that a partner-based approach is crucial in this sector. We have partners in all of those investments in the mining industry, he says, Not everyone can enter into mining unless they have the right partner. Its risky without people that have the experience and the know-how. We have partners from Australia, South Africa, Great Britain. They are equity and technical partners in our projects. Like many leading industrial conglomerates in todays Saudi Arabia, the group traces its roots back to the early days of the oil industry. My late father was one of the pioneers of the Dammam economy, Al Qahtani recalls. He started in contracting in the early 50s, in oil services and other related sectors. In spite of a high level of diversication since then, oil eld
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services remain the core of the companys business with Al Qahtani Marine and Oileld Services Company as its agship. The group is the partner in Saudi Arabia to three of the worlds largest and most active companies in the oil eld services sector, Italys Saipem, an oil and gas pipeline specialist, Halliburton subsidiary Sperry Drilling Services, and Faireld Industries of Texas, which uses advanced technology to acquire seismic data in surveys. With oil prices still near record highs, the Al Qahtani Group is beneting from the current increase in exploration and production that has been triggered across the industry. It has also built up particular expertise in providing onshore and offshore drilling equipment and services, again with the support of a range of multinational partners that include TIW Corporation, Reed Tool Company, Hycalog, and Canadas Top-Co. Industries. Since the early focus on services for the oil and gas industry, the group has expanded into areas as diverse as soft drink production and distribution, petrochemicals, wholesale and retail distribution, and can manufacturing. Diversication is very healthy provided you can master the new business you are getting into, Al Qahtani says. For any new project or new activity, we make the business stand by itself and we give it a different identity. Every one of them, in different elds, is independent: they have independent prots and losses. Diversication is very important today, but we dont go to any industry in which we dont have knowledge. The food and beverages industry is a core area for the group; it is a franchised bottler for Pepsi Cola in the southwest of Saudi Arabia, also bottling Tropicana and mineral water and distributing them on a large scale. In addition to a wide distribution network, Al Qahtani says the companys commitment to quality control gives their clients an edge over competitors. His beverage business has won fteen international quality awards in the last twenty years. Leveraging its strengths in the food and beverage sector, the group has also expanded into manufacturing cans for drinks: its Southern Can-Making Company unit has annual production capacity of 600 million cans. Al Qhatani says that family industries like the group set up by his father are the backbone of the country, and he is condent that the process of economic reform that is being driven forward by King Abdullah will encourage more international partners to invest in the expanding Saudi economy. Of course the kingdom still has to change things to make international investments more attractive, he notes, but Saudi Arabia is very lucrative because of its location and because of its low cost for business. Investors can also benet from clear laws of commerce.

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Adding value to partners

THE WORLDS MOST POWERFUL CORPORATIONS.

THE NAMES OF THE BUSINESS PARTNERS OF E.A. JUFFALI AND BROTHERS READ LIKE A ROLL CALL OF THE GROUP HAS PLAYED A KEY ROLE IN THE DEVELOPMENT OF SAUDI INFRASTRUCTURE AND INDUSTRY.

Anybody who has ever turned on air Progress through diversity is the conditioning in Saudi Arabia, spoken on the motto of the group. Vice Chairman and telephone, used IBM hardware or software, Managing Partner Khaled Juffali says that it or driven in a Mercedes, in other words, has been key to establish the best just about any business traveler in the partnerships in different industries. If we kingdom, will probably have had reason to did not give any added value, these be grateful to E.A. Juffali and Brothers. partners would not stay with us. In over sixty years in business, this Juffali says the success of this business Jeddah-based group has become partner synergy is helping the group maintain its of choice in the country to some of the foreign partnerships after WTO accession. Khaled Juffali, Vice Chairman and Managing worlds leading multinationals. E.A. Juffali A lot of people are scared that their foreign Partner of E.A. Juffali & Brothers and Brothers traces its roots to a shop set partners might not remain, Juffali explains. up by three brothers in Mecca in the 1930s. The company has led But we know the market, we know how to do business in Saudi the way in private sector involvement in the development of Arabia and in the neighboring countries. We have delivered what Saudi infrastructure winning the kingdoms rst electricity we have committed ourselves to. We are not in for the short term, concession in 1945 in the city of Taif. Subsequently it expanded for the hit and run. We are in for the long term. within the electricity business through a partnership with The company is currently looking to expand both Siemens, and moved into areas as varied as refrigeration geographically, in the Gulf and the Levant, and also in business and air conditioning, telecommunication systems (with Ericsson), lines, with a stronger focus on information and communications IT services (with IBM), chemicals (with Dow), construction technology by leveraging its current partnerships. From a business equipment, insurance, printing machinery, and medical point of view you try to expand wherever you can have an added equipment (again with Siemens). value, where the direction of the kingdom is going, Juffali says.

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A green kingdom
THE
POWERS OF THE AND THE

PRESIDENCY OF METEOROLOGY ENVIRONMENT (PME) TO DEVELOP AND

INCREASED.

ENFORCE ENVIRONMENTAL LEGISLATION HAVE BEEN

ON

THE FACE OF GREATER

INDUSTRIALIZATION IN THE KINGDOM, THE

PME

IS

SAFEGUARDING ITS NATURAL ASSETS

A ghter pilot may seem an unlikely environmentalist, but it was during his time in the Royal Saudi Air Force that Prince Turki Bin Nasser Bin Abdulazizs interest in environmental affairs started to become a professional passion. Now, at the head of the Presidency of Meteorology and the Environment (PME), which has had ministry status since 2001, the Prince is responsible for ensuring that the rapid Photo: Nico Smit The fauna of the kingdom includes a variety expansion and industrialization of Saudi Arabia does not come at of colorful underwater species in the Red Sea the expense of its environment. The requirement for a sustainable, balanced relationship environmental protection standards and prepare policies for the between man and nature forms one of the foundations of Islamic kingdom. The PME is in a crucial position in the current diversicabelief, and the kingdom is spearheading Arab and Islamic environtion of the economy: all new major developmental projects in mentalism by launching a new television channel, Beeaty, which will Saudi Arabia require environmental impact assessments at the be shown in schools and universities across the Middle East to raise planning and feasibility study stage, without which a license will the level of environmental awareness in the region. The main purnot be issued. pose is really to show the Arab world how damaged our environThe environmental regulations that we have passed in the year ment is becoming and to try to get support from all civil society, 2000 now have been implemented through penalties, even to the explains Prince Turki. extent of closing factories, Prince Turki says. King Abdullah not only has granted new As far as the new projects are concerned, from powers to the PME to enforce environmental the day they start they must have all the conlegislation, but green concerns are at the trols in place. Before, the PME used to repreheart of the countrys economic mega projects. sent legislation only. Now it has the right to go Needless to say, there are major opportunities and inspect any project or facility in Saudi Arafor the foreign private sector to contribute their bia, be it governmental or private. know-how and expertise in this growth area. In this desert kingdom with a rapidly rising According to the teachings of Islam, man population, water scarcity and water conservais in a position of responsibility to all beings: tion are critical environmental challenges. Saudi his role is as a trustee and steward of the creArabia does not receive enough natural rainfall ated world and of the riches of nature. The to meet all its needs, and the PME, supported Koran teaches that if any Muslim plants a by US know-how, is carrying out a major protree or sows a eld and a human, bird or anigram of pilot projects which use airplanes to mal eats from it, it shall be reckoned as charity seed clouds with chemical substances in order from him. to induce greater levels of rainfall. Combined with the resurgence of environThe latest feasibility study was held in the mental concerns in international policy-making cool season of November 2006 to March organizations, these age-old religious beliefs 2007, taking advantage of the more frequent Prince Turki Bin Nasser Bin Abdulaziz, are leading to greater awareness in all areas of General President of PME naturally forming clouds in northern Saudi the Saudi economy. The PME is in the driving Arabia in that time. Scientists from the US seat of this process. National Center for Atmospheric Research from Texas A&M UniverSaudi Arabia has passed through two phases of [economic] sity, and from private US company Weather Modication Inc., with development, Prince Turki says. The rst one was in the 1970s, the operational support of the PME, studied the climatology of the and did not include any environmental assessment. Now we are region, the physics and chemistry of clouds and rainstorms, and in a larger phase of development, and we are optimistic that we analyzed the impact of the cloud seeding tests using Saudi radar will be able to give environmental issues rst priority from the and specially equipped aircraft. inception stage. Results from these projects suggest that substantial increases in In 2001 King Adbullah awarded the PME, which used to be precipitation and in the countrys water reserves could be achieved merely a legislative and consultative body, powers to enforce laws with this technology, and the PME is currently supervising an expanand to apply penalties. The role of the organization is to establish sion of this program of eld experiments across the country.

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