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.