Mainland firms eye investments in US$30b Saudi industrial park

The global economic turmoil has not dented Saudi Arabia's resolve to create a US$30 billion industrial park in the southwest corner of the world's top oil-producing country. Abdullah Hameedadin, a deputy governor of the Saudi Arabian General Investment Authority, said the decline in oil prices by more than half in the past few months and the global credit crunch had not hampered efforts to diversify the country's economy away from oil. Oil contributes about 50 per cent of the country's economic output. 'Our government has budgeted for a long-term oil price of US$50 a barrel, so even with all this decline in oil prices, it is still trading above the budgeted level,' Mr Hameedadin said after the signing of preliminary expressions of interest with various mainland firms on co-operating in the Jazan Economic City (JEC). As Saudi Arabia is at an early stage of its big industrialisation drive, the JEC plan had not been hit by shrinking global demand and would benefit from lower construction costs, he said. The authority hopes to attract US$30 billion of investment from the private sector over 10 years to bring energy-intensive heavy industries including metal smelting and processing, oil refining and chemicals manufacturing, as well as downstream activities such as food processing and pharmaceuticals, to this remote region south of Jeddah. The industrial park includes seaside luxury residential and commercial property developments. 'Now we are at the beginning ... we are still building ports, roads,' Mr Hameedadin said. 'It will take us three to five years to build our infrastructure. By then the market will go back to where it was.' He added the project would benefit from the lower costs of steel, cement, labourers and engineers. The JEC is among six 'economic cities' planned by the Saudi government outside its big population centres and is part of efforts to create employment in rural regions and upgrade its oil-reliant economy. The Jizan region suffered from a 31 per cent unemployment rate in 2006, compared with the kingdom's average of 18 per cent. While the official launch of the JEC took place two years ago, it has yet to finalise an investment deal with mainland firms. Saudi Arabia is a key strategic partner of the mainland, which has been raising oil import from the kingdom, as it builds more refineries and cuts its reliance on imports from Angola and Iran. Aluminum Corp of China on Tuesday signed a memorandum of understanding under which it may take a 40 per cent stake in a US$3 billion aluminium smelting plant capable of producing annually 1 million tonnes of the metal used to make cars, planes and cans. Malaysian utilities and infrastructure conglomerate MMC and Jeddah-based Saudi Binladin Group intend to hold the remaining stake. State-owned China Power Investment Corp yesterday also signed a preliminary agreement to build eight 300-megawatt power generation units to supply the planned smelting plant. It may also build four more 300MW units to supply other firms in the industrial park. Together, the 12 units are estimated to cost about US$2 billion, said Shi Yaoxin, deputy general manager of China Power subsidiary CPI Power Engineering. Cheap electricity is one attraction in locating the proposed smelting facility in the JEC, as it accounts for about 35 per cent of a smelting plant's operating costs. The Saudi Arabian General Investment Authority says electricity generated from oil in the nation can cost as little as 3 US cents each kilowatt-hour, compared with 3 to 5 US cents on the mainland and 5 to 7 US cents in Europe and the United States. However, it is not known where the proposed smelting plant will source its raw materials bauxite and alumina and if it will sell its products competitively in the international market. It is also not known if the current downturn in the metals sector will affect the viability of the project. Most of the world's aluminium smelters expect to run losses because of currently low aluminium prices. He Zhihui, a vice-president of China Aluminium International Engineering Corp who represented Chalco at the signing ceremony, declined to comment on the progress of the feasibility study on investing in the smelting plant. Separately, state-backed China Harbour Corp has expressed interest to be the building contractor for a proposed bulk commodities port in the JEC, while the mainland's second-largest steel producer, Hebei Iron and Steel Group, is mulling a proposed steel smelting and processing plant. A diplomatic source said the world's third-largest oil refiner by capacity, China Petroleum & Chemical Corp, is looking at the feasibility of investing in a proposed oil refinery in the industrial park, although formal negotiations had not started. Mr Hameedadin said the refinery, estimated at US$10 billion, would have a daily throughput capacity of 300,000 to 400,000 barrels per day. He said the government would ensure crude supply to the refinery. A winning bid would be picked from potential investors by the Ministry of Petroleum in March, he said. To attract investors to the JEC, Saudi Arabia is offering to cut corporate income tax by up to half. The normal tax rate is up to 20 per cent.