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Beyond Fossil Fuels: Bolstering the Saudi Industrial Sector to Achieve Sustainable Growth

Global oil prices have risen on the back of the post-COVID 19 economic recovery and spiked even higher in March 2022 due to the impact of the Russian invasion of Ukraine. In the face of this new reality, there has been a significant focus on one of the world’s leading oil producers: Saudi Arabia. While geopolitics have intensified the ever-present attention paid to  Saudi Arabia’s oil sector, internally the Kingdom has continued to increase its focus and investment on its economic diversification strategy. This includes investment in some of the more conspicuous sectors, including entertainment, tourism, and technology. However, a major component of this diversification is focused on the often-understated industrial sectors, which include everything from mining to renewable energy to manufacturing.

Tapping Strategic and Foreign Investments to Build the Mining Sector

Vision 2030 calls for the Saudi government to build the mining sector into the third pillar of future industrial growth, tapping into the Kingdom’s estimated $1.3 trillion mineral endowment that includes phosphate, gold, and copper deposits. Although Saudi Arabia’s Vision 2030 and planned economic diversification remain in their early stages, there have already been significant advancements in this sector. The mining industry achieved revenues of $194 million in 2021, a 27% year-over-year increase.

State-owned entities will continue to dominate the mining and chemicals sector as the government seeks to maintain control over national resources and direct how profits are used. In January 2022, Ma’aden, a Saudi state-owned mining company, announced that it expected the $880 million Mansoura and Masarah gold mine project to begin production in 2022. Ma’aden is also undertaking a $6.4 billion expansion of its phosphate fertilizer portfolio to boost its capacity to 9 million tons by 2025. This expansion would make the firm one of the world’s largest producers. There will be opportunities for foreign entities to play a role in this sector’s growth, as well. In June 2020, Saudi Arabia’s cabinet approved a new mining law to boost foreign investment and facilitate access to financing and exploration activities. Foreign companies will likely be applying for the mining licenses, including one for the Khnaiguiyah zinc and copper mine, that the government is expected to auction in 2022.

Manufacturing, Logistics, Renewables, and Foreign Competition

Saudi Arabia’s Vision 2030 also aims to transform the country into a leading manufacturing powerhouse and global logistics hub. The development of these areas will face greater headwinds compared to the mining sector due to relatively high labor costs, cumbersome “Saudization” policies (whereby the government sets hiring quotas for Saudi nationals to reduce indigenous unemployment), and stiff regional competition. The UAE, through its Port of Jebel Ali and Dubai International Airport, has already established itself as a regional hub for logistics. Abu Dhabi must therefore compete to grab further market share and remain ahead of      Riyadh in this area.

However, the significant amounts of funding provided by state-owned entities, such as the Saudi Public Investment Fund, and significant private sector interest in accessing the Saudi market will support some degree of sustained growth. In July 2021, Saudi Arabia’s Minister of Transport and Logistic Services Saleh bin Nasser al-Jasser said that Saudi Arabia would invest over $133 billion to bolster the Kingdom’s transportation sector. Moreover, Riyadh is starting to see the need for increased regional transport integration if it hopes to achieve its economic goals; in November 2021, it signed a memorandum of understanding with Oman to enhance transportation cooperation, which would further bolster the logistics sector. Lucid Group, a U.S.-based based company with major Saudi shareholders, has signed agreements to establish a manufacturing plant in King Abdullah Economic City that will eventually produce up to 150,000 vehicles per year. The authorities are also intent to adopt and leverage the latest technologies. In July of last year, the Minister of Communications and Information Technology opened the Fourth Industrial Revolution Center. Five months later, the government announced that 100 plants would be made compatible with applications of the Fourth Industrial Revolution. These developments should lay the groundwork for long-term development if the authorities follow through.

The Kingdom will also continue to make investments in the energy sector, including renewable energy sources. Indeed, the development of wind, solar, and hydrogen will play an important role in staving off criticism of the Saudi fossil fuel industry. Riyadh’s efforts in this area will also further its diversification goals. These investments in renewables will be used to meet massive domestic energy demand and free up domestically-produced oil for export. The profits from these exports may be fed back into the local economy. Some indicate Saudi Arabia will build 7.7 gigawatts of solar capacity by 2026, up from only 300 megawatts in 2021. ACWA Power and Air Products signed agreements in 2020 to develop a $5 billion hydrogen-based ammonia plant at NEOM that has started to make progress in development. The plant will be powered by more than 4 gigawatts of renewable energy. More broadly, the authorities have indicated that the $500 billion NEOM project will be run with 100% clean energy.

Barriers to Bolstering Industrial Development

Notwithstanding the numerous reasons for optimism about the development of industry in Saudi Arabia, there remain systemic political and financial barriers to growth. Saudization initiatives will continue to impose regulations on companies and drive them to use local labor or face higher fees and hiring restrictions. Political and security risks associated with contentious relations with neighbors, such as Iran and the Houthis in Yemen, as well as reputational risks from human rights concerns in Saudi Arabia will remain a consideration for foreign investors. Saudi Arabia must start reforms to facilitate trade and align with internationally accepted legal norms.

While state-owned investors have vast financial capabilities to invest—which have grown with higher oil prices—they have also been mandated by the state to invest in many sectors and projects to diversify their assets. Moreover, foreign direct investment has thus far fallen short of the lofty targets set by the government. The authorities will need to manage expectations and deploy assets strategically to help the economy grow while sustaining the ability to invest for the long-term.

Although challenges to sustainable industrial development remain, industry will remain a significant and growing part of the non-oil economy in the coming years. Bureaucratic and regulatory barriers must be overcome, but sustained government focus on bolstering those sectors will help to sustain the positive trajectory of these sectors. While regional and global competition will be fierce, industrial growth in Saudi Arabia need not become a zero-sum game with competing states. Moreover, Saudi willingness to accept critiques from the private sector and react in a constructive way bodes well for the prospect of developing industrial sectors.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of Gulf International Forum.

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Alexander Werman is a political and security risk analyst focusing on the Middle East and North Africa region. In his current role at The Cohen Group, he advises companies on market entry and strategic risk in the Middle East. From 2019 to 2021, he lived in Dubai and worked at Control Risks, a global specialist risk consultancy, where he led the company’s research on Jordan, Israel, Libya, and the Palestinian Territories. Before Control Risks, Alexander studied Arabic in Jordan and was a contributing writer for the Jordan Times newspaper. He holds a Master of Arts in Security Policy Studies from George Washington University and a Bachelor of Business Administration from Emory University.

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