Understanding China’s new silk road and its impact on the Saudi chemical industry
Since its inception in 2013, the Chinese Economic Belt and Maritime Silk Road initiative has been expected to bring economic development for the countries along the way. With Saudi Arabia representing China’s largest trading partner in MENA, mainly in the area of oil and gas, the chemical and petrochemical industry is well positioned to seize the opportunities of the Belt and Road Initiative (BRI).
According to a recent GPCA report, titled ‘Saudi – China Relations Through the Lens of the Chemical Industry’, the BRI aims to support greater connectivity, improve economic flow, create new job opportunities, bring new investment, raise consumption, and enhance cultural exchange in the spirit of the ancient Silk Road.
“Understanding the impact of the BRI on the chemical industry is a topic of great interest to chemical industry players in Saudi Arabia. Companies are consistently indicating that trade, investment, industrial development and innovation capabilities building are pivotal for the country’s development,” the report says.
Operational cost reduction
With a scheduled completion date of 2049, measuring the immediate impact will take a longer time, however it is still tangible through increased investments and tariff relaxation. Furthermore, the new infrastructure is set to reduce operational costs, such as trade and shipping costs.
“Analysis on individual economies show that shipment time between Saudi Arabia and China will be reduced by 2 to 3%,” the report says. “Reduced shipping time substantially reduces transport costs by up to 33%. For some, significant declines in costs will be evident after switching from air transport to rail, or rail to sea”, the report adds.
The BRI is expected to bring significant gains, particularly when it comes to lowering trade barriers, amounting to annual savings of up to USD 4.5 billion. GPCA estimates that the Saudi-China FTA could yield between USD 600 million (low end) and USD 4.5 billion (high end) of savings per year.
Enhanced trade conditions will boost investors confidence in BRI countries. Both China and Saudi Arabia have been keen to attract foreign investments, while investors have been reluctant to enter these huge but challenging markets.
The BRI will make China and Saudi economies too lucrative to ignore, driving further economic growth. “Opening domestic markets in both countries and diverting more investment from China to Saudi Arabia through BRI collaboration may create new opportunities for growth. BRI could bring an important boost to FDIs in Saudi Arabia,” GPCA’s report adds.
With Saudi’s ambitious plan to attract USD 427 billion by 2030 in foreign investments through an industrial development program, the petrochemical industry, being one of the most attractive industries for investors, considering the abundancy of raw material and developed infrastructure, the chemical industry is well positioned to get a considerable share of the incoming investments.
The signs of investment growth are already materializing with enhanced cooperation and cross investment between China and Saudi Arabia.
According to the recent report, “over the past years, Chinese investors and construction companies have been increasingly involved in industrial project development and execution in Saudi Arabia”.
Enjoying Government support, several Chinese contractors are seeking opportunities abroad. In Saudi, Chinese investors sought a strategy based on partnerships with local established businesses, with BRI attracting more opportunities, the chemical industry in Saudi Arabia can expect more collaborations resulting in an increase in mega projects.
“Chinese contractors are typically successful when they work in consortiums with international companies or after having had extensive experience in other markets. This is how Chinese contractors entered Saudi petrochemicals and fertilizer construction projects, namely Sabic’s Yansab and Ma’aden’s Waad Al Shamal project,” the report says.
Innovation will play a major part in the ongoing infrastructure and capabilities development in Saudi Arabia. The chemical sector is embarking on a digital transformation journey which translated into several specialized research centers, and further opportunities will arise to develop research centers in collaboration with BRI countries.
“Today, Saudi chemical companies are embracing innovation strategies through the establishment of research and innovation centers both in the country and abroad. There is significant potential for a Sino-Saudi joint research in the area of developing new technologies. Within this platform of collaboration, Saudi companies have already established self-funded research centers”.
As China seeks to implement its BRI agenda, its interest in the Saudi oil market and opportunities will increase, according to the report. China is actively seeking new opportunities in Saudi Arabia to supplement its energy trade. “This interest reflects its (China’s) desire to find a collaboration model with maximum impact, especially as China looks to promote its BRI agenda. China and Saudi Arabia have already established a dialogue mechanism through diplomatic relations, joint projects, research initiatives, economic forums and groups,” the report adds.
China and Saudi relations will continue to evolve as the New Silk Road moves towards completion, and the real impact will be more tangible as we move closer to 2049. However, GPCA’s Saudi – China Relations report, paints a holistic picture of the impact across different sectors ranging from better transport infrastructure, reduction of transport cost, expansion of trade, increased investment flow, investments in industrial development, to higher economic growth, and growth of employment and job creation.
“Most of these factors are interrelated and the true impact is seen when considered in combination rather than independently placed. The improvements in transport infrastructure will reduce transport costs and shipment times which in turn will lead to the expansion of trade. The growth in trade and investment will have a positive impact on GDP and on countries welfare. With better collaboration, countries will experience an increase in investment flow, in turn stimulating employment growth,” the report concludes.