beyondbrics

Saudi Arabia only established diplomatic ties with China in 20 years ago but, now according to SABB bank, there are more than 70 Chinese companies operating in the Middle East’s largest economy. Among them are 62 construction groups employing close to 16,000 people.

Projects captured by Chinese contractors include an expansion of King Khalid University, the Mecca-Medina high-speed rail link, and a scheme to build 200 schools in the kingdom. But, according to Silk Road Economy, a blog, commercial relations between the two heavyweights may be about to get trickier.

Ben Simpfendorfer, the chief China economist at RBS who runs Silk Road Economy, has been reading Al-Hayat, a major pan-Arab newspaper. Mr Simpfendorfer finds that Saudi traders are worried by the prospect of cheap Chinese steel flooding the local market:

Foreign prices are now below local [Saudi] prices and, apparently, local producers are already struggling to make a profit. One industry specialist points to the damage already done to neighboring markets, which have been “flooded” by foreign imports.

It’s a tough one. Cheap steel would reduce the costs of the Middle East’s ambitious construction projects. But it will equally undermine the region’s fledging steel sector.

Just so. The kingdom’s steel sector is dominated by Saudi Iron and Steel, known as Hadeed, which is a subsidiary of Sabic, the kingdom’s petrochemicals and downstream giant. Another player is Zamil Steel Industries, wholly owned by one of the kingdom’s most powerful merchant families who have a history of providing government ministers.

The Saudi steel makers have certainly been powering ahead. According to Dow Jones, Saudi Arabia’s steel production rose 19 per cent to 3.05m tonnes in the first 7 months of the year from 2.56m tonnes in the same period a year earlier. Only Egypt in the Arab world produces more.

Saudi Arabia does have one huge advantage and that is, of course, fuel costs. Sabic for one can source the cheapest oil and gas in the world. Moreover Sabic and the Zamil family are among the most powerful political players in the land. That means Hadeed may be able to find room to lower its prices if the kingdom wants it to.

But then both China and Saudi Arabia are WTO members, which is supposed to inhibit their freedom of movement. Do not rule out rising trade tensions between these two emerging market giants.

Related reading:
A Mecca for high-rise projects, FT
Anshan backs away from US deal, FT