All change for KSA

As Saudi Arabia’s 10-year struggle to gain WTO membership comes to an end, the kingdom remains at the centre of the global oil crisis. Rhys Jones talks to Khalid Al Zamil, managing director of Zamil Industrial Investment Company about crude oil, cash, conflict and the changes the country needs to make to remain an economic force.

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By  Rhys Jones Published  September 25, 2005

All change for KSA|~|32-36-Al-Zamil-KSA-Pic-200.jpg|~|LOOKING FORWARD: ZIIC boss Khalid Al Zamil wants Saudi industries to rise to the challenges facing them. |~|LATER THIS YEAR, SAUDI ARABIA’S newly crowned King Abdullah will sign on the dotted line and end his country’s decade-long wait for admission into the World Trade Organisation (WTO). The kingdom’s accession to the 148-member body is expected to lead it towards a raft of major economic, political and legal reforms. As such, Khalid Al Zamil, managing director of Zamil Industrial Investment Company (ZIIC) and an elder statesman of one the Gulf’s most influential merchant families believes the time is right for the country’s industries to respond to the challenges facing them. “With our WTO entry coming up we have to realise that we are going to be operating in a totally different league,” says Al Zamil, the man at the helm of the Dammam-based manufacturing and fabrication giant. “The market will be much more open and all Saudi industries will have to be set for a new era,” he adds. The signing of a key trade deal with the United States late last month all but sealed Saudi Arabia’s admission into the WTO. The freshly inked bilateral agreement was the culmination of five months worth of intensive negotiations and provides improved market access for US producers of agriculture, goods and services. It sets the stage for Saudi Arabia to complete accession negotiations with other WTO members and finally earn ‘preferred nation’ status — something which is likely to have many pro’s and con’s for Saudi industry. “It [WTO membership] has been a long-awaited event, which will help Saudi Arabia in terms of laws, regulations and business. It will also help Saudi industries export more freely around the world, especially to the United States and Europe,” explains Al Zamil, who admits the huge Zamil Group of companies — of which he is a board member — will also be impacted. “It will have a positive and a negative affect on us just like it will have on other Saudi industries,” he states, adding that it will “bring more competition and put a squeeze on our prices” but also “give us more customers and open up more markets for us”. You wouldn’t think there were many new markets that needed opening up for the Zamil Group, however. The conglomerate, which was founded in the 1930s by the late Sheikh Abdullah Al Hamad Al Zamil has over 8000 employees in around 50 different countries ranging from Egypt to Vietnam. Despite its size and reach, the Zamil Group will have to react in order to keep up with the changes WTO membership will bring. “We are going to need to make some adjustments and I think if we adjust in the right ways we will benefit from the WTO but if we don’t react positively and be prepared for it I think it will affect us negatively,” states Al Zamil. “Exports will be very important for us and if we do the right things and perhaps make contact with other international groups through joint ventures or mergers we can be very proactive and help ourselves. On the other side we need to be very careful how we handle the competition,” he adds. Although Saudi Arabia’s imminent admission into the WTO has been big news worldwide, it has failed to knock the issue of oil prices off the front pages. Crude oil prices have risen by about 30% this year to levels not seen since the early 1980s with the latest rises causing worries in importing countries about the economic cost of higher energy prices. Crude oil prices hit fresh highs after the extent of damage done by Hurricane Katrina became clear — a barrel of US light crude reached a peak of US$70.85 last week. In recent months there has been higher than expected demand for oil in industrialised countries and China’s rapidly expanding economy has created a further demand boost — it is up 20% over the past year alone. Traders are betting this rapid growth will continue for several years although there is some chance that the economy will ‘overheat’ and oil demand growth will slacken. Of course the longer a price increase lasts, the higher the income it produces to an oil exporting country like Saudi Arabia. Since oil price increases cannot be planned or budgeted for, the additional income comes as a ‘bonus’ on top of the normal government budget which produces a surplus or is used for discretionary public spending. As the world’s largest oil producer, Saudi Arabia is riding a wave of prosperity buoyed by the record crude prices. With the sudden windfall that has filled its national coffers, the country has paid off debts and driven economic growth to its fastest pace for two decades. Gulf oil revenues are expected to reach almost US$300 billion this year, up from just US$61 billion in 1998. Saudi Arabia is expected to see the bulk of this windfall but ZIIC boss, Al Zamil doesn’t believe the high prices will benefit the kingdom in the long-run. “I think in the short-term high oil prices are good for Saudi in terms of investment, growth of the economy and for paying debts but it should not be considered long-term because it could give the country complacency. I believe a fair market price for a barrel of oil would be between US$50 and US$60 and I think this is what we need to see long-term,” he says. “Very high oil prices could well curtail the world economy or affect world growth where it will indirectly affect us again. But I think if we have a nice normal price we can have sustained world growth,” he adds. Globally, an increase in the price of oil has a negative impact on the balance of payment, the national economy, and is the most common cause of recessions in various countries. Strategically countries need oil for their defence and national security, and tend to become very nervous if they can’t afford to get enough to satisfy their needs. These concerns do not apply to Saudi Arabia, however. At current production levels, every US$1 increase in the price of one barrel of oil translates into an annual income increase of US$2.6 billion to the kingdom. AMONG oil suppliers only Saudi Arabia has significant spare capacity that it can make available to the market and the world’s major oil consumers remain dependent on the Middle East for their oil. But recent violence in Iraq and Saudi Arabia has again raised fears about an interruption to supplies. Attacks on foreign workers in Saudi Arabia by Al-Qaeda-inspired militants have also increased tensions and any substantial attack on Saudi oil facilities would be a major event for world oil markets. This is one reason why Al Zamil is keen to see his country reduce its dependence on oil revenues, which currently account for about 45% of gross domestic product (GDP) with Saudi oil revenue representing some 80% of exports. “I would encourage us to work towards having a diversified economy, where we grow our industry and services so that our economy does not become dependent on just oil,” explains Al Zamil. “Over the past few years there have been a number of Saudi initiatives to improve the economy and I think we need to continue these because I feel we should move from a one product economy into a more diversified economy,” he adds. Putting all your eggs in one basket certainly isn’t a concern for the Zamil Group. The multi-million dollar conglomerate has industrial and commercial interests ranging from air-conditioning manufacturing to food processing, plastics to steel fabrication and stained glass production to travel services. It is also involved in banking and industrial investment, petrochemicals, paint and packaging through joint venture affiliations with numerous international organisations as well as through strategic acquisitions. “Zamil Group is many, many companies — some public and some private — and we are encouraged by the board and the shareholders to take advantage of any opportunity whether it is in the industrial, services or trade business regionally or internationally,” explains Al Zamil. “Our plan is to have a diversified yet balanced portfolio and we don’t just want to depend on one sector and that’s why we invest in other countries because one day construction could be booming here and not in Egypt or Vietnam. We are diversifying and trying to create a balanced portfolio, which is a wise move,” he adds. Earlier this month, one of ZIIC’s business units, Zamil Steel continued the group’s diversification and growth by starting work on its second plant in Vietnam. The new project has boosted the company’s investment in Vietnam to around US$40 million, proof, according to Al Zamil that the group never rests on its laurels and is always on the lookout for new investment opportunities at home and abroad. “We are currently looking at some new initiatives because the market is so competitive that if you don’t move you find yourself in third or fourth place so we need to move. You always need to be on your toes and on the lookout for new technology, initiatives and investments because if you don’t you will find yourself well behind,” says Al Zamil. “But we are always ready and willing to move for investments, mergers and acquisitions and we usually we have the amount of profits we make every year to invest in new ventures — money is not really a problem if we have the right opportunity,” he adds. Cash certainly isn’t a problem for ZIIC, headed up by Khalid Al Zamil. The international manufacturing and fabrication group, which is primarily focused on growth segments of the construction industry, recently announced net profits of US$14.1 million for the first half of this year, an increase of 51.1% over the same period in 2004. Total turnover for the first half of this year continued its upward trend reaching US$318 million, an increase of US$69 million, representing a 28 % growth over the same period last year. Meanwhile, total exports amounted to US$113 million for the same period, representing 36% of turnover. ZIIC, founded in 1998 now meets the requirements of the global construction industry through its three sector businesses: Zamil Air Conditioners, Zamil Steel Industries and Zamil Glass Industries. It exports to more than 70 markets and derives 37% of revenues from outside Saudi Arabia but Al Zamil puts the foundations of its success down to growth in the company’s home market. “Saudi industry has been mature for a long time now — it has experienced around 20 years of constant growth and development - but we have been stagnant for a while and need new polices for Saudi industries to grow and take a more international role,” he explains. “I hope this happens soon because I want to see new initiatives and policies by the government to encourage international companies to come and invest here because we need new investment,” he states. SAUDI Arabia is a country that has started along the road of economic reform, but in many ways still has a great distance to travel. It has set in motion the privatisation of some of its biggest companies, tried to tackle unemployment, mulled plans to introduce income tax, modernised its financial markets, and attracted more foreign investment. Privatisation and the great success of several initial public offerings (IPOs) like Saudi Telecom, Etihad Etisalat, National Company for Cooperative Insurance (NCCI) and Bank Albilad, all added more visibility to the Saudi stock market during the past few years. In recent years, a sizeable amount of the kingdom’s oil wealth has been invested locally in real estate, transportation, light industry, among other sectors with the additional idle capital quickly finding it’s way to the stock market. Due to the availability of many funds and a limited supply of companies to invest in, stock prices increased dramatically — largely based on speculation and less on performance. The Tadawul All-Share Index (TASI) posted a gain of 76% in 2003, almost doubled in 2004, and is up around 30% so far this year, making it the largest stock market in the region with a market capitalisation of US$347 billion. As a result, Saudi Arabia’s latest five-year development plan offers foreign investors an opportunity to tap into sectors of the economy that have recently undergone massive privatisation, a move which Al Zamil welcomes. “At the moment foreign investors are allowed to invest through certain funds but the Saudi government — like a lot of governments of countries with emerging markets — are afraid of direct investments from outside. But I see more funds being established for foreign investors and I think WTO membership will encourage a lot of investors to take up shares,” says Al Zamil, adding that he is keen to see more regulated market conditions. “There have been good moves by the Saudi authorities and the capital market in terms of regulation, transparency and governance but they need to move more aggressively into more regulated state-of-the-art market conditions,” he states. Saudi government forecasts show next year’s gross domestic earnings at US$41.87 billion, an increase from 2000 of 3.16%. Economic development efforts in the new plan focus on diversification of national revenue resources, expansion of the production base and the creation of more jobs for Saudis. During the next five years, the Planning Ministry expects ‘Saudisation’ efforts and economic growth to create 817,000 new jobs for Saudi citizens - an initiative essential to the future prosperity of the kingdom, acording to Al Zamil. “I’m personally for Saudisation because it’s a long-term strategy and need because you have to have security and development. Saudisation will keep a lot of the money in the country and we need a paradigm shift from Saudi business and the private sector,” he explains. “We have to accept the fact that we have to have Saudisation — this means developing the economy to create new jobs and to train Saudi’s to be employed. That does not mean replacing the non-Saudi workforce because we need them and must also have an international flavour in our business and workforce,” he adds. Saudisation looks set to change the face of the kingdom’s workforce in the same way that the construction boom has transformed the country over the past decade. Building cranes have lined the horizon of Saudi Arabia’s biggest cities for many years and despite many predictions that the boom will come to an end sooner rather than later, Al Zamil belives it will continue for some time to come. With the majority of the Zamil Group’s business activity centred around the construction industry any slump in the sector could be disastrous for the conglomerate. This fact is not lost on the ZIIC boss. “I personally believe the boom will last at least another three to four years because the engine is the private sector and not just government money. The fact that the private sector is the main engine of growth gives you sustainability and I feel because of this is the boom will last for a few more years,” Al Zamil predicts, adding, “I hope I’m right”. ||**||

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