Saudis Build Railway to Ease Oil Dependence

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October 12, 2011, 5:44 AM EDT By Glen Carey

Oct. 12 (Bloomberg) -- Saudi Arabia is laying 2,400 miles of rail lines, almost enough to stretch across the continental U.S., in a push to diversify from oil that will also benefit Saudi Basic Industries Corp. and Saudi Arabian Mining Co.

The construction in the kingdom, which relies on crude exports for 86 percent of government revenue, aims at developing mines of bauxite -- Saudi Arabia holds at least 11 percent of the world’s estimated deposits -- phosphate and precious metals. The first major rail line began running test shipments in May.

Phosphate from a mine in the north will be shipped to a complex on the Persian Gulf coast run by Sabic, the world’s largest petrochemical maker. Saudi Arabian Mining, known as Ma’aden, will operate an aluminum complex with Alcoa Inc. that Ma’aden says will generate sales of $1.1 billion a year. It will use the same line to move shipments of bauxite.

“These are very bulky commodities being extracted in fairly remote regions of the country,” Jarmo Kotilaine, chief economist at Jeddah-based National Commercial Bank, said in a phone interview. “Their value won’t be realized unless they are brought to market, and this has to be done in a relatively cost effective way. The only option is by rail.”

The construction is part of a $384 billion plan to develop transportation, housing and education that was announced by King Abdullah’s cabinet last August, targeting an unemployment rate estimated at 10 percent. Generating more revenue from minerals such as bauxite, which is used to produce aluminum, is part of the kingdom’s plan to become less dependent on oil.

Making Aluminum

Middle Eastern countries such as Saudi Arabia, Bahrain and United Arab Emirates will account for almost 10 percent of global aluminum production by 2015, according to analysts at the Royal Bank of Scotland.

Saudi Arabia is “sitting on vast mineral wealth,” David Briginshaw, editor in chief of the International Railway Journal, said in a telephone interview. “China, for example, has a huge appetite for these minerals. Doing these projects will also give the country a huge boost in employment opportunities.”

Saudi Arabia shipped 17.7 million tons of petrochemicals worldwide in the seven months ending in July, compared with 16.8 million tons in the same period last year, according to data published by the Saudi Port Authority in September.

Faster Growth

The Saudi economy will grow will grow 6.5 percent this year, compared with 4.1 percent in 2010, the Washington-based International Monetary Fund said in a review of the Saudi economy in August.

Shares in Ma’aden have increased 13 percent this year, outpacing the 8 percent decline in the benchmark Tadawul All- Share Index as the Saudi economy expands. Sabic, which exports most of its production, is down almost 13 percent for the year amid concern over a global economic slowdown.

Saudis, residents of the kingdom and citizens of the other Gulf Cooperation Council states -- Kuwait, Oman, the UAE, Qatar and Bahrain -- may purchase shares on the Saudi exchange. The shares can also be purchased overseas through exchange-traded funds.

An 865-mile section of the North-South Line, which was completed in May, will move phosphate to a $3.5 billion Ma’aden and Sabic petrochemical plant and create 1,400 jobs, according to Sabic’s website.

The plant will represent 10 percent of global demand for diammonium phosphate, a fertilizer, and increase Sabic earnings when full production starts in early 2012, said Faisal Potrik, a research analyst at Riyad Capital. London-based construction consultant EC Harris estimates the cost of the rail project at $3.5 billion.

Bauxite Demand

Bauxite will be shipped to the aluminum complex along the North-South Line as well. Located in Ras al-Khair, the plant will employ 3,000 people, according to a report on Ma’aden’s website. It will include an alumina refinery with an initial capacity of 1.8 million metric tons a year and a smelter with a 740,000 metric ton annual capacity. It is to begin operation in 2013, according to the website.

Still, the rail lines will only pay off if world aluminum demand keeps rising, said Kotilaine of National Commercial Bank. Economic growth is slowing in North America and the European Union, which Royal Bank of Scotland says account for 31 percent of world aluminum consumption.

“The risk in building this infrastructure is that it is a sunk cost,” he said. “If you can’t get the usage levels you hoped for, then you have potential problems.”

Land Bridge

The rail lines, whose cost National Commercial Bank estimates at $36 billion, will also benefit passenger and cargo traffic. The 950-kilometer Land Bridge Project, covering the distance between Los Angeles and Oklahoma City, will link the Red Sea with a dry port in Riyadh, the kingdom’s capital, and continue to Jubail on the Persian Gulf coast. The Riyadh Dry Port has a capacity of 200,000 standard containers per year, according to the Saudi Rail Organization.

The $7 billion land bridge also will enable companies to carry freight from coast to coast in about 18 hours, compared with the five to seven days it can take to ship goods around the Arabian Peninsula. It will cut passenger travel time in half.

Shipping-container capacity will double to 700,000 a year by 2015, according to data on the website of the Saudi Railway Organization. Saudi Arabia will represent as much as 25 percent of the rail cargo shipped in the Gulf by 2020, according to data from Jeddah-based National Commercial Bank.

More Shipping

Saudi Arabia must “create the means for companies to receive their inputs and ship their outputs in a cost-effective manner,” Kotilaine said. “Shipping capacity needs to be increased and in many cases modernized.”

The government is spending $1 billion to add container capacity at King Abdulaziz port and Ras al-Khair port, according to National Commercial Bank.

Saudi revenue from oil exports jumped 29 percent in 2010 as the commodity gained 15 percent, according to data compiled by Bloomberg. Oil export revenue this year is forecast to be $289.5 billion, said Paul Gamble, head of research at Jadwa Investment Co, based on a price of $90 a barrel. That’s a far cry from the $10 a barrel registered in 1986.

“From the mid-1980s government finances weakened dramatically and there was little investment spending for a long period,” Gamble said. “There is an awareness that the bumper oil revenues built in recent years are exceptional and that they should be put to use on projects that will benefit the economy.”

--With assistance from Agnieszka Troszkiewicz in London. Editors: Louis Meixler, Anne Swardson.

To contact the reporter on this story: Glen Carey in Dubai at gcarey8@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net

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