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Industrial InvestmentFacing the impact of economic slowdownand credit crisisCompanies in the Saudi industrial investment sector operate in a diversified stream ofbusinesses. These firms manufacture and distribute a range of products, includingpharmaceuticals, medical appliances, steel wire and wire related products, glass products,textiles, fertilizers, chemicals, and petrochemicals. According to the Ministry of Commerce andIndustry of KSA, in 2007, approximately 3,900 industrial units operated in the Kingdom,employing around 396,000 personnel (approximately 6% of the country’s workforce).The non-oil Industrial sector experienced strong growth during 2007 and 1H-08 and contributedaround 10% to the Kingdom’s GDP in 2007, primarily due to the increase in commodity prices.KSA’s entry into WTO in December 2005 also encouraged diversification and foreign directinvestments in the country’s industrial sector. However, the credit crisis has adversely impactedthe sector in 2H-08 and led to a sharp decline in demand for industrial and building materials.As a result, commodity prices, including industrial and building materials, slumped during theperiod. Furthermore, the liquidity crunch, engendered by a marked shift in foreign capitalinvestments, has compounded the sector’s woes. As a result, the sector is estimated to havegrown 5.4% YoY in 2008, compared with 8.6% in 2007.With developed nations facing worsening recession and with emerging economies slowingdown, we expect demand for metals and commodities to remain subdued in the near-to-mediumterm. However, in the long term, the export of metal products, electrical goods, machinery andindustrial equipment, construction materials, wood products, and textiles and garments isexpected to increase due to the Saudi Government’s thrust on development of the non-oilsectors.Lack of availability of financeand declining demand coulddelay announced expansionplansCompanies in the KSA industrial investment sector are initiating capacity expansion to leveragethe growth potential. MAADEN plans to build an aluminum project worth USD10.5bn and SaudiPaper Manufacturing Company intends to double its capacity by setting up a second plant worthSR36mn with a production capacity of 25,000 tons per year. MAADEN has, however,postponed its plans to construct an integrated aluminum plant worth USD10.5bn byapproximately three years after its partner Rio Tinto Alcan stepped out from the projectdue to a weak market. Furthermore we remain concerned about capacity expansion projectsamid weak demand. Shortage of skilled technical workforce and rise in cost of raw materials in1H-08 have already delayed several capacity expansion projects. Going forward, decline indemand for building materials and reduced availability of capital are likely to further delayprojects and could lead to cost overruns.JUNE 2009SAUDI ARABIA FACTBOOK78