Gulf industrialization potential gains traction

Al-Monitor Pro Members

Sebastian Castelier

Business journalist covering Gulf economies

June 15, 2023

China’s Baoshan Iron & Steel, a subsidiary of the world’s biggest steelmaker China Baowu Steel Group, announced in May that it will build a $4 billion steel plates plant in Saudi Arabia. The global push to decarbonize supply chains and the rise of a multipolar world is an opportunity for the Gulf to emerge as an energy-rich industrial hub equidistant from Asia, Africa and Europe. It is a $300 billion foreign direct investment opportunity in the short-term, consultancy Strategy& estimated. But that requires overcoming historic roadblocks to industrialization. In 2019, Japan’s carmaker Toyota rebuffed Riyadh’s courting after it concluded that “production costs will be similar to other countries only if there is a 50% government incentive."

Scenario 1: Historic roadblocks and high carbon intensity will limit opportunities

Factors that have limited the Gulf’s industrialization remain, including concerns over labor costs, productivity, limited local markets, legal frameworks and investor protections. Moreover, the region is yet to deliver on building a low planet-warming gases-intensity industrial base. Saudi Arabia is one of the world’s last countries to burn oil to produce electricity. But there are signs of progress, including a tech push to hasten adoption of robotization and artificial intelligence and an increase in low-carbon electricity supply. “Five years ago, marketing any of the GCC states as a low-carbon business destination would have appeared preposterous, but now the UAE is doing exactly that,” oil and gas publication MEES wrote in May 2023. 

Scenario 2: Relocalizations and calls for industrial sovereignty play against the Gulf

During the Covid-19 pandemic, supply chain disruptions questioned the reliance on highly globalized productions. Some rebalancing is expected. In the near future, 30% of European companies expect to change manufacturing locations as there is a “deleveraging from highly concentrated areas of production and towards both locations closer to the end market and a wider range of low labour cost countries,” a Reuters Events survey found. Reshoring will not benefit Gulf industries, but nearshoring would. Still, none of the Gulf countries rank in the world’s top 30 nearshoring and reshoring locations; and global manufacturers might favor countries where the export potential is doubled with a sizeable domestic market, like India.

Sebastian Castelier has been reporting on GCC countries since 2016, with a focus on how the oil-rich region navigates the long-term energy transition economically, socially and politically. He has been a contributor to Al-Monitor since 2019 and writes for various publications, including Haaretz, Al Jazeera, The Independent and Le Temps, among others.