On Sunday, the Kingdom’s Saudi Arabian Mining Company (Ma’aden) announced it had appointed Yasir al-Rumayyan as its new chairman. His appointment is the latest in a series of recent steps which will help develop the Kingdom’s minerals – a key non-oil sector – and streamline the Ministry of Energy in line with Vision 2030’s diversification plans.
While the Kingdom’s recent changes in personnel are important, many commentators have overlooked equally significant institutional reforms. The creation of a new Ministry of Industry and Mineral Resources (both portfolios previously belonged to the petroleum-orientated Ministry of Energy) signals commitment to developing Saudi Arabia’s minerals.
Until the Kingdom’s recent drive for diversification, efforts at evaluating the potential for mineral production — let alone actually producing minerals — were limited. Responsibility for developing Saudi Arabia’s mineral sector lies with Ma’aden, which describes itself as “the largest multi-commodity mining and metals company in the Middle East.” The company was founded in only 1997, over sixty years after oil exploration commenced in the Kingdom.
The minerals sector has the potential to be lucrative. While Saudi Arabia is well-known for its oil riches, the Kingdom is geologically diverse and has the capacity to produce significant volumes of minerals including aluminum, phosphates, and gold. In 2018, Ma’aden’s revenues exceeded $4 billion, reflecting the volume and diversity of Saudi Arabia’s mineral production. According to its 2017 annual report, phosphate reserves equaled 1,400 Mt (one percent of the world’s reserves); gold reserves equaled 140 Mt (one percent of the world’s reserves); industrial bauxite reserves equaled 20 Mt; kaolin reserves equaled 3 Mt; magnesite reserves equaled 3 Mt; and copper reserves equaled 24 Mt (three percent of world’s reserves). While none of these volumes are enough to place Saudi Arabia in the top-ten list for any one given mineral, together they are reportedly worth over a trillion dollars.
The Saudi Arabian government’s decision to place more focus on the mineral sector is supported by the historical data on commodity prices. First, the relationship between the oil price and the minerals that Saudi Arabia is looking to export, such as gold, is weak – in other words, the price of these minerals does not correlate with the price of oil, allowing the minerals to act as effective hedges against the tumult typical of oil markets. Second, the relationships between the prices of most of Saudi Arabia’s minerals themselves are also very weak, meaning that the Kingdom could — once its long-term investment strategy bears fruit — produce a diverse range of minerals and experience greater earnings stability than a country which is heavily invested in only a few commodities.
In turn, freeing the Ministry of Energy from minerals and resources allows it to dedicate itself to developing the energy sector. Renewables such as solar and wind offer many benefits to the Kingdom, including helping it to achieve sustainability targets, and working as a hedge against its carbon-based industries. Allowing the ministry to focus on these projects should enable Saudi Arabia to overcome some of the implementation difficulties that its solar mega-projects have witnessed during the last two years.
Dedicating the ministry to energy issues is also a factor in subsequent advancements in Saudi Arabia’s nuclear program. The Kingdom relies almost exclusively on oil and natural gas for energy generation, but both of these resources are of great value in higher value-added industries such as downstream petrochemicals. A nuclear program would allow the Kingdom to diversify away from using oil and gas as fuel, and instead as higher value-added industries, potentially conferring wider benefits on the economy.
With both renewable and nuclear energy, there are signs that Saudi Arabia is planning to export significant volumes of electricity in line with work on its power infrastructure. The Kingdom is keen on supplanting Iran as a supplier of electricity to Iraq, and the Gulf Cooperation Council Interconnection Authority is working on connecting its grid to Iraq. As the Middle Eastern grids continue to integrate, the long-term aim it to connect the GCC and European grids. This would facilitate a highly profitable exchange of electricity based on climate differences: the Gulf’s electricity consumption peaks in summer, while Europeans consume most in winter. In all these cases, a dedicated Ministry of Energy will be better placed to realize long-term strategic goals.
While these reforms are promising, realizing their potential requires a huge coordination effort at the highest levels of government. The creation of separate ministries ensures more streamlined management of each sector, but it also makes inter-sector coordination more difficult. For example, aluminum production, one of Ma’aden’s primary activities, is an energy-intensive process – policymakers from both the minerals and energy sectors must therefore coordinate in long-term strategic planning.
Nevertheless, these changes should be seen as a welcome step in the ongoing diversification of the economy.
Omar Al-Ubaydli (@omareconomics) is a researcher at Derasat, Bahrain.