As countries and companies race to get their hands on vital raw materials to bolster supply chains and tackle a rocky energy transition, Saudi Arabia is staking its claim. This is a real opportunity, especially with growing unease over dependence on China. But are investors ready to believe it yet? Its sovereign wealth fund and state miner are pouring $3.2 billion into a fund that will invest in resources such as copper, nickel and lithium around the world with a minority stake as a non-operating partner. The company’s formation was announced at Saudi Arabia’s annual Future Minerals Forum, where executives from BHP, Rio Tinto, Ivanhoe Mines and the US and UK convened last week.
The new entity will invest up to $15 billion in companies and assets to secure supplies for local use. Riyadh is ramping up non-oil businesses such as manufacturing and its focus on raw materials is well and targeted, especially with supply chains in disarray and climate regulatory pressures. China’s important but waning role in the global economy has forced companies to seek alternatives, even when critical minerals are scarce. Large industrial undertakings that are critical to the energy transition, such as solar plants, electrolytic hydrogen facilities, EV batteries and carbon capture and storage, require a plethora of metals. Despite the US Inflation Reduction Act that seeks to boost US manufacturing, ResourceLynx has yet to attract real hard dollars.
While Saudi Crown Prince Mohammed bin Salman (MBS) is on an occasion, it will not be easy to execute. This isn’t the usual skepticism surrounding higher visions; It’s more about tired corporate executives and their risk-taking ability. And here’s the rub: No matter how deep or thriving a state is, it will need foreign investors and capital to help with technology transfer, business strategy and productivity. While they are watching, none have yet hit the ground in a big way.
Bringing in Foreign Direct Investment (FDI) could be the biggest challenge. MBS’s Vision 2030 economic blueprint hopes to increase the FDI contribution to GDP from 0.7% to 5.7%. Foreign capital in Saudi Arabia rose sharply in 2021, largely due to a $12.4 billion pipeline deal by the state-run Saudi Arabian Oil Company, or Aramco. But the big undertakings keep disappearing. MNCs are cruising in, signing MoUs and visiting, but that’s it.
Companies must consider the risks of accumulating in an area rich in wealth, but which sits at the intersection of geopolitical and economic tensions. In emerging markets, capital intensive FDI comes with contractual cash commitments and borrowings of years, adding layers of cost and complexities. Can the return on investment in Saudi Arabia compensate for the risk being taken by businesses? And can the rules change before the inverse bite? Multi-billion dollar mining projects require stakeholder approval and are difficult to commit to; Public shareholders don’t necessarily want to wait for long-term returns and are less enthusiastic about big spending. At its peak a decade ago, total spending in this sector was around $150 billion, but this year it is expected to decline to $11 billion globally.
Attracting FDI eventually becomes a self-fulfilling cycle: once a country or region hits a critical mass, it becomes easier to bring in more. Tax incentives and preferential policies like free trade zones help for both domestic and foreign firms. Economies of scale kick in and efficiency increases. However, it is necessary to reach that level of investment.
Even as the world’s top miners and companies began flocking to Riyadh, there was little talk of starting work on the huge projects needed for mining. Barrick Gold Corp. and Saudi Arabian Mining—now known as Madden—announced that they are setting up two exploration joint ventures. Madden will initially contribute $7.6 million. The Saudi miner also announced a $126 million deal with Ivanhoe Electric. Meanwhile, the UK did not move beyond a loose commitment; Its secretary for trade, energy and industrial strategy, Grant Shapps, said it could never depend on any one country and why it needed partners like Saudi Arabia.
China’s experience in attracting FDI shows that domestically focused investment is largely driven by the size and growth of the economy. Other factors such as labor cost and infrastructure are also important determinants. The country remains one of the largest recipients despite questions about governance structures and legal framework. However, it had built itself as the factory floor of the world and had deep manufacturing capabilities on offer.
For Saudi Arabia, the opening up is a big step as foreign businesses are welcoming the invitation, but it remains to be seen whether it can offer a big enough opportunity to foreign investors. He is able to do maths.
Anjani Trivedi is a Bloomberg Opinion columnist covering industries including policies and firms in the machinery, automobile, electric vehicle and battery sectors across Asia Pacific.
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