The kingdom beckons

Experts mull intermodal transport system for Saudi Arabia

THE RECENT holding of a strategic urban transport event in Saudi Arabia couldn’t have been more appropriate, what with the kingdom’s rapid urbanisation and population growth. The allocation of over $5 billion for new transport project in 2009 alone shows government’s strong political will to advance its modern transport services. Riyadh will be spending a total of $400 billion in the five years to end-2013 on development projects, including tramway, high-speed trains and railway systems in existing or planned cities across the kingdom.

URBAN TRANSPORT
Endorsed by the Supply Chain and Logistics Group (SCLG), the Urban Transport Saudi Arabia 2010, held on January 25-27 in Riyadh, stressed the benefits that an intermodal transport system may have on an economy. The merging of a railway system with the bus, ferry and car infrastructures, for instance, would create a world-class transit network for the kingdom, as stressed by the speakers and participants. By now Riyadh must already be aware about the economic benefits of investing in modern urban transport networks.

The two-day event, which merged the most pressing issues – urbanisation and sustainability – affecting the kingdom’s transport sector, tackled the collaboration between transport agencies and public-private partnership on railway projects, among other things. All experts in the transport industry, the speakers also noted the need to open the industry to new entrants, in order to create a more competitive market for better products and services.

Saudi Arabia, which by now must already be aware of the economic benefits of investing in modern urban transport networks, currently supports large infrastructure and social projects. It will, therefore, require a significant number of products and services not only on the transport sector but across various industries over the next few years. There will be requirements for large and central plant rooms and large tonnage chillers, for instance, owing to the planned increase in the number of development projects and new economic cities over the next 15-20 years.

BUDGET, PROJECTS
Opportunities in the Gulf’s largest economy are made even more promising by the kingdom’s current fiscal year’s budget and moves towards increased co-operation between government and the private sector. “When the public and private partnerships will be streamlined further, Saudi Arabia can become the largest market in this part of the world,” says Mohammed R Zackariah, chief consultant at Protecooling, in an earlier interview on the kingdom’s HVAC&R (heating, ventilation & air-conditioning and refrigeration) industry. Protecooling is a division of Suhaimi Design, which offers consultancy services to high-end HVAC projects.

Saudi Arabia’s 2010 fiscal year (FY) budget, which represents a 14% rise over FY expenditures in 2009, was crafted using conservative demand and pricing estimates for oil, according to the US-Saudi Arabian Business Council on its website. This translates to a revenue projection of $125.3 billion, with a deficit of $18.7 billion. The kingdom has allocated $36.5 billion, or a quarter of the total $146-billion 2010 expenditures, for education and human development.

This will be spent on the building of new universities and 1,200 new primary schools (to augment the current 3,112 and the more than 770 completed last year); the renovation of 2,000 schools and study grants for about 5,000 Saudi students, who will be studying abroad under the King Abdullah Scholarship Programme. This is in line with Riyadh’s implementation of its national plan for science and technology development.

HEALTHCARE SYSTEM
The kingdom’s health and social affairs is all about modernising and expanding its healthcare system as well as promoting healthy lifestyle. A total of $16.3 billion has been allocated for the kingdom’s healthcare system, including the construction of 92 new hospitals, with a capacity of 17,150 beds, and a number of primary healthcare facilities. A number of sports clubs and sports centres will be set up also along with social centres and labour offices, to support the various poverty-reduction programmes across the kingdom, which boasts the world’s largest proven crude reserves.

All these education, health and social infrastructure projects will no doubt be carried out along with the development in the kingdom’s transportation networks.

Late last month, the Saudi Public Transport Company (SAPTCO) announced its team up with an affiliate of the French company, Regie Autonome des Transports Parisiens (RATP), to bid for public transport projects. SAPTCO remarked, “[The partnership] is in preparation for existing and future opportunities and projects in the kingdom and in the Gulf countries, which are witnessing growing development in the field of public transportation.”

A fillip for Empower?

ELIPS will secure supply of pre-insulated pipes

IN WHAT is likely to be viewed as a bold move in these most challenging of economic times, UAE-based utility provider Empower and the Denmark-based Logstor have unveiled in a soft opening a joint venture facility, which will manufacture and supply pre-insulated pipes to the region – and beyond.

Called Empower-Logstor Insulated Pipe Systems (ELIPS), the manufacturing facility, billed as the largest for producing pre-insulated pipes in the UAE, has an ambitious agenda. As articulated by its chairman, Ahmad Al Shafar, the facility has the world’s most modern spray technology. It can produce 360 kilometres of piping a year, depending on the size and length. And it can offer pipes as wide as 2.5 metres in diameter. Al Shafar is also the CEO of Empower, which owns a 51% stake in ELIPS.

In the words of Al Shafar, the $25-million facility will start manufacturing from next month. The timing of the pipe opening, on January 20, and the projected month of manufacturing came up for questioning. Following the Lehman Brothers debacle in the last quarter of 2008 and the global financial crisis, district cooling has seen a slump in demand in the UAE, particularly Dubai. Even in Qatar and Saudi Arabia, which were perceived as less affected by the downturn, district cooling did not quite take off in the manner anticipated in 2009. These trends did not cast a shadow during the soft launch, though. It was business as usual; in fact, the mood was quite upbeat when HRH the Crown Prince Frederik of Denmark and Sheikh Mansour bin Mohammad bin Rashid Al Maktoum jointly cut the ribbon to inaugurate the facility among a bevy of officials, including Al Shafar and Preben Tolstrup, the CEO of Logstor, which owns 49% of ELIPS.

When questioned on the timing, Al Shafar said he was optimistic about the long-term prospects of district cooling. “Speaking specifically of Empower, we are doing good,” he said. “And if you look at district cooling, it is not going to come overnight. It is going to happen over time.”

Added Tolstrup: “Besides, we are not only looking at district cooling but also at the oil and gas industry. So we will serve a diversified market.” While acknowledging the downturn and its effect on the district cooling industry, Tolstrup said the most effective way to meet the challenge and also to compete with other pipe manufacturers in the region (in the forms of EPPI, Perma Pipe and SPPI) was to provide top-quality products.

“We are offering the world’s most modern spray technology,” he said. “It’s important to offer innovative technologies to be competitive. Also, we have to remember that top-quality matters, because the piping systems will be on the ground for at least 30-40 years.”

Akram J Mourad, the senior vice-president and MD of district cooling at Logstor, sounded another note of optimism when he said that the facility, by virtue of its location, had a distinct advantage. “Dubai is going to be a good hub to reach out to other GCC entities and a spoke to Asia,” he stressed. “We are already in the bidding stage for a big district cooling project in China.”

Mourad said that Empower and Logstor did not build the facility for Dubai alone but so that they could also serve other places. “We are in the process of getting projects in Saudi Arabia, Bahrain and Qatar,” he added. “In our view, the other countries in the GCC are not as affected. We have come here now to maintain the correct timing for progress of those projects.”

Empower and Logstor said ELIPS has the backing of several years of experience in Europe and a successful track record in the GCC. Tolstrup substantiated the claim when he said that Logstor had over 50 years of experience and 10 factories worldwide that serve customers in over 50 countries.

As for the UAE, and the specific high-ambient conditions of the region, Tolstrup said the very fact that Logstor has been providing piping systems in the country since 1992, means it has the strength to rise to the challenge of serving the region as a partner of ELIPS. “While we have the experience in this region, we have also been supplying pipes to district cooling projects elsewhere, which have conditions similar to the UAE,” he added. “We have a very strong knowledge base on this region.”

For Empower, the advantages of partnering with Logstor on ELIPS are many. Al Shafar said that Empower expects to take at least 20% of the production capacity of the facility, which would secure the supply of pre-insulated pipes to Empower. “The facility will ensure timely delivery and installation of pipe networks, which will have a major impact on Empower’s project timelines,” he stressed.

Another advantage was the pricing. Saying that pre-insulated pipes constitute 20-25% of Empower’s total capital investment, Al Shafar stressed that the utility would be saving between 15% and 20% on the cost of the pipes, thanks to the formation of ELIPS.

“This factory represents an opportunity for Empower to achieve backward integration,” Al Shafar said. “It will also consolidate our status as a leading regional player in pipeline systems by meeting the industry’s primary requirement for pre-insulated pipes. Empower’s position as the region’s No 1 company for district cooling is more realised now with the opening of this factory.”

In the offing

Slowing global trade could lead to East-West trade war

THAT the current slowdown in global trade could lead to a damaging trade war between East and West is becoming evident by the day.

Michael Pettis, senior associate at the Carnegie Endowment for International Peace, notes that when Western unemployment was low, there was less concern about growing trade deficits in the US and Europe. With high unemployment, the issue of trade deficits has become more politicised. Countries that are running large trade deficits are increasingly eager to bring those deficits down.

This has sent countries running large trade surpluses, such as China, a-worried. China’s economic strength relies in no small part on its ability to produce goods for sale abroad. As consumer demand drops, exporting countries must contend for larger shares of a smaller global market.

“A number of countries are trying to increase their share of global demand in order to justify their domestic manufacturing, especially the trade surplus countries that have relied very heavily on foreign demand,” explains Pettis, who is also professor of finance at Peking University’s Guanghua School of Management, where he specialises in Chinese financial markets. “China is the largest trade surplus country in history, as a share of global GDP.” He also taught at Tsinghua University’s School of Economics and Management between 2002 and 2004 and, from 1992 to 2991, at Columbia University’s Graduate School of Business.

MOVING AHEAD
And China, which has taken over the US to become the biggest market for automobiles, is moving ahead with its plans to continue to lead car sales in the world’s largest economy.

BYD, a Chinese automaker, revealed it may launch a car in the US this year with superior all-electric range, though it is said to be lacking the petrol back-up of Chevrolet Volt. It already sells a plug-in hybrid with more purely-electric range than the Volt for a little over half the price in China.

While keeping its eyes on timetables of Chinese car manufacturers, General Motors (GM) upped the ante by announcing a purely electric Volt, without mentioning timing or price. But bureaucratic dithering and financial woes cost it the lead it once had in electric cars, especially after a presidential task force said last year that GM would need to cut costs substantially to be competitive – and foreign manufacturers have advantages other than price.

And while the Chinese carmakers are slowly taking the lead on the US market, premium SUV manufacturer Land Rover has announced that the company is venturing into the Middle East by expanding into Iraqi Kurdistan. The company has appointed Sardar Trading Agencies Limited as the exclusive importer to represent Land Rover, making the SUV manufacturer's first official entry in the region.

As part of its commitment to the brand, Sardar Group has invested in a new state-of-the-art facility for Land Rover vehicles. The 2,400-square-metre showroom and 1,700-sq-m after-sales centre is located on Golan Street in the city of Erbil.

Already present in 19 markets in the Middle East and North Africa (MENA), Land Rover also displayed its 2010 portfolio, for the first time, at the Erbil Motor Show, which was attended by Iraq’s key automotive players at the Erbil International Fairground on January 10-13. The event was a focal point for the development of new business channels, in response to the growing needs of Iraq’s and the MENA region’s flourishing automotive industry.

Robin Colgan, managing director of Jaguar Land Rover, MENA, said, “We are bringing a strong Land Rover product portfolio to the market and the motor show, and we expect the vehicles to be received well by consumers here, just as they have been across the globe and the Middle East region.”

INFRA PROJECTS
The same brisk trade activities are expected among members of the Gulf Co-operation Council, as Gulf Arab bloc accelerates the pace of its infrastructure and network projects. These include transport systems, which are vital for greater mobility of goods and services, increased capital flows and the reduced cost of doing business in the region, which will, in turn, facilitate the GCC’s emergence as a major trading bloc.

Dubai, for one, has allocated 30% of government spending under its recently approved 2010 budget for infrastructure projects. An estimated $2.91 billion (Dh10.7bn), out of $8 billion (Dh29.4bn) earmarked for government spending, will be dedicated to “core infrastructure” projects, particularly road, transport and public utilities. The latter include power, desalination and waste facilities and management, said Dr Nasser Saidi, chief economist at the Dubai International Financial Center (DIFC).

“Infrastructure spending has continued at high levels despite the fall in oil prices and the financial crisis, helping stabilise economies and greatly contributing to avoid the contagion effects from the global credit crunch,” he said. “In fact, during this period, infrastructure spending was mostly financed by the public sector.” He stressed that infrastructure development in the UAE and other GCC countries will continue, owing to two powerful trends – demographic growth and urban middle-class expansion.

SUSTAINED SPENDING
But while sustained infrastructure spending will serve as a powerful counter-cyclical measure to put the Gulf’s economy back on its high-growth track, other countries are careful not to replicate the recent property slump in Dubai.

Some luxury property prices in Shanghai doubled last year, Lee Wee Liat, an analyst at Nomura International Hong Kong Ltd, said, citing $14,587 per sq m (100,000 yuan) sales in December at Casa Lakeview, a project developed by Hong Kong billionaire Vincent Lo’s Shui On Land Ltd.

Across China, new home prices rose 9.1% from a year earlier after a 6.2% increase in November, according to the country’s National Development and Reform Commission (NDRC). Second-hand housing climbed 6.8%, following a 5.5% gain. Policymakers will let construction “boom”, at least through to June, because exports are weak and consumer spending is insufficient to be the main driver of growth, said Mark Williams, a London-based economist for Capital Economics Ltd.

“External demand remains bleak and the task of expanding domestic demand and restructuring the economy remains challenging,” Zheng Xiaosong, director-general of the international department at China’s Ministry of Finance, has said in Manila.

To cool speculation, the Beijing this month re-imposed a sales tax on homes sold within five years of their purchase, after cutting the taxable period to two years in January 2009, to bolster market that was then flagging. In January, the government said it would tighten guidance of property lending, counter inflows of speculative capital from abroad and tackle “overly rapid” price gains in some cities.

SAFE HAVEN
Another buying frenzy that cannot be contained is the rising interests in gold investing. Russia has boosted its gold holdings by 87 tonnes to 606 tonnes, while India has agreed to purchase 200 tonnes of gold from the International Monetary Fund and Sri Lanka bought another 10 tonnes. Demand for bullion will continue to be robust this year, with central banks, especially those with heavy exposure to the US dollar, expected to buy more gold than they sell, industry experts said.

Christopher Wood, chief strategist at the broker CLSA who had predicted the US housing crisis, estimated in early 2009 that gold, currently trading at around $1,000 (Dh3,672) an ounce, is likely to more than quadruple to $3,500 per ounce this year. There are certainly indications that point to higher gold prices, but Rolf Schneebeli, former head of the World Gold Council, said price increases will happen at the end of 2010 and the rate could well be between $1,300 and $1,500 per ounce.

After it was almost forgotten in the ‘80s and ‘90s, gold has recently reestablished itself as a safe haven for assets. John McGaw, senior advisor to Golden Oryx, said that capital preservation is now mostly seen as much more important than yield that gold is now the preferred play for many who prefer significant long-term potential benefits.

With the outlook for 2010 still uncertain, it is only highly plausible that gold will further attract more supporters. “Gold, of course, is traditionally a safe haven in times of uncertainty and, as such, a long-recognised global currency that will benefit – and has benefited – from economic uncertainty,” McGaw noted.

PERSONAL COMPUTING
One sector that has a high demand for precious metals, such as gold, and base metals like copper, is the personal computing industry, which came roaring back in the fourth quarter of 2009 by as much as 22% for the biggest yearly gain in seven years.

While the last quarter of 2008 was especially weak due to the financial crisis, the industry gain nevertheless gave an unexpectedly strong indication of a broader recovery, with sales driven by less expensive portable machines, including netbooks, which have smaller screens and less processing power than traditional laptops.

IT research and advisory firm Gartner placed the overall unit growth at 22% from the end of 2008, while rival market researcher IDC put the gain at 15%. Both firms had Hewlett-Packard keeping its position as the top vendor by volume, with 20-21% of the market. Acer is second and, Dell, third, followed by Lenovo and Toshiba. Dell had about 12% of the market by volume in the fourth quarter, down from more than 13% at the close of 2008. It remains No 2 in the US market.

From West to East

More cash will head towards the BRIC economies

CAPITAL inflows are slowly but surely and more visibly shifting from West to East, as fund managers go where the consumer demand-driven growth and value is.

Brazil, Russia, India and China (BRIC) – the world’s four largest emerging economies – are viewed as high return, relatively safe investment bets, owing to their huge consumer demand. They comprise 40% of the world’s population and account for about 20% of its gross domestic product. Their combined GDP is expected to equal that of the G7 countries as early as 2032, according to Goldman Sachs.

Lately, China overtook the US as the world’s biggest car market. As incomes of 2.5 billion people steadily rise, company profits as well as stock markets will feel the heat. It’s no surprise that direct investment and portfolio capital are increasingly gravitating to the BRIC countries.
China and India posted the highest growth in the world. Russia traded at a 40% discount to emerging markets. Consumer demand is seen as the key to the post-crisis global recovery.

Fund tracker EPFR Global says BRIC-geared equity funds absorbed almost $20 billion from January to November 2009. This is double 2007 levels and equivalent to 40% of what was taken by emerging stock funds, some of which also went to the BRIC. “We are betting on the largest, highest-growth markets with the biggest populations and good liquidity levels,” said Martial Godet, who helps manage €37 billion in emerging stocks at BNP Paribas Asset Management, in Paris.

MORE CASH
BRIC is projected to comprise almost half of global stock markets by 2050 from less than 10% at the moment. It is inevitable that more cash will move to the BRIC markets, according to Goldman Sachs economist Jim O’Neill, who first came up with the BRIC concept.

The UN Conference on Trade and Development said BRIC took in 16% of global direct investment flows in 2008 at a total of $265 billion, a third up from the previous year and more than half of what was received by the 16-nation European Union.

Goldman Sachs attributes this to a rebalancing of global consumption away from advanced economies and towards emerging markets which was expedited by the shock caused to household wealth and employment by the financial crisis. While spending in the developed world will remain flat, Goldman Sachs sees 10% consumption growth in China and five per cent in Brazil and India.

ASEAN + 3
The growth potential is not limited to BRIC. The members of the Association of Southeast Asian Nations (ASEAN), together with Japan, China, and South Korea, are also positioning themselves to be major players in the global economy, as they signed an agreement to create a $120 billion foreign-currency reserve pool.

Dubbed ‘Chiang Mai Initiative’, the fund will strengthen the region’s capacity to safeguard against increased risks and challenges in the global economy. Members can tap the pool to defend their exchange rates during times of financial turmoil, such as that of the last quarter of 2008. Excluding Brunei and Myanmar, the group has amassed more than $4.1 trillion in foreign-exchange reserves, with China owning more than half of the assets. The reserve pool will also tide these countries in times of short-term liquidity and balance of payments liquidities.

BRIC, ASEAN and other emerging markets might be poised to lead the global economic recovery, but rumblings of trouble are felt in banks, particularly those in the US, which serve as conduits for the capital inflows to emerging economies.

FINANCIAL LEVY
These rumblings were triggered by US President Barack Obama’s announcement that he will levy financial institutions to recoup the bail-out funds through the Troubled Assets Recovery Program (TARP) for beleaguered banks during the height of the financial crisis. His proposal includes restricting the size of banks and barring institutions from proprietary trading.

He plans to raise as much as $120 billion over 10 years through a fee on financial institutions to reduce the $1.4 trillion federal deficit last year. Banks repaid $165 billion last year, allowing the US government to recover about two-thirds of its total investment in the banking system.

Scott Talbott, senior vice-president of government affairs for the Financial Services Roundtable, which represents large banks, stated, “The tax will penalise the firms [that] repaid TARP with interest, and those [that] never even accepted it to begin with. It will decrease the availability of loans and limit economic recovery.”

Some US legislators warn that taxing banks will hurt lending and job creation. However, with US lawmakers up for re-election in November, voter anger at banks will be tough to ignore.

As the global financial crisis has shown, all countries are inextricably bound with all other countries. BRIC, ASEAN and other emerging economies might have the potential for growth and faster economic recovery, but events in the West will definitely have an effect on how this will play out in the very near future.