At the height of the Arab Spring when political instability seemed to be spreading rapidly, the Saudi Arabian government announced a U.S $130 billion (97 billion) social spending program. The government denies that this spending program was a response to the uprisings, and stated that it had been in the works for a long time. Irrespective of its origin, this spending program has the potential for addressing some long term problems in the kingdom.
The initiative aims to address the problems of high unemployment – especially among those under 30 – poor education, and shortage of housing. Given its current account surplus and comfortable reserves, Saudi Arabia is able to invest in such a massive spending program even as oil prices are softening.
One of the biggest beneficiaries has been the construction industry. Housing is the primary focus because a large portion of the population does not have housing, a source of social unrest. Spending also focuses on infrastructure such as new roads, high-speed railways, new airports and power plants. Some headline-grabbing projects include a high-speed rail link between Mecca and Medina; a 3.9 gigawatt power plant at Qurayyah; King Abdullah Sport City, which includes six stadiums, youth hostels and a hospital for sport injuries; and a rail network to link Kuwait to Dammam, Saudi Arabia, Bahrain and Qatar.
The construction industry will also benefit from efforts to address poor education and over-dependence on oil. The government is setting up multiple economic clusters to promote new industries and is building institutes for higher learning, such as King Abdallah University of Science and Technology.
The coming construction boom in Saudi Arabia will give a strong boost to lubricant consumption in the commercial automotive sector, though there will be some negative effects on demand. With consumption of around 160,000 tons in 2011, the commercial automotive market accounts for about 48 percent of total lubricant consumption in Saudi Arabia. Heavy-duty motor oil accounts for over 90 percent of demand. Products consumed in this market are almost exclusively blended with mineral base stocks. Synthetics and semi-synthetics account for less than 5 percent of total lube consumption. Given the harsh operating conditions, drain intervals for most users are less than 5,000 kilometers, and use of synthetic and semi-synthetic products does not make sense.
The construction industry is the largest commercial automotive lubricant end-use segment, accounting for more than one third of the market. Fleets and owner-drivers together are the second-largest segment followed by the bus and coach segment, the military, and other minor segments.
As shown in the graph, construction will be the fastest-growing segment in the Saudi Arabian commercial automotive lubricant market.
The construction segment is expected to benefit from planned infrastructure investments. On the other hand, the bus and coach segment will see significantly reduced growth rates compared to historical performance. Buses and coaches are primarily used to transport expatriate laborers and Hajj pilgrims. The local population prefer to use their own vehicles. The planned high-speed rail link between Mecca and Medina will adversely impact demand in the bus and coach segment. Further impact will be felt when the peninsular rail network is completed. The demand in this segment will not completely disappear though, due to the continued need to transport workers to remote sites.
With the growth in the construction industry, the stock of construction vehicles and machinery used to equip these projects is expected to increase rapidly. Not only will this increase overall lubricant demand, it will also drive quality improvements. While monogrades accounted for about 75 percent of HDMO demand in 2010, their share is expected to drop to 70 percent by 2015. On the other hand, 15W-40, 10W-40, and 5W-30 will penetrate the HDMO market, and consumption of the latest API service categories such as CI-4 and CJ-4 will increase.
Whatever the cause, Saudi Arabia has been catalyzed into addressing underlying causes of social unrest through a massive spending program. With its comfortable current account surplus and high reserves, the government has the budgetary and financial means to execute this ambitious program.
The coming construction boom will be a huge boon for commercial automotive lubricant marketers. All of the leading global and regional lubricant marketers, including Shell, ExxonMobil, BP, Total, Petromin, Unilube, Fuchs, and Qalco, have a presence in the market and are well placed to capture this opportunity.