SAUDI ARABIA'S THIRD PILLAR: MINING

C O N F I D E N T I A L RIYADH 000216


DHAHRAN SENDS, PASS TO NEA/ARP JOSHUA HARRIS

E.O. 12958: DECL: 02/01/2019
TAGS: ECON EMIN PGOV SA
SUBJECT: SAUDI ARABIA'S THIRD PILLAR: MINING

REF: 08 RIYADH 1302

Classified By: CG Joseph Kenny for Reasons 1.4 (b),(d)

(U) Key Points:
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-- Saudi Arabia aims to be the third largest phosphate rock
producer in the world by 2020.

-- Plans for a $10 billion aluminum smelter in Ras al-Zour
have been delayed after Rio Tinto Alcan pulled out.

-- U.S. firm Alcoa has requested USG advocacy for obtaining a
concession of subsidized gas feedstock to make it worthwhile
to bid on the aluminum smelter project.

-- A 1,500km rail link between mines in northwestern Saudi
Arabia and Ras al-Zour in the east is nearly complete.

(C) Comment:
--------------

-- The Saudi Arabian Mining Company, known as Maaden, is
leading the Kingdom's best attempt to diversify away from
purely petroleum-based industries. Although the
energy-intensive aluminum smelting process benefits from
access to cheap gas feedstock; the aluminum market is not
inextricably linked to oil prices -) unlike petrochemicals.
Maaden and other industry insiders have made it clear that an
aluminum smelter will eventually be established at Ras
al-Zour; however, whether the partnering company is Chinese,
Russian, or U.S. remains to be seen. Similar to Saudi
Arabia's other two pillars (petroleum and petrochemicals),
mining is not labor intensive and will likely not be a
significant job source.

End key points and comment.


1. (SBU) RAS AL-ZOUR, MINING CITY. On January 20, Dhahran
Consul General Kenny, EconOff and Commercial Specialist
visited Ras al-Zour ) a planned multi-billion dollar
industrial complex and residential city ) 70 km north of
Jubail along the Persian Gulf coast. Ras al-Zour, dubbed by
Saudi government planners the Minerals Industrial City, is
located more than 1,000 kilometers from its sources of
bauxite and phosphate (Reftel) in central and northwestern
Saudi Arabia. The site was chosen over a western Red Sea
port location because of the Gulf's relative proximity and
lower transportation costs to Asian markets. The president
of the Maaden Phosphate Company, Abdulaziz al-Harbi, provided
the following update on construction at Ras al-Zour.


2. (C) ALUMINUM SMELTER DELAYED. Al-Harbi confirmed that Rio
Tinto Alcan had pulled out of a deal with Maaden to build a
740,000 ton aluminum smelter at Ras al-Zour. However, he was
confident that another partner will be identified shortly and
that the aluminum project would only be delayed by two or
three years. (Note. In a separate, unrelated meeting on Dec
3, 2008 Khalid al-Fuhaid (please protect),the president of
Midad Holding company and a mining industry insider, told
EconOff that Maaden will eventually build a smelter at Ras
al-Zour, but it could take "1,000 years." End note.) Until
a new partner is identified, no construction or other
physical work at the site for the aluminum smelter will begin.


3. (SBU) PHOSPHATE BACK ON SCHEDULE. Al-Harbi said that the
phosphate processing facilities at Ras al-Zour will continue
as planned and will not be affected by the delayed aluminum
project. After some initial delays in the construction of
the phosphate fertilizer processing facilities and the
completion of the three berth port, Ras al-Zour is largely
back on track. The mines in al-Jalamid should be producing
phosphate rock by the end of 2009 and the processing
facilities that produce the phosphate-based fertilizer should
be operational by September 2010. By 2011 Maaden will be the
7th largest producer of phosphate rock in the world with a
plan to reach the top three by 2020. At annual production
levels of nearly 6 million tons of phosphate rock, Saudi
Arabia's phosphate industry can sustain about 30 years of
development before fully depleting known reserves ) about
half the industry standard. However, Maaden expects new
discoveries to increase the industry's lifespan to 150 years.


4. (SBU) MORE THAN JUST FERTILIZER. Al-Harbi said that the
Saudi phosphate rock also has low levels of both radiation
and heavy metals, making it of an especially high quality.
In fact, the phosphate is of such high quality that
researchers are looking into mixing the gypsum waste from the
phosphate fertilizer process with red mud waste from the
aluminum smelting process to create a soil that can be used
for agricultural purposes. Also, the chemical reaction
created by converting sulfur to sulfuric acid creates enough
heat to generate more electricity and water than is actually
consumed by the phosphate processing facility. The expected
ten megawatts of excess electricity will be sold to the Saudi
Consolidated Electric Company (SCECO) and the excess water
will be pumped to Riyadh via Hail.


5. (SBU) ALL ABOARD. The 1,500 kilometer, multi-billion
dollar rail link connecting phosphate mines in the north,
bauxite mines in the center, and Ras al-Zour in the east is
"about 80% complete," according to the president of Maaden
Phosphate. Considering the harsh desert environment and
difficulty of keeping the track clear of shifting sand dunes,
this has been an enormous engineering challenge. The railway
ties, made of concrete as opposed to wood, are manufactured
in Saudi Arabia. Al-Harbi said that possible spurs south
from Ras al-Zour to Jubail and Dammam may be built to move
freight and eventually passengers between the urban and
industrial centers. He even discussed long-term ideas to
build an additional spur north from al-Jalamid into Iraq to
import Iraqi phosphate for processing at Ras al-Zour.


6. (C) MAADEN LACKS "CAPABILITIES." In a revealing comment,
al-Harbi admitted that Maaden was struggling to fill key
positions throughout the company and that the organization is
lacking "capabilities." This admission corroborates opinions
shared by other industry insiders that have interacted with
Maaden. In fact, a Saudi businessman familiar to the mining
industry said that one of the primary reasons for Rio Tinto
Alcan pulling out of Ras al-Zour was the perceived
incompetence of their Maaden counterparts. At one point he
said, "Maaden is filled with stupids!" Since then other
Consulate Dhahran contacts have made similar comments to
EconOff.


7. (SBU) IS MINING THE THIRD PILLAR? In a January 19 Saudi
Gazette article Sultan bin Jamal Shawli, deputy minister for
mineral resources, said that total investment in the Saudi
mining sector is SR40 billion ($10.67 billion). Also, many
open source reports have cited Saudi Arabia's implementation
of the Mining Investment Code in April 2004 as a major
impetus for investment by improving transparency and
guaranteeing equal legal protections for foreign and Saudi
companies. An unfortunate reality for the mining industry -
like the other two pillars of petroleum and petrochemicals )
is that it is not labor intensive. Without deep vertical
integration into downstream activities, this budding industry
will absorb only a fraction of the hundreds of thousands of
Saudi jobseekers.


8. (C) ALCOA LOOKS TO SAUDI ARABIA. The president of Midad
Holding Company, Khalid al-Fuhaid, told EconOff that he is
working with Maaden and Alcoa to build an aluminum smelter in
Saudi Arabia, though not necessarily at Ras al-Zour. Alcoa
has requested that the Embassy advocate to the Saudi
government on their behalf to secure a subsidized concession
of gas feedstock from the Ministry of Petroleum and Minerals.
This feedstock is essential to producing energy-intensive
aluminum profitably.

(Approved: JKenny)


FRAKER