It’s not surprising that a country with 11 time zones covers a lot of the Earth’s surface — and a lot of its natural resources. Russia could invade Ukraine “at any time”, says the US. That threatens secure supplies of a host of commodities, raising concerns, but also an opportunity for the Gulf to seize.
The threat comes from food. Russia and Ukraine together amount for more than a quarter of the world’s wheat exports and are also important for sunflower oil and corn. The Middle East and North Africa region contains the world’s two biggest importers of wheat: Egypt and Turkey, along with Algeria and Iran that are in the top ten. The GCC countries, with their arid climate, are heavily dependent on food imports in general.
A conflict could disrupt crop supplies in four ways. Fighting, sabotage or naval blockades may interrupt harvesting and exporting. US and EU sanctions on Russia in response probably would not be aimed at food directly but may hamper financial transactions.
Russia might counter by limiting its agricultural sales. In fact, in December, it already cut the quota for February 15 to June 30, 2022, to 11 million tonnes of grain, including eight million tonnes of wheat, to protect the domestic market, from a level of 17.5 million tonnes for the same period last year. The drop between is equivalent to the GCC’s entire wheat imports. Prices have risen to the highest levels since 2012.
Supplies of fertiliser may also be interrupted, denting international crop yields. Early this month, the Russian-headquartered EuroChem Group announced it had made a binding €455 million ($516m) offer for the nitrogen fertiliser business of Borealis, which is 75 per cent owned by Austrian oil and chemical group OMV, and 25 per cent by Abu Dhabi’s Mubadala.
EuroChem would become Europe’s second-largest fertiliser company, after Yara of Norway. Brussels might block the acquisition, but also this month, the Kremlin banned its own fertiliser exports.
Meanwhile steep gas prices threaten Europe’s own nitrogenous fertiliser output, having forced Yara to cut output by 40 per cent in September. Compounding the problem, the second and third-largest world exporters of plant nutrient potash are Belarus and Russia. Belarus’s potash industry was already aimed at by European and American sanctions last month, over Minsk’s repression of protesters following a disputed presidential election.
The wealthy GCC countries are crucial exporters of other vital materials — oil and gas. This gives them the leverage to negotiate and purchase sufficient food. They have taken measures over the years to build up strategic food reserves and boost domestic agricultural output as far as possible.
Beyond these measures, the opportunity lies in a host of other basic commodities and manufactured goods. The Gulf is already an important producer of several materials.
Abu Dhabi-listed Fertiglobe, owned jointly by Adnoc and OCI, is the largest nitrogen fertiliser producer in the Mena region. The GCC produces nearly ten per cent of the world’s aluminium, with the UAE in the lead. Prices for the light metal are already up 15 per cent this year on European and Chinese power shortages and risks to Russian exports. But the region can do more — in both basic and more sophisticated products.
Three trends drive this opportunity. The most immediate is the threat the Ukraine crisis poses to supply of energy and numerous materials.
The other two are more fundamental. The US, EU and China have all, in various ways, become concerned about the concentration of key items in the hands of others — particularly those that underpin the clean energy revolution.
For the EU and US, these include fertilisers, rare earth minerals, lithium, polysilicon, solar panels, batteries and semiconductors. Beijing worries about oil, liquefied natural gas, and even Australian coal. They may try to increase their domestic supply, but where this isn’t feasible, they would like to see supply chains in the hands of friendly states, or at least more diversified.
The GCC enjoys generally good relations with all the main likely trade partners in Europe, the US, south and east Asia, as well as Russia. Its industrial expansion need not be politicised but can follow pragmatic commercial considerations.
Thirdly, emerging demand for low-carbon materials is likely to take off rapidly. European manufacturers in particular have increasingly committed to low-carbon material inputs — more than the continent can likely produce itself.
This includes steel, aluminium, ammonia, methanol, synthetic fuels, plastics, cement, carbon fibre and others made using renewable energy, hydrogen and carbon capture and storage. These in turn spawn a host of high-performance derivatives and manufactured products. The Ta’ziz industrial zone in Abu Dhabi is an example.
The UAE, Saudi Arabia and Oman all have big ambitions in hydrogen, and Emirates Global Aluminium is developing a road map for decarbonisation. They enjoy available land, excellent logistics, low-cost solar and some wind power, reasonably-priced and abundant gas, and ideal geological conditions for safe underground disposal of carbon dioxide.
In the past, the build-up of Gulf industrial capacity was driven by the input of oil and gas at prices well below world market levels. While this established a strong base, it cannot be the model in future and an expanded GCC industry should focus on the highest standards of commerciality, efficiency and environmental performance.
Bulk chemicals should be the foundation for a sophisticated set of outputs, to add more value and employment. Sensible intra-regional collaboration should be preferred over competition.
Deepening the sophistication of Gulf industry makes the economy more diversified and robust. It protects against future diminishing demand for hydrocarbons. And it enriches international trade, reducing the likelihood and impact of global supply shocks and conflict.
Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis
