The flipside of the commodities boom: Import dependencies of the GCC countries

That they are also dependent on imports of a variety of other commodities is less well-known. The prices of some of these commodities, like iron ore and aluminum, have more than doubled over the last two years and call for a closer look at this dependency.

The GCC countries have tried to diversify their economies away from a pure oil base, focusing on energy-intensive industries like petrochemicals, aluminum, steel, and cement. In Dubai about 7 percent of the GDP comes from Dubal, the local aluminum factory, while Abu Dhabi is currently planning the biggest aluminum smelter in the world. Saudi Arabia and Qatar, on the other hand, have invested heavily in petrochemical and steel plants.

But apart from energy, these industries require the import of commodities like aluminum/bauxite, iron ore, and some rarer metals like nickel and molybdenum. All of these metals are coming out of a multi-year bear market. At the mining companies, the pipeline of new projects has often dried up because investments in exploration were limited during the years of subdued prices. As a new mine needs 5-10 years to start producing, and as demand is expected to remain elevated (in part because of demand from China and India), many expect a bull market in commodities that will last for another decade. This may be accompanied by considerable corrections. In fact, such a correction just took place, after institutional investors, like hedge and pension funds, piled massively into the commodity sector, which was virtually unknown to them as an alternative investment only two years ago.

Thus, the GCC economies are vulnerable to price rises and supply disruptions. This calls for a proactive policy to safeguard future supplies, not unlike the current policy of China to actively secure oil and gas imports via foreign investments and bilateral agreements (like those in Sudan, Iran, Angola, and Canada). GCC companies like Dubal, Hadeed, and Quasco will need to carefully analyze their import needs, and should establish long-term relationships with their suppliers. At the political level, important commodity suppliers like Australia, which exports bauxite, iron ore, and coal, should acquire more prominence on the diplomatic radar screen of GCC governments.

Apart from strategic buffer stocks, joint ventures with mining companies could be a viable way to attain supply security. The world iron ore market, for example, is dominated by an oligopoly of three companies accounting for about 75 percent of all seaborne trade: BHP Billiton, Rio Tinto, and Brazil's CVRD. The latter is an important supplier to the Gulf, and has a virtual monopoly on the high-end market of iron ore pellets in Southeast Asia. The concentrated iron ore pellets are gaining an increased market share because of factors such as declining ore grades and a growing usage of specific production technologies (DRI vs. blast furnace). The Japanese commodity trading house Sojitz estimates that the demand for iron ore pellets in the Gulf will increase fourfold over the next seven years from less than 5 million tons currently to over 20 million tons in 2012. GCC companies could therefore gain crucial supply security by acquiring equity stakes in emerging new competitors like Australia's Grange Resources, which will produce iron ore pellets in Australia and Malaysia.

Another strategy would be for the GCC countries to produce the commodities themselves. To the surprise of many, the Gulf offers some potential in the field of mineral production. In Saudi Arabia, state-owned Maaden has made headway in mineral exploration. Established in 1997 and about to go public this year, the company is already mining gold and zinc in some small-scale operations. With the huge phosphate and bauxite projects in Al Jalamid and Al Zabirah in the northeast of the country, Maaden is about to enter the mineral extraction business in earnest. Meanwhile in Oman, geological teams are currently on the ground to map out the country's mineral potential in greater detail. So far, copper, chromites, gold, and silver are produced in smaller quantities. It remains to be seen whether further exploration efforts will have encouraging results similar to those of Saudi Arabia.

The need for commodities and the need to import or produce them will thus be a major theme of the GCC countries' ongoing diversification drive into heavy industries. It is theirs to play the game of the ongoing commodity 'super cycle' in a smart fashion and safeguard the interests of their economies.