JEDDAH: Despite the collapse in global demand for industrial chemicals and the squeeze on bank credit that has affected a number of smaller projects, the petrochemicals sector offers one of the most promising long-term routes toward economic diversification in Saudi Arabia. The Kingdom’s reserves of oil and natural gas give it a substantial cost advantage over global competitors. This will allow the Kingdom to continue expanding basic chemicals output even as a global supply glut begins to squeeze out higher-cost producers in other parts of the world, according to a report by the Riyadh-based Samba Financial Group entitled “Saudi petrochemical sector: Current situation & future prospects”.
It has been a difficult 12 months for the Saudi petrochemicals industry. The onset of global economic recession has bitten hard into sales: Saudi Basic Industries Corp. (SABIC), the Gulf’s largest producer, recorded a SR937 million loss in the first quarter of 2009, abruptly reversing a trend of years of large and growing profits.
The single largest sector of Saudi Arabia’s economy is the extraction of crude oil and natural gas (hydrocarbons), which accounted for 27 percent of real GDP (gross domestic product) in 2008. Government services were the next largest contributor, with 17 percent, and were easily the biggest employer. Petrochemicals provided 9 percent of GDP last year, up from 7 percent a decade ago, the Samba report said.
From being a net importer in the 1970s, Saudi Arabia has emerged as one of the world’s leading petrochemicals exporters, supplying over 100 countries and accounting for around 7 percent of the global supply of basic petrochemical products. It accounts for around 70 percent of the GCC’s (Gulf Cooperation Council’s) output.
SABIC, which was established in 1976, is the dominant player in the industry, and now ranks among the world’s top six producers. Over the past three years the company has nearly doubled its output of petrochemicals, and now accounts for over 8 percent of the sales of the world’s top ten firms.
However, deregulation means that there are now a number of private firms operating in the sector. In recent years, the state hydrocarbons producer, Saudi Aramco, entered the market via joint ventures with foreign partners. However, none of its projects have yet come on line.
All participants were initially attracted by the access to cheap and abundant ethane. Between 1990 and 2007 the Kingdom’s olefins capacity increased five-fold. Currently, there are some $45 billion worth of chemical projects under way. The majority are under construction, including the world-scale Yansab (Yanbu National Petrochemical Company) and Sharq olefins complexes developed by Saudi Aramco, and the Saudi Kayan Petrochemical Company complex at Jubail, which is understood to be the largest single-phase petrochemicals complex ever built.
Most petrochemicals production is based in Jubail. Other plants are located in Dammam and Yanbu.
SABIC’s joint venture with Saudi Kayan is expected to cost between $8 billion-$10 billion, and will consist of an ethylene cracker and units producing ethylene glycol, high-density polyethylene (HDPE), polypropylene and low density polyethylene (LDPE). The Kayan project is also at the heart of its plans to raise the proportion of specialty chemicals to 30 percent of total sales by 2020. Elsewhere, SABIC affiliates are increasing polyolefin and polymer production, including a propane dehydrogenation (PDH) plant at Ibn Zahr, and a polyethylene terephthalate plant at Sharq. SABIC is also partnering with Mitsubishi Rayon of Japan to produce a new $1 billion plant producing material for cars and household appliances. The plant is expected to come on line in 2013.
SABIC is also pursuing a joint venture with Sinopec in China’s region of Tianjin, which should raise the company’s total output by around 3.2 million tons.
Despite its obvious cost advantages, the Saudi petrochemicals sector has not escaped the ravages of the global credit crisis. The sector has been buffeted by the ongoing financial crisis and the associated collapse in global demand for industrial chemicals.
However, its cost advantage is substantial and this should allow it to ride out — and indeed thrive in — an environment of overcapacity.
“The Saudi petrochemical sector will continue to expand, and should become the primary center of global production — at least for basic chemicals — over the long term,” Howard Handy, chief economist at Samba, said.
Petrochemicals appear to be a slightly larger employer in Saudi Arabia. SABIC, which is state-owned, is the dominant player, and like Saudi Aramco has a mandate to employ Saudi nationals where possible, the Samba report said.
International players are likely to step up their investments in Saudi Arabia through joint ventures. International investors will acquire cheap feedstock. Saudi firms, meanwhile, will gain access to best manufacturing, procurement, integrated engineering and marketing techniques — elements of foreign direct investment that should benefit the whole economy.