Founded just seven years ago, Saudi International Petrochemical Company (Sipchem) is the largest private petrochemicals company in the Kingdom and one of the largest in the Middle East — and business is booming. Third quarter figures this year show continued healthy profits, SR325 million before Zakat tax, up 25 percent on the same period last year.
The figures came too late to influence the company’s SR2.47 billion initial public offering (IPO) of 45 million shares, 30 percent of the total, in September. They did not need to. It was second only to the Emaar IPO this year in stirring up public excitement. It was oversubscribed 165 percent, attracting 6.7 million applicants — around 40 percent of all Saudi citizens.
For Sipchem Executive President Ahmad Al-Ohali, that was because the company is well perceived by the Saudi public as both profitable and professional.
As to profitability, the 2005 figures told their own story: Profits of SR463 million compared to SR7 million in 2004, in large part because of the new butanedial unit in Jubail which started production in October 2005.
It is clearly a company that is going to pay healthy dividends to its shareholders. As to well run, “extremely professional” was the comment of one Western petrochemicals consultant; so much so that it is being actively courted by international petrochemical firms as their potential partner in the Kingdom, especially after both its methanol and butanedial plants came on stream ahead of schedule and under budget. Initially, Sipchem had had some difficulty obtaining licenses for the technology; after this early impressive performance, companies “have been queuing up” to join forces with Sipchem.
For Al-Ohali, though, evidence of Sipchem’s professionalism can be seen at more basic levels: “We achieved a record in refunding money to oversubscribers in just four or five days,” he says, with evident pride. That is impressive anywhere, not just in Saudi Arabia.
For him, this year’s profits are due to four reasons — increased methanol production, increased sales from the company’s next-door methanol unit, a rise in petrochemical prices worldwide and a tight rein on company costs.
The only disappointment — short-lived though it was — was when Sipchem’s shares fell below offering price on debut on the Tadawul.
It said everything about the erratic state of the market and the ignorance of punters, who clearly would not know a sound investment if it hit them in the face. It said nothing about Sipchem. The company is solid blue chip.
Sipchem’s next major development is its integrated acetyl complex, also at its Jubail I site, which will produce carbon monoxide, acetic acid and vinyl acetate monomers, the first two in part as feedstock for the latter.
“It will give tremendous downstream opportunities in the Kingdom,” says Al-Ohali, not just for Sipchem but for others producing paints, adhesives and solvents. About two-thirds of output will go to the local market.
Also on the horizon is its polyolefins complex at Jubail II; Sipchem was the first to be given a site allocation there. The massive project, costing $7 billion is expected to come on stream in 2010. The project management contract was awarded last week to Worley Parsons, Houston, Texas, and the financial advisory role to HSBC. Sipchem’s potential partners in this project are Mitsui of Japan, DuPont of US and Lucite of UK.
For the moment there are no plans to expand abroad, as state-controlled petrochemicals giant Saudi Basic Industries Corp. (SABIC) has done. “Not yet; our plate is full now and we’re a young company,” says Al-Ohali.
But a young company going places fast.
However, it is not all plain sailing. The present boom has its downside explains Al-Ohali and there are question marks about feedstock supplies.
Construction costs have risen substantially as a result of the boom, up 70 percent, in some cases up 100 percent, he says. Cement, steel, labor have all increased. But, says Al-Ohali, almost in philosophical mood, it has not stopped construction or slowed down growth — and “everyone has the same problem.”
That is certainly true. When announced two years ago, the cost of the petrochemical complex and refinery at Rabigh being built by Sumitomo and Aramco was put at $4.3 billion; the figure is now up to $9.8 billion — without taking into account expansion plans.
Feedstock supplies are a more important issue. The concern in the Eastern Province business community is that there may not be enough for new petrochemical industries. “There is hardly enough for existing customers,” said one Indian consultant, “at most just for two or three extra plants.” And what is going to happen as Aramco builds its own downstream industries? he asks. “It is presumably going to give its own companies preference.”
Al-Ohali sees availability of feedstocks being a potential “bottleneck” for the Saudi petrochemical industry just when it is expanding. There has to be a level-playing field when it comes to supplies, he says, not just for private sector producers like Sipchem but for government-controlled SABIC as well. It is a matter for the Ministry of Petroleum and Mineral Resources to deal with — and decisions have to be based on what is good for the Saudi economy as a whole, not just one company. He is relatively relaxed about it though. The expectation is that Aramco’s own future feedstock requirements will come from refinery expansion.
Competition, whether from Aramco’s new ventures, or from SABIC or from companies abroad, does not faze Sipchem. The foreign competition, Al-Ohali says, is not in any case so much in Europe or the US as elsewhere in the Middle East and in Asia — in the Asian case, it is mainly because of the timescale in transporting product to the manufacturers there. But it is not something Sipchem worries about. “Competition makes you sharper,” Al-Ohali believes.
Sharp Sipchem certainly appears. There are no grandiose, overstaffed offices as preferred by some companies elsewhere in the Kingdom; no preening employees with an overblown opinion of their own importance, busy doing little. Not that staff are overworked or undervalued, as is also the case in some businesses. On the contrary, Sipchem values them highly and has devised an innovative scheme to keep hold of them, awarding them shares based on length of service.
But as Al-Ohali himself admits, just a few years ago, this rising star of the Kingdom’s increasingly powerful private sector had difficulties convincing Western petrochemical business to give it licenses for the advanced technologies it now uses. The present success must seem sweet. A success that the IPO has crowned.
