SABIC climbing up the growth ladder

Roger Harrison I Arab News
Publication Date: 
Mon, 2009-10-05 03:00

IN 2008, SABIC was ranked the No. 1 chemicals company in Asia and No. 4 in the world by Fortune Global 500. The first three global positions in terms of revenue were BASF, Dow Chemical and Bayer.

SABIC also improved its position from being the world’s 301st largest corporation in 2006 to 227th in 2007.

By 2009, it had moved up to its current position, at 186, on the Fortune 500 ranking with revenues of $40.2 billion, profits of $5.8 billion and assets standing at $72.4 billion. However, despite its improvement in world ranking, by 2009 it had slipped to No. 5 on the list of chemical producers and had posted its first ever loss. (In August, a report on the Saudi petrochemicals sector by the Riyadh-based Samba Financial Group listed it as sixth largest in the world).

Nonetheless, it is a huge, profitable and entirely Saudi-owned operation and a major source of revenue, employment and commercial credibility on the world stage for the Kingdom.

Saudi Basic Industries Corporation, or SABIC, is one of the world’s leading petrochemicals companies. Following its $1,983 million acquisition of the petrochemicals division of The Netherlands’ DSM in 2002, which also represented the company’s first expansion beyond its Saudi Arabia base, SABIC became the 11th largest petrochemicals company in the world. That purchase signified SABIC’s intent to expand and become a true global company.

The company is also among the lowest-cost producers, having as it does, access to the natural gas by-product of Saudi Arabia’s vast petroleum reserves.

Central to the business are its core areas of interest: Basic Chemicals (Ethylene, methanol, propylene, styrene, etc.); Performance (Speciality) chemicals (de-foamers, retention aids, dyes, and biological control agents); Intermediates (industrial gases, ethylene glycol, ethylene dichloride, caustic soda); Polymers (polypropylene, polyvinyl chloride, polyesters, polystyrene); Fertilizers (ammonia, urea, phosphates, sulfuric acid) and metals (long and flat steel products along with stakes in aluminium companies).

In 2007, SABIC bought the US-based GE Plastics (now the Innovative Plastics unit) for$11 billion, greatly expanding the scope of its American operations and also adding its seventh core business area. “Our commitment to the plastics industry and our customers is unshakable,” Charlie Crew, president and chief executive officer, SABIC Innovative Plastics said recently. “It is clearly evidenced by the aggressive steps we are taking to continue accelerating the development of newer and better sustainable, high-performance, top-quality materials,” he said, adding that the company’s goal was to catapult its materials to greater technological excellence, creating the most innovative products on the market today.

Within SABIC’s aegis are 16 subsidiaries, many of which are joint ventures with major international corporations such as Dow Chemical, Exxon and Mitsubishi. The majority of the company’s operations are located in Jubail Industrial City, custom-built for the company in the mid-1970s. The company also has operations at Yanbu Industrial City, in Dammam and joint venture partnerships in Bahrain.

SABIC remains 70 percent controlled by the Saudi government; the balance of the company’s stock has long been reserved for citizens of Saudi Arabia and other Gulf Cooperation Council countries. The Saudi government has, however, spoken of its commitment to reduce its holding in SABIC to just 25 percent.

It was during the 1970s that SABIC germinated as an idea as a result of the dramatic increase in world oil prices. Until then Saudi Arabia was relatively unindustrialized. The country’s huge crude oil reserves were used almost exclusively for oil production and the hydrocarbon gases, a natural by-product, were simply flared off at the wellhead.

In August 1971, the US delinked from the Gold Exchange Standard, a mechanism where only the value of the US dollar was pegged to the price of gold and all other currencies were pegged to the US dollar, and allowed it to “float”. Shortly afterward, the UK allowed sterling to float and other industrialized nations followed suit. Anticipating fluctuation in currency prices, they printed money to increase reserves causing the dollar to depreciate and therefore reducing the purchasing power of oil producing nations.

The OPEC soon issued a joint communiqué stating that forthwith they would price a barrel of oil against gold. This resulted in the “oil shock” of the mid-1970s. Until 1967, oil had risen at about two percent per year since 1947. When floating currencies became volatile, the incomes of the oil states lagged for several years until they put mechanisms in place to update prices to reflect market conditions. The substantial price increases of 1973-74 largely brought their incomes back up to previous levels in terms of commodities such as gold.

Energy consumption in the West was rising at five percent annually, while also paying low oil prices and selling inflation-priced goods to the petroleum producers in the developing world. The situation was ripe for change. Not only did oil prices rise, from $2 to $30 a barrel, but also the flared-off gas became a potential source of profit and a high priority target for investment in recovery, power generation and downstream processing.

The Saudi government decided to construct a Master Gas System to capture by-product gases for use as an energy source and establish its own petrochemical industry. Jubail, a sleepy fishing town on the Gulf coast was chosen as the site of a new industrial city with a partner city in Yanbu; the Royal Commission for Jubail and Yanbu set up to oversee operations.

To populate the city with industries, specifically petrochemical firms, the government created SABIC in 1976. One year later, the infrastructure was under construction. However, anticipating the need for trained staff, the company began sending employees to the US for training and signed up joint venture partners who agreed to help it establish its industrial operations.

In exchange for technology, training and marketing support, deals were struck with the partners giving them access to the company’s ample and low-cost feedstock. By the end of that year, the company had signed agreements with Dow Chemical, Exxon, Mitsubishi and Korf-Stahl.

SABIC had, by 1979, launched its first manufacturing affiliates: AR-RAZI, also known as the Saudi Methanol Company, created in partnership with Mitsubishi Gas Chemical Company for the production of methanol; SAMAD, or Al-Jubail Fertilizer Company, a 50/50 partnership with the Taiwan Fertilizer Company for the production of urea, ammonia, and other products; and SAFCO, the Saudi Arabian Fertilizer Company, formed to produce ammonia, urea, sulfuric acid, and melamine.

Many of the company’s partnerships were formed with leaders of the global petrochemicals market, but SABIC also developed partnerships with three Bahraini groups, creating ALBA, GARMCO, and GPIC. At the same time, the company founded HADEED, the Saudi Iron and Steel Company. Construction on that company, as well as the SADAF site, began in 1980.

Thirty-three years after its formation, SABIC has developed into one of the great global companies and a dominant force in the downstream petrochemical industry. Born of the circumstance — the economic pressures that came from floating currencies — the company capitalized on the opportunity, invested in training and technology and the result today is one of the world’s top petrochemical firms, employing some 30,000 people within the Kingdom and with 60 major manufacturing and compounding plants in more than 40 countries — not just in Saudi Arabia but across the Middle East, Asia, Europe and the Americas. It is some answer to a currency problem.

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