Falling demand and rising competition for feedstock, alongside a national push to bring the price of raw materials closer to market rates, are combining to put pressure on Saudi Arabia’s petrochemicals industry.
The price of petrochemicals dropped to a five-year low at the beginning of 2015 on the back of easing demand across a number of key markets. The operating environment is expected to remain challenging in the coming months, with little to indicate a significant pick-up in global economic activity, although forecasts of growth in Asian markets suggest a more positive outlook for producers in the longer term.
Strong Fundamentals
However, as Saudi Arabia’s petrochemicals industry prepares to mark its 40th anniversary in 2016, the sector is expanding and its interplay with the oil and gas sector is evolving. “Fundamentals remain strong, so demand will not disappear. If there is a slowdown in purchasing, it will be because converters are consuming their inventories while waiting to see how much falling oil prices will drive down commodity petrochemical prices,” Abdullah Al Garawi, president and CEO of Advanced Petrochemicals Company, told OBG in May 2015, suggesting the market’s continued strength.
The biggest player is the majority state-owned Saudi Basic Industries Corporation (SABIC), which started with six employees in 1976, including the man who was its CEO until February 2015, Mohammed Al Mady. It faces competition from the state oil company, Saudi Aramco, which intends to use 10% of its crude oil output for petrochemicals production on sites adjacent to its refineries, and in 2015 the huge Sadara complex it is building in Jubail Industrial City II, in conjunction with the Dow Chemical Company of the US, is set to begin production.
In March 2015 Saudi Aramco also confirmed financing had been put in place for the SR19.4bn ($5.2bn) extension of the Petro Rabigh facility on the Red Sea it runs as a joint venture with Sumitomo Chemical of Japan. Both SABIC and Saudi Aramco see themselves playing crucial roles in the country’s economic diversification, and to this end they are investing in ways to nurture industries further down the petrochemicals value chain.
SABIC Performance
The initial unaudited financial statements issued by SABIC in January 2015 showed that the company’s net assets had grown from SR337.2bn ($89.9bn) at the end of 2013 to SR341bn ($90.9bn) at the end of 2014. However, the company blamed lower average sale prices and market uncertainty caused by the fall in the crude oil price for a 7% slide in profits from SR25.3bn ($6.7bn) in 2013 to SR23.4bn ($6.2bn) in 2014. SABIC’s fourth-quarter profits fell, year-on-year, from SR6.15bn ($1.6bn) to SR4.36bn ($1.2bn). SABIC’s then CEO Al Mady told reporters the company’s annual performance was “a good result”, adding, “We are used to this cycle of petrochemicals.”
Jadwa Investments reported that in the year to October 2014 export growth of petrochemicals products was 3.7% lower than in the same period the previous year. Figures from the Central Department of Statistics and Information for January 2015 showed the value of Saudi Arabia’s petrochemicals exports had declined by 12.5% from SR5.56bn ($1.5bn) in January 2014 to SR4.87bn ($1.3bn).
SABIC figures show that in 2013 it produced 68.5m tonnes, up from 35m tonnes in 2001. The firm says chemicals, its largest business unit, accounts for 60% of total production. It is the world’s third-largest producer of polyethylene and polypropylene, and the largest producer of mono-ethylene glycol, methyl tert-butyl ether, granular urea, polycarbonate, poly( pphenylene) and polyetherimide. The company employs around 40,000 people worldwide. Its SABIC Europe subsidiary employs 6000 people and produces over 2m tonnes of polymers and 5m tonnes of basic chemicals. SABIC Europe was created as the result of two acquisitions in 2002 and 2006 of DSM Petrochemicals and Huntsman’s European business.
In October 2014 IHS Chemical Week placed SABIC third in its annual sales ranking based on 2013 figures. BASF of Germany was ranked first with $81.5bn, followed by China’s Sinopec with $72.3bn, SABIC with $60.7bn, ExxonMobil with $59.3bn and the Dow Chemical Company with $57.1bn in sales. IHS for 20 years and it said SABIC’s position in the top three demonstrated its global force. “The presence of both Sinopec and SABIC in the top three companies in our sales ranking, which puts them ahead of powerhouse US companies ExxonMobil Chemical and the Dow Chemical Company, is profound when you realise that just 10 years ago neither of these companies were in the top 10,” said Rob Westervelt, editor-in-chief of IHS Chemical Week.
Sector Players
SABIC is 70% state-owned, but is listed on the Saudi Stock Exchange. In March 2014 there were 14 petrochemicals companies on the exchange with a combined market capitalisation of SR437.6bn ($116.6bn), equivalent to 22% of the exchange’s total, with SABIC itself valued at SR254bn ($67.7bn). Saudi Aramco is 100% government-owned and so the company is not listed on the exchange, nor does it publish financial statements.
In February 2015, Al Mady, who joined SABIC at its inception in 1976 after completing a masters degree in chemical engineering in the US, was appointed president of Saudi Arabia’s Military Industries Corporation and was replaced by Yousef Al Benyan as acting CEO. Al Mady retains his position as Saudi Arabia’s governor for the Organisation of Petroleum Exporting Countries.
SABIC holds a 35% stake in its subsidiary Saudi Kayan, which began production in Jubail in 2011. The plant’s total production capacity is 5.88m tonnes per annum (tpa), of which 1.48m tonnes is ethylene. The plant also produces propylene and benzene, which, along with the ethylene, are used as feedstock for 20 different lines including polyethylene, ethylene glycol, polypropylene and cumene. The petrochemicals produced at the plant are used in the manufacture of a host of items ranging from clothing and automobiles to aircraft, sunglasses, herbicides, toys and medical appliances.
Sadara Chemical Company
In 2015 the first manufacturing processes are due to begin at Sadara Chemical Company, which has been built at Jubail Industrial City II, quite close to the Saudi Kayan complex. Sadara is a joint venture between Saudi Aramco and the Dow Chemical Company, and it is the largest petrochemicals plant in the world to be built in one phase. Sadara’s complex will consist of a hydrocarbons and chlorine-based production facility with a capacity of 3.2m tpa and will cover 6 sq km. It will take advantage of the existing industrial port, pipeline corridors, utilities and supporting industries that are already established in Jubail.
However, the plant will not only be utilised to blend and mix chemicals to create value, but will also be exploring reactive chemistry and manufacturing, which makes the park unique.
Its position on Saudi Arabia’s Gulf coast means its products can be easily exported to markets in Asia and the Middle East, but Sadara will also be targeting Africa and Eastern Europe, as well as satisfying growing domestic demand. Production is due to be phased in from the second half of 2015, with full operations commencing in 2016, and will include some chemical products produced for the first time in the Kingdom. Saudi Aramco and the Dow Chemical Company say output from Sadara’s 26 chemical processing plants will generate an estimated $10bn in revenues within a decade of commencing operations, and annual revenues of $5bn-6bn are projected for its first years.
Sadara will act as a feeder for two adjacent PlasChem zones, a conversion park for downstream industries including formulators and plastic converters, and a chemicals park for reactive chemical industries that will cover 12 sq km. These combined operations are designed to create new value chains and performance products so that Saudi-owned businesses can produce a range of finished items from plastic bags and detergents to foam materials for both local customers as well as for export. During the construction process, Sadara began training programmes for the staff that will work in engineering and manufacturing roles at the site, hiring 475 apprentices and 235 on-the-job trainees. Sadara says it will ultimately employ more than 3000 people and contribute to the creation of a further 15,000 employment opportunities in related industries.
Saudi Aramco says financing for the $20bn project represented the largest sukuk (Islamic bond) and the largest publicly listed sukuk in history, involving 26 commercial banks and 11 Islamic banks.
The investment also demonstrates Saudi Aramco’s resolve to operate as an integrated energy company rather than one that is purely focused on oil and gas exploration and production. The company’s in-house newspaper, Arabian Sun, included a speech that was delivered at the World Economic Forum in Davos, Switzerland in January 2015 by Saudi Aramco’s then-CEO, Khalid Al Falih. “We’re also investing in downstream, and that includes refining and petrochemicals, which is not only creating value for us, but it’s part of what I call building resilience in the company and making sure our portfolio is not dependent solely on the upstream,” Al Falih told delegates. “Saudi Arabia is going to be the centre of the oil business, the petrochemicals business and the power-generation business.”
Sadara’s mixed-stock cracker will be fed by naphtha and ethane, while benzene and toluene will feed the aromatics hydrogenation and extraction facility. Saudi Aramco’s policy is to build petrochemicals plants alongside refineries in petrochemicals cities. The naphtha used at Sadara will come from the Saudi Aramco Shell Refinery at Jubail, a joint venture with Saudi Shell, while the benzene and toluene will be supplied by Saudi Aramco and affiliates.
On Saudi Arabia’s Red Sea coast the Petro Rabigh facility, a joint venture between Saudi Aramco and Sumitomo Chemical, also uses mixed feedstock consisting of 400,000 barrels per day of crude oil and 1.2m tpa of ethane. Sumitomo, a Japanese chemicals company established in 1913 as a maker of fertiliser, is now listed on the Tokyo Stock Exchange, while the joint venture is listed on the Saudi Stock Exchange, having launched an initial public offering in 2008 for 25% of its stock. The Petro Rabigh facility produces 2.4m tpa of petrochemicals, including naphtha, kerosene petrol, diesel and fuel oil. In March 2015 Reuters reported that the financing had been finalised for phase two of Petro Rabigh, which will cost about SR30bn ($8bn) and produce 5m tpa of petrochemicals products, with operations scheduled to begin in the first half of 2016.
Looking East
Mixed feed crackers will give Sadara Chemical Company a price advantage over its rivals when the new facility comes on-stream, while also better equipping the firm to adapt to changes in the market, according to Ziad Al Labban, the company’s CEO. The plant, which is expected to be fully operational in 2017, will also be well placed to expand into growing markets, Al Labban told OBG.
“Saudi Arabia is… next to the high-growth markets of Africa and Asia,” he said. “With less than 3% of petrochemicals in the GCC being specialty products, there is a great opportunity for expansion.”
When it comes to sustaining demand and growth, it is to Asia that Saudi Arabia’s petrochemicals producers are looking, according to Mutlaq Al Morished, CEO of the National Industrialisation Company ( Tasnee). Al Morished is confident that the Kingdom’s long-term focus on Asia will pay dividends, despite some short-term weakness in demand. “There will be lower prices for petrochemical goods until economic activity picks up in Asia,” Al Morished told OBG. “However, we expect to see good long-term growth due to macro trends such as population growth and urbanisation,” he added. Demand from some rapidly expanding markets in South-east Asia, including Vietnam and Indonesia, alongside steady sales to established Asian centres, should help Saudi Arabia’s petrochemicals industry to strengthen its position, while the industry is waiting for the global economic rebound to gain momentum.
Overseas petrochemicals sales currently account for around 7% of Saudi Arabia’s exports and some 60% of non-oil exports. Despite this prominent economic role, most Saudi petrochemicals firms fell short of analysts’ profit forecasts for the first quarter of 2015, according to media reports, with combined results coming in 2% lower than expectations.
While analysts see present levels of gas supply meeting industry needs, rising demand from the utilities sector for the production of water and electricity could result in restrictions on how much gas is made available to petrochemicals firms. Any shortfall could be made up through the use of oil-based feedstock, though this would mean diverting oil production capacity away from the export market.
The industry will also have to factor in increases in feedstock prices, with the state looking to lift the cost of gas to nearer market rates. While such a move will benefit state finances, any increases are set to partly erode the price advantage currently enjoyed by many Saudi petrochemicals firms. Some industry experts suggest that oil should be used more extensively in electricity production, freeing up gas for the petrochemicals sector, and paving the way for the Kingdom to expand its industrial base.
In addition, concern is also mounting that lower oil prices could prompt the government to scale back on spending, pushing down demand for petrochemicals products in the domestic market.
Depressed oil prices are leaving many people in the business community worried about future demand given the potential for lower government spending as revenues decrease.
Feedstock Issues
Feedstock for Saudi Arabia’s domestic petrochemicals plants has traditionally been natural gas, allocated by the Ministry of Petroleum and Minerals at a heavily subsidised price of $0.75 per million British thermal units. In April 2014 Al Arabiya quoted Al Mady as saying that a shortage of the feedstock would hamper plans to increase production within the Kingdom. In November 2014 Bloomberg reported comments on feedstock made by Al Falih and Al Mady at an industry meeting in Dubai. While Al Falih reportedly suggested that petrochemicals firms should upgrade their plants to utilise both liquids and ethane, the report said Al Mady stated that SABIC would gradually start using more liquid feedstock in its plants.
In February 2015 Saudi Kayan reported that it had been granted an additional allocation of 10m standard cu feet per day from July 2015. Saudi Kayan reported that this would enable it to boost ethylene production by 93,000 tpa and ethylene oxide capacity by 61,000 tpa by the second quarter of 2017.
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