The single commodity dependence leaves APC exposed to downward price pressures in the global polypropylene market
Advanced Petrochemical Company (APC) is one of several Saudi petrochemicals players that have positioned themselves to take advantage of competitively priced feedstock through long-term supply deals with Aramco, while striking distribution agreements with well-established international distribution partners.
Unlike its rivals that have opted to produce a variety of products, APC has so far focused on polypropylene. This looks to have been an astute move for its early phase of development, given a broadly encouraging climate for polypropylene prices in recent years.
The propane and natural gas feedstock is supplied by Saudi Aramco through long-term supply contracts that will offer a 30 per cent discount to market prices until the end of 2011. International polypropylene producers operate at a significant disadvantage not being able to achieve this discount. After 2011, APC will pay a revised price for the next 20 years, which is likely to continue to be in the range of a one-third discount.
Among APC’s other strengths is a noted capacity to keep construction costs under control at a time when engineering, procurement and construction (EPC) prices in the Gulf were spiralling. According to Bahrain-based Sico Research, APC has the lowest capital expenditure cost of any PDH-polypropylene integrated plants commissioned in the kingdom during 2007-09, at $690m. The costs were managed by better execution and the favourable nature of the EPC contract. APC has also managed to keep its leverage down by funding the project via a 50:50 debt/equity mix. In the long term, this may play to the company’s advantage, with sufficient room to increase debt if and when it is needed.
However, the single commodity dependence leaves APC exposed to downward price pressures in the global polypropylene market. If prices are strong, as they were in 2010 when they rose by about 20 per cent on the previous year, it plays to APC’s advantage. But when prices fall, as it has in July, with Asian demand for polypropylene slackening and new Middle Eastern output coming on stream, it could affect the firm’s bottomline.
In the long-run, however APC will be shielded from any significant price pressures as it is unlikely there will be big increases in propane feedstock prices, on which the company’s business model is built.
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