If Riyadh raises feedstock prices, reduced growth and lower profits are likely to hit petrochemicals sector
The challenges of higher prices and competition from US producers are prompting concerns for future growth in the kingdom’s petrochemicals sector.
From virtually zero production in 1980, Saudi Arabia now accounts for almost 13 per cent of global petrochemicals production. The dramatic rise has been made possible by the government’s willingness to subsidise ethane, one of the basic feedstocks for the industry.
However, as the kingdom’s population grows and demand for power and water increases, gas has become more scarce. The government’s response has been to halt all new allocations of ethane since 2006.
To the consternation of local producers, since 2011, the government has been considering raising its ethane price. It has yet to make an announcement, but a price of $1.50 a million BTUs has been mooted. This would double the price currently enjoyed by Saudi producers.
A price of $0.75 a million BTUs of ethane has helped producers enjoy huge growth over the past 30 years. It is understandable that they want things to stay exactly as they are.
Raising the ethane price, local producers warn, will be ruinous to the industry, prompting a drop in future investment with knock-on effects to Saudi Arabia’s downstream diversification plans.
When the kingdom can no longer rely on cheap feedstock for its growth plans, it will have to look to propane and naphtha-based crackers for growth. This is where it is likely to lose its competitive advantage just as the shale gas boom in the US begins to drive domestic petrochemicals investment.
A MEED Subscription...
Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.