Gulf petrochemicals producers maintain competitive advantage

26 June 2009

While petrochemicals prices have fallen significantly since last year, Middle East producers remain in a strong position compared with their European and US rivals. But plans for large new plants are on hold.

Large new petrochemicals projects will become increasingly rare in the Gulf as companies try to extend the capacities of their existing plants and struggle with the reduced availability of gas supplies.

As production starts on a raft of projects that were launched in 2006 and 2007, the global industry will move towards a position of overcapacity. But despite falling profitability, Middle East companies are still in a good position to undercut competitors from other regions.

At the moment, many regional companies are finding the market a tough one in which to operate, not least Saudi Basic Industries Company (Sabic), which made a SR973m ($260m) loss in the first quarter of 2009.

Demand for petrochemicals fell by 30-40 per cent between July 2008 and January 2009, according to the American Chemistry Council, and the price of high-density polyethylene (HDPE), which is one of the most heavily traded petrochemicals commodities, fell by 44 per cent between January 2008 and January 2009 to $900 a tonne, according to Bahrain investment bank Sico.

Since then, optimism in the sector has grown as the key Asian economies show signs of recovery from the global economic downturn. In March and April, there was an increase in the volume of petrochemicals being traded in Asia, and HDPE prices had recovered to $1.195 a tonne by early May.

However, the petrochemicals market is largely driven by demand for consumer goods in the West, and key customers such as car makers have been hit hard by falling sales volumes. This has led many petrochemicals companies to cut production and, as of May 2009, an estimated 20 per cent of the world’s crackers, which produce basic chemical feedstocks, were switched off.

Middle East companies could still capitalise on the downturn, however, as they remain the world’s lowest-cost producers. The lower price of oil this year - it is down from its peak of $147 a barrel in July 2008 to about $70 a barrel in June - has helped push the cost of natural gas to about $4 a million BTUs on the open market. But Middle East companies can expect to pay closer to $0.75-1.50 a million BTUs because of agreements with governments.

Cost advantage

According to Hassan Ahmed, head of global chemicals research at UK-based bank HSBC, this gives Middle East producers a cost advantage of $300-350 a tonne over their Western rivals. “Unquestionably, the Middle East [producers] have the edge on price,” says one London-based chemicals industry analyst. “They also have much stronger balance sheets than the other major producers, and none of the debt.”

Other firms such as the US’ Dow Chemical Company are sitting on debts of tens of billions of dollars while their profits shrink because of higher feedstock costs. “This is a great time for shakedowns, for con-solidation,” says the London-based analyst. “And plant closures are going to happen in the high-cost areas, not in a place like Saudi Arabia.”

However, ethane supplies are getting tighter as demand increases for gas as both an industrial feedstock and for power generation.

Several major new plants are due to come on line in 2009, such as the $10bn Petro-Rabigh integrated refinery and petrochemicals complex in Saudi Arabia planned by Japan’s Sumitomo Chemical Company and Saudi Aramco, which will produce about 8.3 million tonnes a year (t/y) of petrochemicals.

But analysts say that projects such as Petro-Rabigh will become increasingly rare in the Middle East as producers fight for diminishing market share.

“European, US and Asian producers who buy expensive feedstocks on the open market will have to shut capacity down to help maintain prices and keep market supply in balance, but this does not mean that there will be extra market share,” says the London-based analyst. “New plants now do not make sense.”

The most notable major project still to be built is the petrochemicals complex planned by Abu Dhabi National Chemicals Company (Chema-weyaat) at its industrial zone at Taweelah.

Estimated to cost about $10bn, the project will be the largest integrated petrochemicals complex in the world, producing 10 million t/y of petrochemicals. What is most notable about the plant is that it will use liquid naphtha, a by-product of crude oil, as feedstock rather than ethane gas.

Ethane can produce only a limited range of products, known as polyolefins, while naphtha offers a much wider potential range, including styrene and polycarbonates, but has none of the cost advantages.

“This is where the Middle East is going to go from here,” says the London-based analyst. “The industry is sated with what is already on offer and there is no more gas for now. If countries want to diversify their industry away from oil, this is the way to do it. They have the money to build the most high-tech plants, so they will be the technology leaders.”

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