Gulf petrochemicals producers see recovery in sight

05 May 2010

Increased sales volumes have delivered increased profits for Gulf petrochemicals producers, but their capacity additions will dent global supply/demand balance this year

In 1990, the Middle East accounted for little more than 5 per cent of global ethylene production capacity. Barely 20 years later and the region’s market share is set to reach 20 per cent. Producers start the new decade in a position of strength within the world petrochemicals industry, despite the turbulent end of the last. 

Chemicals companies expect to see a recovery this year, following the collapse in demand triggered by the global financial crisis. Global petrochemicals output is forecast to increase 4.6 per cent this year, returning to 2008 levels, according to Mohammed al-Mady, chief executive officer of Saudi Basic Industries Corporation (Sabic) and chairman of the Dubai-headquartered Gulf Petrochemicals and Chemicals Association (GPCA).

Companies based in Saudi Arabia, in particular, are already experiencing an improvement in profitability, erasing the headline-grabbing losses seen in 2009. Sabic, the largest producer in the region and mainstay of the kingdom’s industrial sector, posted its first quarterly loss since 2001 for the first three months of 2009.

The company ended the year positively, however, and has come on stronger since the start of 2010. Sabic posted a net profit of SR5.43bn ($1.45bn) for the first quarter of 2010. This is a stark contrast to the SR970m loss posted for the same period in 2009, and represents a 18.6 per cent rise from the SR4.58bn recorded for the previous quarter.

Key Facts

  • 4.6 per cent: Forecast increase in global petrochemicals output for 2010
  • SR5.43bn: Sabic’s net profit for the first quarter of 2010
  • 95 per cent: The estimated operating rate of Saudi producers for 2010

Sources: Sabic; SICO

New capacity

The company attributed the improvement to “an increase in output and sales volumes, and a marked improvement in the prices of most petrochemical products and plastics compared to the fourth quarter”.

“We are overcoming the impacts of the global financial crisis, as well as continuing our strategy of growth and investment in new industrial plants,” Al-Mady said, presenting the results.

Already this year, Sabic has brought new capacity on stream through several subsidiaries. Its $2.7bn joint venture with China Petroleum & Chemical Corporation in Tianjin, began production in January. The 1 million tonne-a-year (t/y) ethylene plant is already operating at high rates.

Since then in March, Yanbu National Petrochemical Company (Yansab) began commercial production at its 4 million t/y plant. Its product slate includes ethylene glycol, polyethylene, polypropylene, methyl tertiary butyl ether and aromatics. The firm is 51 per cent owned by Sabic, with 35 per cent listed on the Saudi stock exchange, the Tadawul, and the remainder owned by Sabic subsidiary Saudi Industrial Investment Company and private companies.

There are surpluses in most regions, so producers are just … hanging onto their domestic sales

Paul Hodges, International Echem

The company posted a profit of SR259m for the first quarter of 2010, its first in two years, as it ramped up output. The earnings beat analyst forecasts due to higher utilisation rates and stronger margins.

The UK’s HSBC had estimated that Yansab’s operating margins would be 39 per cent, six percentage points lower than the reported margins of 45 per cent. But this assumed an operating rate of 80 per cent, while the company was in fact running close to full capacity.

Another Sabic subsidiary, Saudi Kayan Petrochemical Company plans to bring online the first unit at its Jubail petrochemicals complex in the second half of this year. When complete, the complex will produce 6 million tonnes of petrochemicals, including aminoethanols, dimethylformamide, dimethylethanol, dimethylethanolamine, ethoxylates, phenol, cumene and polycarbonates – it is the first time these speciality chemicals will be produced in the kingdom.

 Estimated share of global ethylene capacity additions (percentage)
Rest of world505823661000
Middle East504277340100
Source: Alpen and CMAI
Global ethylene capacity and demand (million tonnes)
Source: Alpen and CMAI

Ethylene market

Sabic’s 50:50 joint venture with Japan’s Mitsubishi Corporation – Sharq Eastern Petrochemical Company – also based in Jubail, has brought 1.2 million t/y of ethylene capacity on line this year. The plant will also produce polyethylene and ethylene glycol.

But the global petrochemicals industry still faces a prolonged phase of readjustment as it responds to new, lower-cost capacity additions. According to US consultants CMAI, world ethylene capacity will increase by 8.3 per cent in 2010 and 4.2 per cent in 2011. The US’ Dow Chemical predicts some 9-12 million tonnes of less competitive, naphtha-based ethylene capacity in Europe and Asia will be closed by the end of 2011, as a result.

Already there has been a significant increase in production from the Middle East, along with as much as 2 million tonnes of additional ethylene capacity added in Asia. This month, Qatar’s Ras Laffan Olefins Company added 1.3 million t/y tonnes of ethylene capacity, and 1.4 million t/y will come from Abu Dhabi’s Borouge by mid-2010. Iran will also add to the mix, bringing online the 500,000  t/y Morvarid petrochemicals complex in the second half of the year.

But Al-Mady, speaking at the annual general meeting of GPCA in Dubai in March, was confident that the economic crisis was over for the regional industry. Petrochemicals production growth this year is forecast average 3.7 per cent across the Middle East, led by Saudi Arabia with 6.3 per cent growth, according to data from the American Chemistry Council. Dow, meanwhile, estimates global ethylene demand will grow by 5 per cent a year to 2014. Normura Energy, meanwhile, expects capacity utilisation rates to run at more than 90 per cent in response to demand recovery. Although, this means that in the short-term supply will exceed demand.

Prices for some petrochemicals prices continue to disappoint, however, reflecting the reduced demand for commodity plastics and a perception of oversupply in the market, particularly in the light of new capacity additions.  At the end of March, low-density polyethylene traded at $1,445 a tonne, down 8 per cent on February numbers.

Trade protectionism also appears to be on the rise. In November 2009, the GPCA complained that it was facing increasing measures from India, China and the EU to prevent low-cost Gulf producers from exporting large volumes into their markets. The problem has not gone away. The association now plans to hold a workshop on anti-dumping levies later this month to address the issue.

It should not be overblown, however. “This is not the end of globalisation for the petrochemicals market,” says Paul Hodges, chairman of International Echem, a UK-based consultancy. “But I think we have passed the high-water mark for the industry.”

Over the next few years, the industry is likely to focus more on regional markets.

Feedstock advantage

“There are surpluses in most regions, so producers are just concentrating on hanging onto their domestic sales,” says Hodges.

That Gulf producers are able to exploit the region’s access to low-cost ethane is well known. With this feedstock advantage, petrochemical companies have been able to run at significantly higher operating rates than the global average during the downturn.

Ethane prices vary across the GCC from $0.75 a million BTU to $3 a million BTU. For Sabic, the cash cost to produce one tonne of ethylene – the most basic building blocks of the chemicals industry is about $150 a tonne.

According to Bahrain investment bank Sico estimates, the global average operating rate for petrochemical producers in 2010 will be about 82 per cent, but Saudi producers will be able to run at closer to 95 per cent operating rates.

Increasingly, however, the region’s feedstock mix is changing to include naptha and gas liquids, as ethane availability becomes tighter. This will enable the production of speciality chemicals and support the development of local conversion industries, but the cost advantage will be much less in the future. Yet, despite this, petrochemicals companies in the Middle East will continue to outperform counterparts in other regions.

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