Petrochemicals: Riding the roller coaster

09 November 2001

The third quarter reporting season is well under way among international petrochemical producers and it is not making happy reading. A slump in petrochemical prices - the result of new capacity coming on stream and the slowdown in the global economy - has slashed corporate earnings and dashed hopes of an imminent recovery. With profit warnings proliferating, 2001 looks destined to be the year the famine returned to the petrochemical industry.

The Middle East has not been immune to the latest downturn in the notoriously cyclical world of petrochemicals. Its largest producer, Saudi Basic Industries Corporation (Sabic), announced on 22 October that net profits for the first nine months of the year had slumped by 37 per cent, despite a year-on-year surge in total production of 27 per cent. The one consolation for Sabic is that, by industry standards, the performance was creditable: the majority of the top 25 producers have seen profitability contract by 50-60 per cent this year.

Sabic's results have underlined yet again the Middle East's competitiveness in petrochemical production. Despite some softening in the oil price this year, regional producers have retained a comparative feedstock advantage over their international rivals. That has been derived from the Middle East's use of ethane as feedstock, as opposed to the naphtha favoured in much of Europe and Asia.

The cost advantage of ethane over naphtha is considerable, especially at a time of high oil prices. According to US-based consultant CMAI, Middle East ethylene producers using ethane feedstock have a $100 a tonne price advantage over their naphtha-based rivals when the oil price is at $10 a barrel. At $30 a barrel, that advantage jumps to about $300 a tonne - because naphtha prices rise in line with crude, while the cost of ethane remains unchanged.

The feedstock factor helps to explain that, while much of Europe and the US is shutting down capacity, the Middle East is building more. The UK's ChemSystems estimates that 5 million-8 million tonnes a year (t/y) is under development in the region. CMAI says that over the next five years, the Middle East could see 13 new crackers, and eight of those appear certain.

The investment drive is being assisted by lower capital costs in the Middle East. Gone are the days when building capacity in the region was considerably more expensive than elsewhere. With basic infrastructure now in place in much of the region, and intense competition among international engineering contractors for work, costs are declining rapidly. In a recent survey on relative battery limits capital costs, CMAI concluded that if the US Gulf coast is taken as the benchmark of 1, the capital cost of installing capacity ranges between 0.9-1.1 in Saudi Arabia and between 0.7-0.9 in Iran.

The latest round of investment in Middle East capacity will have a profound effect on the global petrochemical industry. By 2005, Sabic looks set to be among the top five ethylene producers worldwide; by 2015, it may well be joined by Iran's National Petrochemical Company. The region's share of the global ethylene market is forecast to double to 15-16 per cent in the next five years and Middle East polyethylene exports will jump to an estimated 5 million t/y from 2.5 million t/y over the period.

Given the surge in output, new markets will have to be found. Traditionally, Middle East polyethylene production has been geared towards meeting demand in the Far East. However, Asia will be insufficient for all the new volume and producers will need to penetrate new markets, particularly Europe.

The significant capacity build-up in the Middle East, coupled with the economic slowdown in the US, has resulted in an uncertain price outlook. Sabic's vice-chairman and managing director Mohamed al-Mady told MEED in late October that he hoped for a price upturn in the latter half of next year. Others are not so sure. ChemSystems has recently pushed back its forecast for recovery to 2003/04. Whatever happens, one thing can be sure: the Middle East looks destined to fare better than anywhere else.

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