Saudi Arabia is hardly a novice in downstream plastics. It has more than 550 plants, mostly small and medium-sized enterprises, converting 1 million tonnes a year (t/y) of locally produced polymer feedstock. However, the industry is largely focused on import substitution, and if it is to double in size as targeted by 2010, it will need to increasingly develop its export capabilities.

SAGIA estimates that the sector will only experience 7 per cent growth if it remains wedded to import substitution. To achieve much higher growth rates, exports will need to account for almost 25 per cent of domestic output. Several products have been identified as being suitable for export, including film and sheet materials, bags and roll stock, geomembranes, fibres and disposables.

Saudi Arabia has good reason to head downstream. Plastic converters employ considerably more people per dollar of capital investment than upstream industries. They also provide an array of opportunity for private investment.

There are obstacles in the way of the sector's development, however, not least the fact that the further away from the cracker, the less efficient the Saudi plastics sector becomes. 'A key challenge is the dilution of the feedstock cost advantage along the

production chain,' Al-Sadoun says. 'The average cost advantage of a Saudi versus a European petrochemical producer at each processing step downstream from an ethylene cracker on a product-delivered-to-Europe basis, is 80 per cent at the primary level, 40 per cent at the secondary level and only 10 per cent at the tertiary level.'

One of the main complaints among local plastic converters is that the price of locally produced resins is cheaper in key export markets, such as China, than at home. The phenomenon is not unique to the kingdom. Raw material price differentials were the main factor behind the relocation of much of Europe's downstream conversion industry to China in the 1980s: for example, downstream converters located in China could buy resin from BP's plant in Scotland much cheaper than their Scottish counterparts.

'Unless this issue of differential pricing is addressed, it is difficult to see how downstream industries located in Saudi can compete in export markets with Chinese production,' says Edward Wilson, a consultant with Chemair Technologies (UK).

'When resin is 80 per cent of the cost of plastic film, you cannot survive if you are paying 10-15 per cent more for resin than your competition.'

There are some signs that the situation could be changing. Volume discounts are beginning to be introduced in the region and the hope is that with a wave of new local olefin producers coming onto the market over the next three years, competition will force local resins prices down.

'Competition is going to be very good for the kingdom and will result in further commercial changes in price,' says Bill Urquhart, vice-president of consulting at Houston-based Townsend's Polymer Services & Information. 'If freight rates are competitive and the product is in large enough quantities, there is no reason why parts of the GCC industry can't be competitive in world markets.'

The issue of major producers such as Saudi Basic Industries Corporation (Sabic) selling high volumes of product into China at a discounted price provokes considerable debate. 'Which is right?' asks Andrea Borruso of Zurich-based SRI Consulting. 'In o