Rock bottom

23 April 1999
SPECIAL REPORT PETROCHEMICALS

The Middle East petrochemicals industry is weathering one of the most difficult periods in recent memory. Prices for the bulk chemicals that dominate the regional product slate have plummeted over the past 18 months. A collapse in demand from Asia was the trigger but slower growth in the Gulf region and Europe has compounded the difficulty. Margins have been squeezed and profits have tumbled, most significantly at Saudi Basic Industries Corporation (Sabic), the region's largest producer by far.

'Sabic has not got away lightly,' says Andrew Spiers, a director at Chem Systems in London. 'As oil prices have fallen, their gas prices have remained the same - a percentage of their comparative advantage has been eroded.' Cheap crude has slashed costs for rival naphtha-based producers in Asia, Europe and the US, undermining the advantage that Sabic has previously enjoyed from low cost ethylene, the basic building block of the Saudi Arabian industry (see page 10). Saudi restraint has prevented the already dire market conditions from getting any worse. 'As European and Asian producer costs have come down, Sabic has not created low prices to buy market share,' says Spiers.

As in the past, Sabic has been scrupulous not to drive prices down to grab market share and it has countered the latest downturn by seeking new outlets in Africa and the Americas. There is a limit to the new market potential, however. Says Spiers, 'Asia has had its import needs cut dramatically, forcing basic exports elsewhere. They will have to push more product into Western Europe - where there is a larger product requirement - due to the Asian effect.'

At the moment, Sabic is at a price disadvantage to European producers when the costs of freight and tariffs are added. On the plus side, tariffs are on a downward trajectory, crude prices are recovering and European demand for imports is rising. 'Western Europe is already a net importer from Saudi Arabia and when oil prices creep back up Sabic will be in a good position to push product into Europe,' Spiers says .

Diversifying

Sabic is also suffering from its status as a large-scale transitional producer of commodity petrochemicals. The Middle East, where it is the dominant producer, accounts for 40 per cent of the world trade in ethylene and no less than 60 per cent of the trade in ethylene glycol. Having moved from methanol into ethane cracking for ethylene, polyethylene and ethylene glycol, it is now trying to diversify into more valuable products as well as expanding the volume of its existing range. Plans for the addition of 250,000 tonnes a year (t/y) of polyester capacity by 2001-02 are being considered and private sector investors in Saudi Arabia are focusing on a broader range of new products.

As Sabic moves more strongly into polymers, it is moving into yet another crowded market. Despite project delays and cancellations in Indonesia, Malaysia, the Philippines and Thailand, start-ups by 2000 are expected to add 12 million t/y to global polypropylene capacity, which is 5 million t/y higher than projected demand growth. The heavy investment in polyethylene - in high density polyethylene and linear low density polyethylene in particular - is likely to depress prices for at least the next two years, even though demand is expected to rise by 5 per cent a year.

The outlook for new investment in the regional industry is clouded by the uncertainty about global demand. Although China has started buying again, luring more product eastwards, Asian demand remains flat. Asia is oversupplied by projects that had already started construction when the financial crisis hit and start-ups are delaying the tightening of the supply and demand balance. Substantial investment is also already under way in the Middle East and major additional investment is unlikely until export opportunities can be more clearly identified. There are still copious opportunities to develop viable petrochemical projects in the region but analysts warn that the economics of future ventures will be less lucrative.

Private developers in Saudi Arabia are already running up against the reluctance of Saudi Aramco to sign up new clients. 'The big issue is the availability of feedstock. The original feedstock is committed and there is not a lot more...Aramco has been very cautious about committing to customers,' says Spiers. Instead of the cheap ethane and methane that enabled Sabic to build its empire on feedstock that had limited alternative use, new investment will use liquids such as condensates. As liquids are internationally traded, their real value can be established and Aramco will have little incentive to supply at below market rates.

Another issue is technology. Sabic's array of strong international partners brought their own technology for the grassroots bulk chemical plants set up in the 1970s and 1980s but access to technology will become harder as the company moves to higher value products. Despite its in-house efforts to develop technology of its own, Sabic's shift to high-end, more sophisticated processes will inevitably rely on partnerships with international technology providers. If the comparative advantage of the region remains under pressure from lower oil prices, potential partners will be driving a hard bargain.

Ethylene and derivative projects under construction will intensify competition sharply as they come on stream in the period to 2002. Three Sabic projects underway and the Q-Chem and Borouge projects, in Qatar and Abu Dhabi respectively, will alone add 3.42 million t/y of ethylene and 2.197 million t/y of polyethylene. The BP Chemicals scheme in Oman, if it goes ahead, will add another 450,000 t/y of ethylene and 450,000 t/y of polyethylene. Smaller volumes of ethylene glycol, ethylene di-chloride and styrene monomer will also be added.

The hope in the Gulf is that these projects, being developed during the depths of a downturn, will be bringing their product to market in time for the inevitable upturn. Analysts are cautious about when the rebalancing of supply and demand will tighten markets but they are increasingly sure that conditions will not get much worse. Says Spiers: 'The industry is close to the bottom...there is not a lot of money being made at present.' On a more optimistic note, he adds: 'The bottom is this year.'

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