Saudi Basic Industries Corporation is increasingly moving downstream as it aims for global dominance.
Saudi Basic Industries Corporation’s (Sabic) origins go back 32 years, to when the government embarked on a strategic push to use associated gas from its oil production as the key feedstock for the production of chemicals, poly-mers and fertilisers. With a $80bn market cap, Sabic is now the largest public company in the Middle East, though the government still owns 70 per cent of its shares.
As one of the world’s top 10 petrochemicals manufacturers, Sabic produces a large and expanding range of products, and is among the world’s market leaders in the production of polyethylene, polypropylene, glycols, methanol and fertilisers. Overall production capacity has grown from 27 million tonnes in 2001 to 49.1 million tonnes in 2006. In the first nine months of 2007, Sabic reported a 13 per cent increase in output to 40.9 million tonnes.
Date established: 1976
Main business sectors: Chemicals, polymers, fertilisers and steel
Main business regions: Gulf, Asia, Europe and North America
Market capitalisation: $80bn
CEO: Mohamed al-Mady
From its Riyadh headquarters, Sabic controls 18 manufacturing affiliates inside the kingdom. Eight are joint ventures with foreign partners, while seven are joint-venture deals with local/regional partners. Three are wholly owned. Most of its affiliates are based in Jubail Industrial City and Dammam. Others are based in Yanbu.
The company has in the past 10 years undergone a major organisational restructure, shifting from a functional, site-based structure to a strategic business unit (SBU) structure. Sabic operates six interlinked SBUs: basic chemicals, intermediates, speciality products, polymers, fertilisers and metals.
The company operates a series of dedicated research and technology centres, and has a dedicated engineering and procurement function that will manage Sabic’s increasingly diverse contractor base.
Sabic has two large production sites in Saudi Arabia, at Jubail and Yanbu, comprising 19 world-scale complexes. Some of these complexes are partnerships with international joint venture partners such as the US’ ExxonMobil Corporation, the UK/Dutch Shell Group and Japan’s Mitsubishi Chemicals. Increased production has come from an ethylene glycol plant at Jubail, a reinforced steel plant through the Saudi Iron & Steel Company (Hadeed) and urea and ammonia plants through Saudi Arabian Fertilizer Company (Safco).
In Europe, Sabic employs about 3,300 staff at three petrochemical manufacturing sites at Geleen in the Netherlands, Teesside in the UK and Gelsenkirchen in Germany. Sabic Europe produces 2.5 million tonnes a year (t/y) of polyolefins and 3.3 million t/y of basic chemicals. Since its mid-2007 acquisition of GE Plastics - to be known as Sabic Innovative Plastics - Sabic has also massively increased its US footprint.
Sabic’s profits are expected to grow further this year as three world-scale petrochemicals pro-jects - Yansab, Sharq and Kayan - are due to come on stream in 2008 and 2009, augmented by a series of smaller plants up to 2010.
Having established its credentials as the first genuine Saudi multinational, Sabic is not content to stop at a top-five placing. By 2015, the company wants to become the world’s largest petrochemicals producer.
The industrial giant is prepared to use its strong financial position to consolidate its recent growth spurt with a far wider footprint, both in terms of its product portfolio and its geographical positioning.
The move downstream is a necessity. With ethane in such short supply in the Gulf, polymer and base chemical production are likely to peak in 2010, leaving the strongest growth in the plastics sector, though it also means Sabic must market directly to the consumer. Sabic will have to adopt a whole new skills set, and fast, if it is to meet its ambitious targets.
Sabic does not have to grow through acquisitions to extend its reach further down the value chain. Some of its ventures, such as the $9bn Saudi Kayan petrochemicals complex, will extend its product slate to take in poly-carbonates and phenols. It is also forging strategic relations with other Saudi corporates - for example, moving into the mining sector via a $3.5bn joint venture with the Saudi Arabian Mining Company (Maaden) to produce phosphate fertilisers.
Sabic has met all the targets set out at its inception in the mid-1970s. In the past five years, it has emerged as one of the world’s top 10 petrochemicals producers, and significantly grown its foreign presence with intelligent acquisitions in high-growth markets. By the end of 2009, when two petrochemicals complexes - Yanbu National Petrochemical Company (Yansab) and Eastern Petrochemical Company (Sharq), of which it owns 50 per cent - come on stream, it will enter the top five.
Though numerous domestic private players are competing for feedstock, these are unlikely to dent Sabic’s regional dominance. Indeed, Sabic is widening the gap between itself and its nearest Gulf competitor. According to a recent MEED analysis, Sabic enjoys a total production capacity of nearly eight times its nearest rival, Qatar Fertiliser Company (Qafco).
Sabic will press ahead with plans to secure new markets and access new technology, but its plans may be undermined by international financial markets. Ratings agency Moody’s Investors Service weighed in with a potential ratings downgrade for Sabic Innovative Plastics in December 2007, out of concern that Sabic had used a highly leveraged funding structure, which put added pressure on the business.
These concerns may prove well-founded, given that Sabic has to deal with rising costs, For example, the Sabic-Maaden phosphate project costs have risen by 62 per cent to $5.6bn. But it has sufficient financial reserves to support all its overseas businesses.
Still, there will be some concern at Sabic over the impact of the anticipated tailing off of petrochemicals prices in the second half of 2009, which may put further production increases in doubt.
Sabic in Numbers
Turnover (2006): $23bn
Operational profits (2007): $7.2bn
Total production capacity planned for 2008: 60 million tonnes
Total asset value (September 2007): $65.6bn
Value of property plant and equipment (2006): $31.1bn
Value of long-term debt (September 2007): $11.8bn
If there is one thing that has defined Sabic’s corporate strategy in recent years, it is its increasingly bold moves into the international market.
In 2002, when oil prices began to gain momentum, Sabic bought the Dutch DSM Chemicals for $2bn. In late 2006, it acquired the UK’s Huntsman Petrochemicals for $685m, renaming it Sabic UK Petrochemicals. In May 2007, it picked up GE Plastics, the global plastics division of the US’ GE, for $11.6bn.
With hindsight, it timed the GE deal well, coming a few months ahead of the global credit crunch, raising the money at attractive rates on the back of strong financial performance. What has subsequently taken place in financial markets means that it would not be so easy to raise that finance now.
The burgeoning asset haul is not a hasty deployment of surplus liquidity. Under chief executive officer Mohamed al-Mady, Sabic has evolved a strategy that is geared to aligning its commercial interests with those of the host region. Sabic recognises that oppor-tunities for growth will not be limited to Saudi Arabia. To maintain its growth rate, it needs to look at other areas.
The acquisition of GE’s plastics division highlights Sabic’s move downstream. The company was prepared to pay an estimated 10 times historic earnings to pick up the company, in the belief that the long-term strategic pay-off would dwarf the high one-off cost. Though Sabic has forged a competitive lead in commodity chemicals, it needs to diversify into higher-value products - downstream chemicals and plastics - that are nearer to the final customer. In Sabic’s view, it has little option but to venture into speciality products if it is to maintain its market lead.
The DSM deal in 2002 granted Sabic a valuable toehold in the European market, as well as a more diverse array of products and access to new technologies. Similarly, the well-timed GE purchase has secured the Saudi player a more diverse product array in the US, as well as access to capabilities needed in Saudi Arabia.
According to Al-Mady, Sabic has acquired technologies that might have taken more than 50 years to develop on its own. US chemicals groups, boasting extensive retail networks and technological capabilities, present ideal candidates.
The globalisation thrust extends beyond the chemicals sector. In 2007, Sabic agreed to take a 35 per cent stake, worth $262m, in an iron ore project in Mauritania. The global acquisition drive offers other benefits. A widening geographic footprint prevents overexposure to a single area, besides providing a platform for further organic growth in these new markets.
To continue to penetrate in these new markets, Sabic says it must build a global marketing and supply chain, which in turn necessitates having the vessels, terminals and marketing personnel around the world to operate and manage the network.
Having planted its flag in Europe, Africa and North America, Sabic could make a bigger splash in Asia, where it needs to stay ahead of local competition. It is considering two opportunities in China, and is likely to be receive approaches from Asian players to form joint ventures. China is the market with the biggest potential for Saudi Arabia, so some kind of linkage between the two countries might be prudent.
If Sabic does succeed in the Far East, its long-term aim of becoming the world’s biggest petrochemicals producer will become increasingly achievable, and Saudi Arabia’s vaunted ambition of diversifying its industry base could be realised.