Saudi Basic Industries Corporation (Sabic) has been one of the Middle East’s major success stories since it was formed by a royal decree in 1976. At that time, Riyadh’s objective was to establish a company to add value to Saudi Arabia’s oil industry by producing intermediate petrochemicals for export. Thirty-seven years on, Sabic is one of the biggest players in the global chemicals industry.

Unlike its competitors, however, the company has an added responsibility to support the strategic needs of its home country, in particular, to support Riyadh’s bid to heavily industrialise the Saudi economy.

Despite these potentially competing goals, Sabic is confident it can juggle its commitment to the kingdom, while driving a global expansion that aims to see it established as the largest integrated chemicals company in the world within the next decade.

Positive outlook

“Sabic should be viewed as a truly global company now and, as such, has to make decisions that fit the markets it operates in,” says an executive working in the region’s petrochemicals industry. “This means a decision taken at home will not be the same as one taken overseas.”

Sabic enjoyed a stable 2012 that, results-wise, showed a decline on its 2011 performance, but still left the firm with a positive outlook. Sales volumes hit a record 55 million tonnes and the company’s assets grew SR5bn ($1.33bn) to SR338bn.

The firm also retained its top rating with international credit rating agencies, enabling it to gain favourable credit terms. Net profits, however, fell 15.5 per cent to SR24.72bn in 2012 compared with 2011. In a January company statement, Sabic cited “higher cost of sales and lower sales prices for certain products” as the reason for the decrease.

“Lower prices were a factor for all petrochemicals producers, so this was to be expected,” says the executive. “The fundamentals were still in place, however, that will drive Sabic’s business forward.” 

Although the Saudi Arabian government is Sabic’s biggest shareholder, with a 70 per cent stake, the remaining 30 per cent is publicly traded on the Tadawul, the Saudi Stock Exchange. This means the firm must announce all major decisions on the bourse, as well as publish its quarterly and annual results. As a result, Sabic is significantly more transparent than many other state-owned entities in the kingdom.

Domestically, Sabic has some of the most competitive feedstock prices in the world, which has been the driving force behind its global expansion. Its moves into Europe and the US have been built on the back of strong operating margins within Saudi Arabia.

Feedstock diversification

Securing additional gas feedstock for new petrochemicals production has reached a critical stage in the kingdom with no new ethane allocation since 2006. This has meant a switch to heavier feedstock, such as propane and butane, which is not as heavily subsidised as ethane. This move has subsequently increased production costs and reduced profitability. 

But diversifying its feedstock has enabled Sabic and its affiliates to innovate their product portfolios, resulting in a wave of new speciality chemicals projects.

According to Middle East projects tracker MEED Projects, Sabic has $8.1bn-worth of major investment projects planned or under way in the kingdom. Most of these are focused on speciality chemicals, creating products that can then be used to supply multiple downstream industries, including automotive, consumer electronics and plastics sectors.

Sabic’s biggest current project is the $3.4bn elastomers 50:50 joint venture with the US’ ExxonMobil Chemical under construction at the Al-Jubail Petrochemical Company (Kemya) complex in the Eastern Province.

When completed, the facility will produce about 400,000 tonnes a year of carbon black, rubber and thermoplastic speciality polymers, which can be used to produce components for the automotive industry, in line with Saudi Arabia’s industrial diversification programme.

Sabic has been given a wide-ranging remit by Riyadh to support the development of industrial clusters across several key sectors in the kingdom. This includes offering guidance and advice to entrepreneurs looking to start businesses. 

“There is no doubt Riyadh has got a plan in place and Sabic is helping to implement this plan,” says the executive. “However, you need to remember these products cost more to produce and there is not yet a market for them in the region. It is vital for these conversion industries to be attracted to the kingdom to absorb the offtake coming from these new ventures.”  

Global aspirations

Abroad, the main thrust of Sabic’s operations will be in fast-growing emerging markets, such as China, as well as in the US. The US market is experiencing a renaissance due to the emergence of its shale and unconventional gas industry.

Although Sabic has several large-scale operations in Europe, it aims to scale back operations there, which will lead to closures of some non-profitable plants and a cut in its workforce. This would, however, free up capital to invest in new markets. The company is now considering one or two investments that would involve the construction of a new ethane cracker in the US. Plans are still at the study phase, but they are a direct reflection of the amount of ethane and cheap natural gas liquids, such as propane and butane, that would facilitate such a move. 

Investing in ethylene production facilities in the US would represent a significant expansion of the company’s operations there. 

In contrast, Sabic has had long involvement in China’s petrochemicals industry dating back to 1980 and now has 18 offices in the country. It also operates three manufacturing plants in Shanghai, Guangzhou and Tianjin and has a technology and innovation centre in Shanghai.

Despite its global aspirations, Sabic will always see Saudi Arabia as its core market. Cynics might suggest that if there was ample feedstock demand in the kingdom, Sabic would be less inclined to look overseas. The company has, nonetheless, proved it can adapt to global markets and prevailing economic conditions better than most of its regional and international competitors.