SABIC: Moving further along the value chain

23 April 1999
SPECIAL REPORT PETROCHEMICALS

SAUDI Basic Industries Corporation (Sabic) is by far the largest petrochemicals producer in the Middle East and operates under some of the most favourable circumstances found anywhere in the industry. Since its creation in 1976, a formidable business empire has been built up, almost entirely within Saudi Arabia. Annual profits rose steadily at first, then seemingly inexorably, reaching SR 6,281 million ($1,675 million) by 1995.

Since then, however, Sabic's largest market, East Asia, has collapsed, exacerbating an already sharp downswing in world petrochemicals prices. In three years, the corporation's earnings have plummeted by more than two-thirds to stand at SR 2,020 million ($539 million) in 1998. Petrochemicals markets may be notoriously cyclical but the slide in Sabic's profits looks alarming nonetheless.

Part of the problem particular to Sabic has been the coincidence of low petrochemicals prices and low oil prices, a factor referred to by Hashim Yamani, the corporation's chairman, who is also Saudi Industry & Electricity Minister, when he presented the results for 1998. Sabic cracks ethane to obtain the basic petrochemical ethylene, which in recent years has proved more cost efficient than the naphtha cracking commonly used in Europe and the US. Combined with the advantage of easy access to cheap and abundant feedstock, Sabic has been able to deliver ethylene derivatives to Asia or Europe at competitive prices even after tariff and transport costs are taken into account. However, the prolonged slump in oil prices has handed operators of naphtha-based plants a rare competitive advantage over their Saudi rivals.

In addition, Sabic has several structural weaknesses. First, the corporation manufactures relatively few products in enormous quantities, making it more vulnerable to market fluctuations than some of its competitors. For example, three Sabic companies produce about 13 per cent of the world's methyl tertiary butyl ether (MTBE) supply. Two others produce some 10 per cent of the world's methanol. At Saudi Arabian Fertiliser Company (Safco) - the only one of 16 local Sabic companies with an individual listing on the stock market and therefore required to report publicly - production is based on two products, ammonia and urea. In two years, the company's profits have fallen by almost three-quarters and its market capitalisation has halved.

By contrast, the banks that recently agreed to lend $300 million to Saudi Petrochemical Company (Sadaf), another Sabic affiliate, cited its relatively wide product slate as a significant factor influencing their decision and one likely to ensure that the company performs well in the future.

A second, related weakness is that Sabic production has centred on basic petrochemicals rather than polymers and other commodities where more value can be added. Next year, the corporation is expected to produce more than 4 per cent of the world's methanol, ethylene, propylene, butene and benzene, toluene and xylene (BTX).

This imbalance is now being corrected in Sabic's third major phase of expansion, which got under way in 1997. By 2001, production of polymers - to include polyolefins, polyvinyl chloride (PVC), polyester, polystyrene and melamine - is set to rise to more than 4 million tonnes a year (t/y).

This is to be through projects under construction at: Saudi Yanbu Petrochemical Company (Yanpet) - 535,000 t/y high-density polyethylene (HDPE) and 260,000 t/y polypropylene (PP); Al-Jubail Petrochemical Company (Kemya) - 218,000 t/y grassroots low-density polyethylene (LDPE) and 250,000 t/y linear low-density polyethylene (LLDPE) debottlenecking; Eastern Petrochemical Company (Sharq) - 300,000 t/y debottlenecking of two existing LLDPE plants; and Saudi European Petrochemical Company (Ibn Zahr) - 320,000 t/y PP expansion.

However, the state of Asian demand when these projects come on stream remains far from certain. Sabic anticipates commodity polymers demand in Asia in 2000 will be 25 per cent lower than pre-crisis forecasts, growing at around 5 per cent a year thereafter. For South-East Asia in 2000-02, it predicts LLDPE demand will grow by 8 per cent a year, PVC by 6.4 per cent, HDPE by 5 per cent, PP by 3.5 per cent and polystyrene by 3 per cent. Sabic's own prospects have been helped by the cancellation or postponement of a number of projects in Thailand, Indonesia and South Korea, which had threatened to worsen substantial overcapacity in the region. By the end of next year, Sabic believes the situation will have eased.

In other polymers markets, Sabic believes prices have passed their low point and supply and demand are broadly in balance. For Europe, Sabic predicts growth rates for 1998-2002 of 8 per cent a year for LLDPE, 4 per cent for HDPE and PP and 1.7 per cent for PVC. It projects US growth rates over the same period at 7 per cent for PP, 5 per cent for LLDPE, 4 per cent for HDPE and zero for LDPE.

However, Asian demand remains the critical factor. Doubts about its resurgence have led to the deferral of several major projects recently. These include an estimated $1,000 million aromatics complex for Sadaf, for which a long list of prospective main contractors was drawn up in mid-1998. The project is now thought unlikely to proceed until late 2000 at the earliest. Two other schemes have been postponed indefinitely - a 1,500-tonne-a-day off- gas ammonia project for United Jubail Fertiliser Company, a new Sabic company, and a 50,000-t/y phthalic anhydride project for Al-Jubail Fertiliser Company (Samad).

While market conditions appear to have capped expansion plans for the near future, the longer-term growth of Sabic - and the nascent private petrochemicals industry - could also be constrained by the availability of feedstock from Saudi Aramco. For more than two years, Aramco has been saying publicly that developing gas reserves is its top priority. To help pay for this, industrial users have, since 1998, been charged 75 cents per million British thermal units (m/btu) for ethane and methane, a 50 per cent increase on the 50 cents m/btu price that had been held since the master gas system came on stream almost 20 years ago. So far the price rise has hardly dented Sabic's overall competitiveness as the costs directly associated with the move rose by only SR 314 million ($84 million) last year. Equally, however, there has been little indication that it is helping Aramco deliver a prompt increase in feedstock supplies. Moreover, there are good reasons for believing that, as things stand, Aramco cannot do so.

High costs

First, Saudi officials admit that gas prices would have to be lifted to at least 100-120 cents m/btu to equal the replacement cost. There is no sign that such an increase is imminent. Second, Aramco has appeared understandably reluctant to increase the availability of liquefied petroleum gas (LPG) to local industries - some 14 million t/y is currently exported - when it may not be in its best economic interests to do so. This is because it would involve investments in pipeline capacity, particularly the east-west link to Yanbu, uneconomic use of storage facilities if exports are reduced, and lower income since local consumers are charged at 70 per cent of the lowest international price obtained by Aramco in any quarter in which a sale is made.

Third, and perhaps most cogently, low oil prices and production restraint have forced Aramco to slash capital spending. Construction is going ahead on the 1,440 million-standard-cubic-feet-a-day Hawiya gas processing plant. But Hawiya output is targeted for use by central region power stations, which are currently being converted for this purpose. There are no funds available now for new exploitation of gas fields, particularly isolated ones such as Midyan in the extreme northwest which could, if developed, preclude the need to build a new east-west pipeline.

Further evidence that Aramco cannot contemplate investment aimed at developing the petrochemicals industry came with its launch of a build-own-operate tender for a xylenes extraction project. Several companies, including BP Amoco and Chevron Corporation, are now considering proposals for the project under which Aramco would sell a stream from the continuous catalytic reformer at the Ras Tanura refinery to a private developer who would build and own a xylenes extraction plant on the refinery site. Plans also call for construction of a pipeline and, at its terminus in Jubail, an aromatics unit where the mixed xylenes would be processed into paraxylene and/or other petrochemicals. Both these facilities would be built, owned and operated by the developer, while the xylenes extraction unit would be operated by Aramco.

There is also some evidence that Aramco is having difficulty fulfilling supply commitments already made. For example, industry sources say Sadaf recently had to explore alternatives for sourcing fuel gas from sister Sabic companies for its planned co-generation project when it appeared Aramco would not be able to honour a supply agreement.

All Saudi petrochemicals companies, Sabic or private, will naturally be anxious that questions relating to the availability of cheap feedstock, the key to their viability, are resolved as soon as possible. However, additional challenges to growth in the local industry could also be posed by members of the World Trade Organisation (WTO) in the run-up to Saudi Arabia's accession to the body. If Saudi Arabia's well-documented argument that feedstock supplies are not subsidised prevails, the reward for the industry will be substantial. From one perspective, admission to the WTO can be expected to provide greater and more secure access to world markets for Saudi petrochemicals. Taken another way, the risk of unilateral measures being imposed against Saudi petrochemical imports if Saudi Arabia remains outside WTO trade discipline and rules will be removed. For Sabic and the emergent private producers, there is much to play for.

A MEED Subscription...

Subscribe or upgrade your current MEED.com package to support your strategic planning with the MENA region’s best source of business information. Proceed to our online shop below to find out more about the features in each package.