SAUDI Basic Industries Corporation (Sabic) is already a business of global significance. The company is the fruit of the largest national industrialisation project undertaken in the developing world. Since its foundation by royal decree in 1976, Sabic’s strategic thrust has been clear. It is the key component of a long-term national development plan. And, Sabic has an extraordinary advantage, unparalleled elsewhere in the fiercely competitive international petrochemicals business – access to Saudi Arabia’s enormous hydrocarbon resources.

But, as Sabic moves further away from its basic product portfolio, it risks diluting that competitive advantage. Sabic’s growth strategy has been clear, until now. The plan was that the company would be an efficient, world-scale producer of quality petrochemicals, plastics, resins, fertilisers and metals. Efficiencies would improve as the company grew. It would concentrate on the production of basic petrochemicals and fertilisers – ethylene, methanol and ammonia – using the ethane and methane components of natural gas as feedstock.


The plan has worked. Using feedstock that is the most competitively priced in the world, Sabic and its joint-venture partners have built state-of- the-art plants and become instant world beaters.

In becoming a potent force in the business, Sabic has been adept at improving yields and efficiencies. For example, in 1993 the saleable product from Saudi Yanbu Petrochemical Company (Yanpet), the Sabic-Mobil joint venture, was 75 per cent above the original design capacity. The ethane-based ethylene cracker came on stream in January 1986 with capacity tagged at 455,000 tonnes year. Last year, it produced about 800,000 tonnes.

But, Sabic has now taken the first step away from its natural gas strategy. This crystallised last year with the commissioning of a flexible cracker which uses heavier feedstocks – propane, butane and naphtha. It provides propylene for the downstream Saudi European Chemical Company (Ibn Zahr) polypropylene unit which is the kingdom’s first polypropylene plant. With the addition of polypropylene capacity, Sabic has become one of the few companies in the world to produce all five of the commodity-type thermoplastic resins.

That strategy is sound, up to a point. It is based on assumed strengths but it exposes possible weakness too. The competitive edge provided by gas-based feedstocks does not apply. Demand for polypropylene is growing fast but the strategy of supplying the whole range of propylenes is not necessarily a winner, as the UK’s ICI was to discover. Other questions arise. Is the switch from gas to liquid feedstock crackers driven by the ambition to broaden the range of products or is it to provide a local market for naphtha? Is the switch a defensive measure driven by the conviction that associated gas supplies are uncertain because they are determined by crude output quotas? For the time being, the alternative of tapping into non-associated gas supplies which creates a problem of excess methane production, has not been explored.

The Arabian Industrial Fiber Company (AIFC) is Sabic’s bid to deepen and stretch the portfolio. Sabic has a 51.7 per cent stake in the joint venture which is already running ahead of schedule and should be on stream by mid-1995. When it was announced, Sabic said: ‘Its establishment underlines the fact that Sabic is venturing into an entirely new area of product diversification. We expect our polyester products to expand investment scope for the private sector by opening new business opportunities for downstream industrial diversification and import substitution.’


The stated intention is that the 140,000 tonnes of polyester – staple for clothing production, filament yarn and carpet staple, and resin for use in PET plastic bottles – will provide a major boost to domestic carpet manufacturers and beverage bottle makers.

At the same time the project takes Sabic into new territory. The project will depend, in the early stages, on imported feedstock. This is because polyester polymer is produced by the polycondensation of ethylene glycol with purified terephthalic acid (PTA). The glycol will come from the nearby Yanpet complex, but until Sabic builds its own unit, PTA will have to be imported.

There are other strands to the diversification strategy, apart from AIFC. In Jubail, the Sabic/Taiwan Fertiliser Company joint venture Al-Jubail Fertiliser Company (Samad) is adding a 150,000-tonne 2-ethyl hexanol unit and 50,000 tonnes of di-octyl phthalate (DOP) capacity. Sabic is also expanding output of linear low density polyethylene (LDPE), ethylene dichloride and polyvinyl chloride (PVC) paste.

The whole drive to create a fuller derivatives business carries risks for a company that has never put a foot wrong. For the unconvinced, Sabic is pursuing a questionable strategy. These purists suggest that Sabic would do better to sustain its unique competitive advantage in ethane- based basic and intermediate products. They reason that Sabic is unbeatable when moving basic or intermediate products. As markets open up in the Indian subcontinent and South Africa it is in a prime position, in terms of both logistics and structures, to benefit.

Now that the Uruguay round of the General Agreement on Tariffs & Trade (GATT) is signed, barriers in the international chemicals market are set to come down, which should also be an advantage for Sabic. In OECD states, external tariffs on chemical intermediates are being reduced to 5.5 per cent and to 6.5 per cent for finished products. Reductions will be over five years for tariffs currently under 10 per cent and over 10 years for the remainder. Pharmaceuticals and pharma-intermediates tariffs are to go to zero from 1 July 1995.

As industry consultant Trichem noted in its latest annual review and five-year forecast: ‘Outside the OECD, a number of ‘new producers’ are likely to join in the tariff reductions, notably South Korea, albeit on a limited product range only, and in due course Saudi Arabia and China, both of whom wish to become active, full members of GATT.’

The big battle will come in Europe where the tariff reductions will open up the market. Says Trichem: ‘The European market will become rather more attractive to efficient, inherently low-cost producers in the Middle East.’

The details of GATT are still being devised but a future of more open and more competitive markets has been clearly signposted. Trichem urges

petrochemicals companies to assimilate the consequences of the Uruguay round into their strategic planning. Despite the clear potential advantages for Sabic, there are implicit threats too. One possible hazard is that rules on subsidies have been clarified and tightened up.

The liquids feedstock pricing policy for Sabic’s recently commissioned, wholly-owned Petrokemya cracker at Jubail might fall foul of the GATT rules on subsidies. The next cracker to be built in the kingdom, now on the drawing board as Yanpet’s first liquids cracker at Yanbu, might run the same risks.

Efficient and rewarding

So far, Sabic has successfully pursued a strategy as a low-cost leader. Even a limited attempt at international comparisons suggests that the effort has been efficient and rewarding.

In a presentation to an April conference in Dubai, Chem Systems attempted to gauge the respective profitabilities of three key petrochemical producers – BASF, Dow and Sabic. The estimates were qualified because they were based on incomplete or approximate data but they are at least indicative. They show that the return on equity figures, taken from annual report data, for Dow and Sabic conform to the same pattern. And, apart from in 1986 and 1992, they are quite closely comparable. Chem Systems notes: ‘Sabic has benefited from low-cost loans and tax holidays. The arithmetic average of the Dow figures is around 15 per cent and of the Sabic figures around 16 per cent.’

But, what next? Chem Systems believes that Middle East producers will be able to equal if not exceed the returns on investment that can be achieved in more developed markets. This may not apply to all products, however. It predicts that return on investment levels of 10-15 per cent can be achieved, depending on the price and availability of feedstock and the capital location factor. This second figure is based on the capital investment required for an equivalent plant located on the US Gulf coast. Significantly lower returns are anticipated for products such as ammonia, urea and methanol.

The challenge for Sabic and other Middle East/North African producers is to maintain derivative export volumes over the years ahead as new local capacity is commissioned in their main export markets of the Far East and Southeast Asia. Those two areas together account for about 40 per cent of Sabic’s exports. Another consideration is Iran, which is poised to become an important petrochemicals producer. The Arak cracker was commissioned late last year but, more significantly, further crackers at Tabriz and Bandar Imam will both be fully operational within the next two-three years. In particular, the Bandar Imam complex is expected to affect Sabic as the bulk of its production is bound for the export market.

Sabic’s task is to clarify its core strategy. Is it going to concentrate on a particular segment of the market and stick with being a low-cost producer or will it try to market a differentiated product? If Sabic’s raison d’etre is the same today as it was in the early 1970s, when the plan to construct basic industries at the source of raw materials was conceived, the strategic options should be clear. But if it has to meet other criteria, as a buyer of naphtha or as the feeder for new domestic downstream industries, the company’s direction may not remain so clear.