Riyadh is encouraging the petrochemicals sector in the kingdom to sell its products to local manufacturers at a discount, in an effort to promote growth in the domestic plastics industry.

Thanks to abundant gas production, basic chemicals producers in the kingdom are supplied with ethane feedstock at a cost of just $0.75 a million BTUs, considerably less than the $6-8 a million BTUs outside the region.

This gives the petrochemicals sector a strong cost advantage and is the principal factor behind the Gulf's rapid emergence as the dominant producing region globally.

However, while upstream polymer and olefins production has prospered, downstream plastic conversion and moulding industries have been slow to get off the ground. Traditionally, such industries have been based close to the major consumer markets such as China to cut transportation costs.

In an effort to diversify the economy and create more jobs, most Gulf states have begun to focus on establishing their downstream conversion industries. Being able to buy polymers at a discount would encourage investment in these facilities.
While no direct order has been issued by Riyadh, local producers say they are being encouraged by the government to start passing on part of their feedstock discount to downstream manufacturers.

"Sooner or later, we will pass on some concessions to converters," says Jamal Malaikah, acting president and chief operating officer of National Petrochemical Industrial Company (Natpet). "You need to have a pricing mechanism, and I think it will happen soon."

Another private sector local producer takes a similar view. "There should be some discounts," says Abdullatif Bhairi, vice-president of planning and project development at Saudi International Petrochemical Company (Sipchem). "I think in general we will start seeing some flexibility on this."

Such a move might not have an immediate impact on the profits of the basic chemical producers as the amount of downstream capacity in the kingdom is limited and it will take time for the sector to be built up.

However, the move may have a negative impact on Abu Dhabi's plans to build a polymer conversion park. The emirate wants to import polymers from Saudi Arabia and convert them locally before exporting them. But if manufacturers are offered discounts in Saudi Arabia there would be little incentive for them to invest in Abu Dhabi (MEED 30:6:08).

There is also growing concern over the future of the kingdom's pricing policy for liquefied petroleum gas (LPG) feedstocks, such as butane and propane.

The pricing formula, which is based on a discount of the Japanese naphtha export price, is due to expire in 2011, potentially forcing producers to pay the full international rate. "It is true that the mechanism for pricing LPG is due to expire by 2011, but the mechanism also calls for a review one year prior to the expiry of the formula," says Moayyed al-Qurtas, chief executive officer of Saudi industrial group Tasnee.

"Having invested so much in the development of the petrochemicals sector, I do not see how the government will allow discounting to be dropped."

Ultimately, feedstock and polymer discounting may be out of Riyadh's hands as the World Trade Organisation, which Saudi Arabia joined two years ago, may decide that such pricing formulas effectively constitute a subsidy and are therefore an unfair advantage.