The news that petrochemicals producers in Saudi Arabia are considering selling their output to local manufacturers at a discount will provide a welcome boost to the kingdom’s nascent plastics industry.
It may not have issued any direct orders, but Riyadh will clearly be happy if producers pass on some of the benefit of the cheap gas feedstocks they receive to their customers.
Until now, international firms have been reluctant to invest in the sector. Unlike basic chemicals producers, which have cheap gas to make them competitive, there have been few obvious advantages to setting up downstream plastic facilities in the Gulf.
Traditionally, plastics manufacturers prefer to be based close to large consumer markets to cut out expensive transport costs. But for basic chemicals output, it makes more sense to be located closer to the source of the feedstock.
The prospect of cheap polymer and olefins output may be enough to alter the economics of plastics manufacturing and kick start Saudi Arabia’s industrial diversification programme. In turn, it will provide a boost to Riyadh’s job creation strategy.
The region can provide other advantages, beyond cut-price materials. Labour, while not as cheap as in Asia, is still competitive compared with the cost of hiring staff in Europe and North America. The existing infrastructure is also world class, and energy can be supplied at much low rates than elsewhere.
Eventually, the region itself may become a large consuming market. Increasingly, Riyadh is encouraging plastic-intensive international companies such as Toyota and Unilever to set up manufacturing facilities in the kingdom. The plastics conversion industry may then find that its own finished products can also be sold closer to home, providing even more benefits.