Under pressure on all fronts

24 April 1998
SPECIAL REPORT PETROCHEMICALS

THE economic turmoil affecting much of Asia is being watched with some concern by Middle East petrochemical producers. Much of their production is targeted at Asia and with a number of new projects planned, there are inevitable concerns about excess capacity.

However, the consensus among most analysts is that the Middle East has little to worry about. While prices may be depressed for the next couple of years, the region's producers are well placed to benefit from the inevitable recovery in Asia early in the next century.

Prices for most major petrochemical products have taken a tumble over the past year. Propylene is now trading in Asia at about $320 a tonne, down from more than $600 a year ago; ethylene is trading at less than $400 a tonne, compared to almost $700 a tonne

12 months ago.

Global overcapacity and a general slow down in world economic growth are the main reasons for the fall in prices. But the problems in Asia have added to the pressures. In Indonesia alone, demand for polymers has dropped by 25 per cent since the start of the year. Similar falls have been registered in Thailand and South Korea.

In spite of the depressed demand and lower prices, it has not been all bad news for petrochemical producers. The dramatic fall in oil prices since the start of the year has slashed production costs. This has been especially good news for European producers whose primary feedstock is naphtha. 'European producers are making bigger profits than expected,' says David Glass, a director at Chem Systems in London.

But the drop in oil prices has a downside for the Middle East, which has lost some of its competitive advantage over rival producers in Asia, the US and Europe. An abundance of cheap feedstock is one of the region's great strengths but while lower oil prices have reduced production costs for competitors elsewhere, feedstock costs are actually rising for regional giants such as Saudi Basic Industries Corporation (Sabic), the Middle East's largest producer.

In January the Saudi government raised the price of methane and ethane by 50 per cent. 'We expect an increase in the cost of raw materials of between 420 and 430 million riyals [$114 million-116 million] this year,' Sabic chairman Ibrahim Ibn Salamah was reported as saying in March.

The prospects for the region's producers having their balance sheets boosted by an immediate rise in prices are not looking rosy. While prices are not expected to fall to the record lows of the early 1990s, Chem Systems expects prices to remain below last year's peak until 2000. 'We expect prices to drop for the rest of this year,' says Glass.

But Middle East producers are well-placed to benefit from the expected turnaround in Asian economic fortunes after 2000. 'There are problems - especially financing - on petrochemical projects in Asia,' says Glass. When demand in Asia does pick up, there will be little new production capacity in place to meet the demand and imports will have to rise. 'This will lead to higher prices, which will benefit Middle East producers,' Glass adds.

In spite of some short-term difficulties, there are few doubts about the long-term prospects for Middle East producers. 'Middle East projects are still very competitive. There is no evidence of delays or cancellation of new projects,' says Glass. 'As long as they stay with commodity products, they will be successful.'

Right across the region, new petrochemicals projects are in various stages of development. Kuwait became a producer last November when the $2,000 million Equate complex came on stream. The plant has nameplate annual capacity to manufacture 650,000 tonnes of ethylene, 450,000 tonnes of polyethylene and 350,000 tonnes of ethylene glycol. Equate is a joint venture between the local Petrochemicals Industries Company and the US' Union Carbide Corporation, which each have a 45 per cent stake, and the local Bubiyan Petrochemicals Company, which has the remaining 10 per cent.

Saudi Arabia remains the dominant regional petrochemicals producer. Sabic is pushing ahead with its third major expansion programme since it was set up in 1976. The corporation's total annual output is set to increase by 5 million tonnes a year (t/y) to 28 million t/y by 2000. The expansion programme includes three grassroots ethylene schemes at Arabian Petrochemical Company (Petrokemya), Saudi-Yanbu Petrochemical Company (Yanpet) and Al- Jubail Petrochemical Company (Kemya - see page 12).

Iran is executing an ambitious five-stage programme of expansion of its petrochemical production. The plan is to nearly treble annual ethylene output to 30 million t/y at a cost of about $12,000 million. Tehran is looking to foreign investors to provide about half of the financing.

Three large contracts have been awarded this year at the Bandar Khomeini special industrial zone. In March a German/local joint venture of Linde and Oil Industries & Construction Engineering was awarded a DM 300 million ($164 million) contract to design and supply an ethylene cracker for an olefins facility. Project financing has still to be finalised. Spain's Intecsa-Uhde and the local Petroleum Industries Design & Engineering Company (Pidec) have been awarded a DM 95 million ($51 million) contract to build a 140,000 t/y polyethylene unit. A joint venture between Pidec and Spain's INITEC is also reported to have been awarded a $150 million contract for a methyl tertiary butyl ether (MTBE) plant.

Egypt has also been making significant progress in developing its petrochemical industry. In March, South Korea's Samsung Engineering Company signed an estimated $200 million contract to build Egypt's first polyethylene plant. The client is the Sidi Krier Petrochemicals Company (Sidpec). The plant will produce 200,000 t/y of linear low-density polyethylene under licence from the UK's BP Chemicals. The ethylene feedstock will come from a 300,000 t/y plant being built by Japan's Toyo Engineering Corporation.

Egypt's other major petrochemicals project is being undertaken by the privately-owned Orient Petrochemicals Company (OPC), which, like Sidpec, works out of Alexandria. In early April it awarded a contract worth about $70 million-$75 million to Toyo to build the country's first polypropylene plant. The 160,000 t/y plant will use technology from Union Carbide. Unlike most other regional producers, Egyptian production will be targeted at the domestic rather than the export market.

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