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Aug 10 2009

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Saudi Arabia economy: In the dumps

Saudi trade officials have so far had little joy in their efforts to persuade the Indian government to pull back from the imposition of dumping surcharges on exports of polypropylene by two Saudi companies. The row with India and a similar dispute with China have led Saudi officials to suspect that some of their industries are at risk of being hit by a rising tide of protectionism in Asia.

The Indian government has imposed six-month provisional dumping duties on two Saudi Arabian firms, in response to a formal complaint made by Reliance Industries, India's largest producer of polypropylene, about the pricing of imports of the highly versatile polymer from Saudi Arabia, Oman and Singapore. One Omani firm and two from Singapore have also been saddled with dumping duties.

A delegation led by the Saudi commerce and industry minister, Abdallah Zeinal Alireza, returned home on August 8th after four days of discussions with the Indian authorities about the affair. The Saudi government has made no formal announcement, but according to Al Watan, a local newspaper, the delegation did not manage to resolve the problem, despite having submitted what it considered to be clear evidence to refute the dumping allegations. Saudi commentators have interpreted Reliance's complaint as having arisen from the company's concern to defend its dominant position in the Indian market in the face of much tougher international trading conditions.

Punitive

The two Saudi firms affected are Saudi Basic Industries Corporation (Sabic) and Advanced Petrochemicals Company (APC) . Sabic faces a dumping duty of US$821/tonne (equivalent to 185%); APC , which started up its polypropylene plant early last year, is to be charged a duty of US$440/tonne (54%) on its exports of the product to India. A third polypropylene producer, National Industrialisation Company (Tasnee) , has been exempted. The duties may remain in force until the end of January 2010, while the validity of the Indian complaint is subjected to further scrutiny. If at the end of this period the Indian authorities decide to persist in supporting the dumping complaint, the duty could be kept in force for up to five years.

Both of the Saudi companies have rejected the allegations, but they have also sought—not wholly convincingly—to reassure shareholders that the dispute will not seriously damage their total earnings. Sabic is one of the largest petrochemical producers in the world, and its turnover in 2008 (including fertilisers and metals) was US$40.2bn; this compares with US$57.5bn for Dow Chemical of the US. It has been finding the going harder in 2009, with net income down by 94% year on year in the first half, although it did manage to record a small increase the volume of sales in the first quarter, to 22.9m tonnes, and its first-quarter earnings were affected by a large impairment charge on its investment in GE Plastics.

Asia has been Sabic 's fastest-growing market in recent years, and accounted for 24% of its total sales last year. Protectionist moves from this quarter are therefore a worrying development for this flagship Saudi industrial conglomerate. Sabic and another Saudi firm— Sipchem —have also faced dumping allegations from China with respect to sales of methanol and butanediol (BDO)

APC (which recently changed its name from Advanced Polypropylene to Advanced Petrochemicals, in a signal of its plans to invest in new product lines) is a newer and much smaller venture. It said that the Indian dumping duties would not make much difference to it as India only accounts for 2.5% of its sales. When it started production at its 450,000-tonne/year plant it said that a large part of its output was pledged to three long-term offtakers—Vinimar in the US, Mitusbishi Corporation of Japan and Netherlands-based Domo.

Feedstock gripes

The details of Reliance's complaint against the Saudi firms have not been made public, but it is likely that the Indian firm has focused its attack on feedstock pricing. This has been a long-running concern for Saudi Arabia's international competitors in the petrochemical industry, but the Saudi government considers that the matter was resolved in 2005 as part of its accession to the World Trade Organisation (WTO). Saudi Aramco , the national oil company, sells natural gas (both methane and ethane) to domestic consumers, including petrochemical companies at US$0.75/m BTU. This is much lower than the international price of natural gas, but the WTO considered that it was fair, based on natural advantage and on the fact that Saudi Arabia does not export natural gas—if it were to do so, there would be considerable costs associated with building the necessary infrastructure. Saudi Aramco sells natural gas liquids (NGLs) for domestic use at a price lower than the export price, but it argues that this is justified by the higher costs associated with exporting and by local factors such as long-term offtake agreements with domestic industries. In any case, Saudi Aramco has indicated that it is planning to phase out NGL exports in favour of using these fuels as supplementary feedstock for petrochemical production, which would lay to rest the dual pricing issue once and for all.

Biteback

The dumping accusations have prompted some Saudi business groups to consider possible retaliation. Asharq Alawsat, a Saudi-owned newspaper, quoted Abdelrahman al-Zamil, the head of the Saudi exporters association, as saying that dumping by Asian tyremakers over many years had been a major impediment to the development of a vehicle tyre industry in Saudi Arabia, despite the advantage that the country has in producing essential materials such as carbon black. Mr Zamil said that Saudi Arabia could take a number of steps to rectify this situation, for example through setting more demanding specifications for tyres to be sold in the kingdom or introducing a new tariff higher than the standard 5% common external tariff of the Gulf Co-operation Council.

SOURCE: ViewsWire