Thirty years ago, Saudi Arabia was an importer of petrochemicals. It is now a major exporter, providing some seven percent of the world's supply of basic petrochemicals. Last year, according to the WTO, these exports were worth $14.3 billion. Together with plastics, they account for over half of the Kingdom's nonoil exports.
The prime market is Asia. SABIC, the largely state-owned giant in the Saudi petrochemicals orbit and the fifth largest petrochemical company in the world (according to Fortune magazine; sixth largest according to Samba Financial Group), has sales offices throughout the Far East -- in Beijing, Shenzhan, Shanghai, Hong Kong, Jakarta, Singapore, Tokyo, Manila, Seoul, Taipei and Ho Chi Minh City. (It has many more in Europe but these tend to concentrate on products from the three European petrochemical sites, in the UK and Germany and the Netherlands, owned by SABIC's European subsidiary. They do not count as Saudi exports.)
Within Asia, China is the most important destination, importing not only for its own domestic market but as a manufacturing base for exports to Europe, the US and elsewhere. In 2008, China imported 840,000 tons of Saudi methanol, worth $2 billion -- around 14 percent of total Saudi methanol production of 6.2m tons (most of it from SABIC which produces 83 percent of Saudi methanol) and 15 percent of total petrochemical exports.
The giant PetroRabigh petrochemical complex, a $10 billion-joint venture between Saudi Aramco and Japan's Sumitomo Corporation, and one of the largest such plants in the world, started production in April this year and started exporting to China the following month. However, Japan will be a significant destination for its output.
It is China's seemingly limitless appetite for petrochemical products, however, that has made it loom large in Saudi eyes. As SABIC's Vice Chairman and CEO, Mohamed Al-Mady noted in a speech at the Financial Times China-Middle East Summit in Riyadh last year, "Saudi Arabia's large hydrocarbon resources made the Kingdom a 'natural strategic trading partner' for China's dynamic industrial and economic growth."
SABIC's relationship with China is based not only on sales; the China National Petroleum Company (Sinopec) has been a partner in the construction of a major polyolefins complex for SABIC affiliate Yansab (Yanbu National Petrochemicals Company) in Yanbu, much of it products being expected to head to China, and the two companies are involved in a $3-billion joint venture one-million-ton-a-year ethylene derivatives plant in Tanjin in China; the project was approved by the Chinese government in July.
The collapse in petrochemical demand in Asia in the second half of 2008 and, with it, the price of key products such as high-density polyethylene (HDPE; it fell 60 percent between July and November 2008) and ethylene (an 80 percent fall) hit Saudi manufacturers hard. SABIC recorded a SR937 million loss in the first quarter of 2009. Since then the picture has improved, driven largely by a resurgent Asian market.
The price of HDPE hit $1,000/ton in August, up from $600/ton in January, and this helped SABIC turn the first quarter loss into a second quarter $480m profit. But the situation is still precarious. Traders in Europe and the US expect the price of HDPE to drop toward the end of the year as -- ironically -- more becomes available as new Middle East polyethylene plants open.
In the long term, according to Riyadh-based Samba Financial Group, which published an in-depth report on the Saudi petrochemicals industry in August, the prospects are extremely good: "The Saudi petrochemical sector will continue to expand and should become the primary center of global production -- at least for basic chemicals -- over the long term."
But there are warnings. China and the Far East may be the prime markets at the moment but they are also the potential rivals: "From a long-term global perspective, the main battle will pitch the Saudi (and broader GCC) petrochemicals producers against their East Asian counterparts."
That might seem odd given that Saudi Arabia has access to cheap feedstocks and China and others in the Far East do not. There is, however, another factor in the equation: cheap labor -- and there China can score. "China's petrochemicals industry, which is likely to be Saudi Arabia's main competitor in the years ahead, boasts a well-skilled, cheap and flexible labor market," says the report. "Saudi Arabia will need to respond in kind if it is to compete at the more sophisticated end of the product chain."
Already the first signs of a clash have appeared. China recently accused Saudi Arabia of undermining its own nascent petrochemicals industry by dumping subsidized petrochemicals into the market and threatened to impose tariffs on Saudi imports.
The argument centers on the use of cheap feedstocks below the international market price. It led to Saudi exporters to complain that China is not above using cheap labor and an artificially low currency to steal a advantage in its export trade and that the Kingdom should retaliate with its own tariffs on Chinese goods.
The argument has died down for the moment; China needs to import ethylene -- and it does not want to antagonize its prime source of oil. But as China develops its own petrochemicals capacity it will undoubtedly affect Saudi exports. It will import less. Its purchases of ethylene are expected to fall from 13.5 million tons in 2008 to 8.9 million tons by 2013 as it builds up its own ethylene production (it plans to add some 12 million-tons-a-year of new ethylene production capacity in the next five years). The Kingdom should be able to see off China as a petrochemical rival thanks to cheap feedstocks -- but it will not be the gleaming market it has been.
That means looking for new ones -- especially in the US and Europe. One of the easier ways is by buying into established petrochemical corporations with existing market share -- which is what SABIC has been doing: the purchase of Huntsman's the three European petrochemical sites in 2006 and of GE Plastics in the US in 2007. The trend is likely to continue.
In the meantime, it is not going to stop other international petrochemical players setting up joint ventures in the Kingdom, attracted by the prospect of cheap feedstocks. There are 81 petrochemical projects planned or under way. Of these 32 are due for completion this year and another 10 between 2010 and 2013. The remaining 39, worth more than $40 billion, are still in the gestation stage.
Not only will they bring best-of-class manufacturing and technology as well as dedicated marketing techniques, they will, given their existing market penetration, bring markets for Saudi products. It is a growth scenario.
By Michel Cousins
© Arab News 2009
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