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Saudi Arabia: Industry set for the long haul

Saudi Arabia's petrochemicals industry is about to get a massive boost, with a new $20bn plant in the works and extensive state spending on infrastructure set to further improve the nation's logistics backbone. Before the full benefits are realised, however, the sector may have to endure a down period as the recovery of the global economy continues to falter.

On July 25, Saudi Aramco announced it had formed a joint venture with the Dow Chemical Company to build and operate what will be one of the world's largest petrochemicals production facilities. The plant, to be located at the Jubail Industrial City some 100 km north-west of Dammam on the Gulf, will house 26 manufacturing units, with initial construction work set to begin before the end of August.

The venture, which will operate under the name Sadara Chemical, will make polyurethanes, propylene oxide, propylene glycol, elastomers and polyethylene, with projected sales being around $10bn a year, which could translate to annual profits of $1bn once the plant reaches full capacity in 2016.

Announcing the launch of Sadara, Khalid Al Falih , the president and chief executive officer of Saudi Aramco , said the joint venture would break new ground in the campaign to develop the country's industrial capacity.

"Many of Sadara's products will be produced for the very first time in Saudi Arabia," he said. "This enterprise will play a key role in the Kingdom's industrial and economic diversification while contributing to the creation of thousands of high-quality jobs. It will enable significant development in the country's conversion industry, thereby supporting Saudi Arabia's ambition to be a magnet for downstream manufacturing investments that add significant value to the Kingdom's hydrocarbon resources."

According to data from the joint venture, some 45% of sales will be to the Asia-Pacific region, 25% to the Middle East and 10% to Europe, a recognition that some of the more traditional markets, such as the cooling US and European economies, are either saturated or no longer as profitable, while those in Asia hold greater promise for the future.

Though the long-term future of the petrochemicals sector seems assured, both through investments such as the Sadara Chemical venture and with the country's infrastructure network being strengthened as part of the state's multi billion-dollar spending programme aimed at broadening the economy and supporting industries, shorter-term prospects look less bright.

Saudi petrochemicals producers were among those affected by Standard & Poor's downgrading of the US credit rating in early August, with a number of leading downstream firms seeing their shares fall on the Taduwal All Shares Index as concerns rose over a further slowing of the economy in one of the Kingdom's biggest export markets.

Another sign that the global economy may be cooling again came in August when data issued by the Saudi Ports Authority showed a decline in petrochemicals shipments for June, with exports down by 5.8% compared to May. However, year-on-year performance looked better: Saudi Arabia's petrochemicals industry shipped 2.44m tonnes of products in the sixth month of this year, up slightly from the 2.29m tonnes in June 2010.

However, despite the fall in June, Saudi's overall petrochemicals export performance for the first six months of 2011 was far better than for the same term last year, with shipments of just under 15m tonnes versus 14m.

While a slowing of the global economy will have a trickle-down effect into Saudi Arabia's petrochemicals industry, this impact will be mitigated to some extent by the policy that has been pursued for many years of expanding the market for its products beyond Europe and the US and into Asia, where prospects look brighter.

With its new industrial capacity set to come on-line in four to five years, plenty of time for currently slowing markets to normalise, Saudi Arabia will be well placed to maximise returns when these markets are ready to import again and to meet the rising demand from the East.

© Oxford Business Group 2011