Dubai: The oil and petrochemical economy of Saudi Arabia will benefit above average from the rising demand of emerging countries like India, China and Brazil, Riyadh-based investment company Al Rajhi capital said in its current research on the sector.
According to Saleh Alsuhaibani, head of research at Al Rajhi Capital, Saudi petrochemical suppliers are expected to outperform global rivals with margins driven by cheap raw material costs and strong demand coming from Asia.
Due to major new projects like the new plants by Saudi Arabia's leading petrochemical company Sabic, the largest public company in the Kingdom, Saudi Arabia should account for over 10 per cent of global petrochemicals capacity by 2014, the report said.
Among the countries with rising demand for oil-derived products, China is the primary force driving global petrochemicals demand. While the country is adding significant domestic capacity, Al Rajhi expects demand growth to outpace capacity additions for many years from now.
China and other Asian countries are already the key market for the Saudi petrochemicals industry, and the focus on this region is expected to increase.
Apart from China, India and Brazil represent the next big markets which will generate demand over the longer term, the analysts said. In the near term, they expect capacity additions to lag demand growth in all three markets and so believe that a ready market will soak up expansion by the Saudi petrochemical majors.
For example, Chinese state-owned players like Sinopec and PetroChina are rapidly building new ethylene capacity, aided by favourable government policies for joint ventures with foreign majors. China is also on a propylene capacity build-up which will see the country become the largest producer of the chemical in the world.
The report also said that the centre of ethylene production will shift to the Mena region given expected capacity shutdowns in the US and Europe while propylene output in Saudi Arabia will also be boosted by the shift towards heavier feedstock.
The petrochemicals sector accounts for about 17 per cent of Saudi GDP and 34 per cent of the value of the stock market. Sabic alone represents 22 per cent of the Tadawul stock index. Saudi Kayan, Sabic and other petrochemicals stocks have dominated recent market trading, the researchers said.
"The Saudi economy looks strong and, driven in part by robust demand for hydrocarbons, we predict 3-4 per cent GDP growth in 2010. In our view, taking a stand against Saudi petrochemicals is equivalent to taking a stand against Saudi Arabia itself," the report stated. The analysis includes five companies: SABIC, Saudi Kayan, Sipchem, Petro Rabigh and Yansab.
According to Alsuhaibani, the sector has also been boosted by favourable government initiatives which aim to shift Saudi Arabia from an economy concentrated largely on crude oil exports to an economy with higher value-added, integrated oil and petrochemicals segments.
As the Saudi Arabian petrochemicals majors increase production capacity to exploit these advantages, the output from new facilities might find ready demand from the emerging markets of China, India and Brazil.
"These nations have huge underserved petrochemicals markets which will drive strong volume growth. We do not see local supply outpacing demand in these regions, thus providing a lucrative market for Saudi players."
The government of Saudi Arabia provides ethane, a major raw material for the petroleum and petrochemicals industry, at a price of $0.75/mmbtu (one million British thermal units, a measurement for energy). The average global market price is currently $4.5/mmbtu. The price is granted for local petrochemicals companies such as Sabic, Sipchem and Petro Rabigh.
The low purchasing price "transforms Saudi Arabian petrochemicals companies into global low-cost producers", the analyst said.
While global majors had to deal with the double blow of rising ethane costs and falling petrochemical prices in 2008 and early 2009, Saudi petrochemicals players were insulated on input costs. This fact partially shielded them from the margin erosion recorded by competitors all over the world.
The Saudi petrochemicals sector currently accounts for seven per cent of the global supply of basic chemicals. It is expected that this share will increase to 13 per cent by the end of 2011, propelled by ambitious capacity addition plans backed by abundantly available cheap raw materials.
The Saudi petrochemicals industry is emerging as a global leader in this market, the researchers said.
In their view, lower feedstock costs and higher operating efficiency enable the petrochemical industry in Saudi Arabia to continue production without being subjected to the vagaries of changing feedstock prices.
A significant change in market prices of ethane or naphtha can force global players to mothball their production facilities. This entails maintenance and upkeep charges which are incurred with the aim of recouping such expenses once production recommences.
Saudi petrochemicals players, whether based on ethane or mixed feedstock, enjoy a material advantage over their competitors which procure feedstock at higher market rates and which are also exposed to the volatility of oil prices.
Saudi majors like Sabic thus enjoy high operating margins as the majority of their costs are fixed at very low levels, the report said.
The share of the Middle East in global ethylene capacity has increased at a compound annual rate of 7.7 per cent during the period 1995-2010, while from different industry sources Al Rajha estimates that the region's share of the global polyolefins capacity has shown compound annual growth of 9.9 per cent over the same period.
This rapid growth has been made possible by the abundant supply of ethane made available to petrochemical producers. As demand for petrochemicals is growing at a marginally slower pace than global installed capacity, this wave of new capacity has come at the cost of weak petrochemicals capacity growth in US, where in fact there have been no additions to ethylene production capacity since 2001.
Given that the US and Europe accounted for a majority of petrochemical capacity additions till the turn of last century, this signifies a tectonic shift in the nucleus of the petrochemicals industry from developed markets to the Middle East and China, which is on a capacity expansion spree of its own.
Companies from Saudi Arabia currently account for 10 per cent of China's petrochemicals imports.
The analysts believe a major chunk of future demand growth will come from this region and should enable the Saudi petrochemicals industry to find a ready market for the output of the aggressive capacity expansion projects currently underway at Yanbu, Jubail, and other locations.
China and especially India have some way to go before being anywhere near the developed markets in terms of per capita petrochemicals consumption. A narrowing of this gap will be the main growth driver for the petrochemicals sector globally, the report said.
Currently, key exports from the Middle East to Asia mainly include basic chemicals which are processed further by Chinese manufacturers and subsequently exported to the US and EU. Such products include PET bottles, cups, textiles, etc.
Thus, besides the local demand from the Chinese market, there is derived demand for Middle Eastern petrochemicals which is correlated to developed market economic growth. Domestic demand for such products is set to grow strongly from now on.
The big players
The company (Saudi Basic Industries Corporation) has concentrated its expansion plans on basic petrochemicals. Over half of Sabic's basic petrochemicals output is exported to Asia, with China and India accounting for a major portion. Besides its existing facilities, Sabic is adding production capacity through its expansion at Jubail and Yanbu. Saudi Kayan, coming on stream at Jubail, will be one of the largest petrochemicals plants in the world. Sabic is currently the second largest global ethylene glycol producer and is expected to become number one after the introduction of these new projects. Sabic is also the third largest polyethylene manufacturer, the fourth largest polyolefins manufacturer and the fourth largest polypropylene manufacturer. Sabic is also the world's largest producer of mono-ethylene glycol, granular urea, polyphenylene and polyether imide.
Petro Rabigh was established in 2005 as a joint venture between Saudi Aramco and Sumitomo Chemical. Following the IPO in 2008, the share of each promoter came down to 37.5 per cent. The company has two business segment: oil refining and petrochemicals. In refining, the company has a capacity of 400,000 barrels per day of Arabian Light crude oil and in the petrochemicals business it has a capacity of 2.4mtpa. The two segments are highly integrated in order to enable the company to convert low-value crude oil into higher-margin products. Petro Rabigh benefits from a cheap and secure source of feedstock made available to it by the Saudi government. Saudi Aramco, the state-owned oil company which owns 37.5 per cent of Petro Rabigh, has guaranteed supply of ethane to its affiliate for a period of 30 years till 2038. According to company filings, 96 per cent of Petro Rabigh's petrochemicals output is exported outside Saudi Arabia, with Asia accounting for 84 per cent of the total. In contrast, only 35 per cent of refined oil output is exported, with the rest consumed within the Kingdom.
Saudi International Petrochemical Company (Sipchem) is a Saudi joint stock company owned by private sector investors of Saudi Arabia and GCC countries, incorporated in 1999, Sipchem has chosen Jubail Industrial City to build its industrial complex for producing various chemicals. The major market for Sipchem's products is Asia, which accounts for almost 50 per cent of its sales whereas the EU region accounts for around 38 per cent. The greater part of Asian exports is directed to China. China has long been a net importer of methanol. Sipchem, with its low-cost methanol output, is expected continue to expand its exports to the Asian region. he company has virtually no competition in BDO (butanediol) and acetic acid and these segments should help in generating high margins.
Saudi Kayan is a subsidiary of Sabic, running the company's facilities in Jubail. It is Saudi Kayan which is responsible for the Sabic group's huge expansion there. Once the Jubail project is completed, one could reasonably assume a sharp drop in Saudi Kayan's capital expenditure levels. Saudi Kayan is supposed to launch operation in 2012.
Yansab is the most recent Sabic affiliate, and will be Sabic's largest petrochemical complex. It will have an annual capacity exceeding 4 million metric tons (MT) of etrochemical products. Yansab is expected to employ 1,500 people in phase I and phase II. Sabic owns 55 per cent of Yansab's capital. Sabic's affiliates, Ibn Rushd and Tayef, hold 10 per cent of Yansab's capital. 35 per cent of Yansab is public stocks.