INSIGHT: The shift downstream on the Arabian Peninsula

INSIGHT: The shift downstream on the Arabian Peninsula

22 September 2010 16:16  [Source: ICIS news]

SINGAPORE (ICIS)--Saudi Arabia is busy reshaping its petrochemical industry to reflect a drastic shift in priorities.

Such is the change in the kingdom that commentators are going so as far as to say that major capacity additions of commodity petrochemicals will soon become a thing of the past.

The Saudi government is only supporting new investments downstream of the basic cracker derivatives in an attempt to diversify the economy and create more jobs (as you go further downstream, labour intensity increases).

To some extent, this also applies to other countries in the Gulf Cooperation Council (GCC). But what happens in Saudi Arabia is important, as this is where most of the project activity is in differentiated, or value-added, chemicals.

A separate but very important theme worth more exploration is where the new commodity capacity to serve voracious emerging-market demand growth will be added – as what is being planned in Saudi Arabia and elsewhere in the GCC is unlikely to be anywhere close to sufficient.

China is an obvious candidate. So is Singapore, as it takes advantage of spare refinery-based feedstock.

Malaysia is another strong possibility. It has very competitive ethane-gas feedstock, and the petrochemicals division of Petronas will have a much bigger motive to expand once its listing takes place, the current schedule for which is the fourth quarter this year.

But returning to Saudi Arabia, the shift downstream will leave the smaller, private producers that have a limited or even a single-product portfolio in a weak position, according to an industry source.

“Even if future allocations of natural-gas feedstock were readily available – and we all know they are not because of supply constraints – the government will only give them to companies moving up the value-chain.”

It is a classic chicken-and-egg situation, according to an HSBC report on Middle East petrochemicals.

“Access to feeds that can be used for downstream development is likely to be limited to companies that [already] have a broad product portfolio and can therefore integrate internally,” said the HSBC report.

Companies involved in refinery-based petrochemicals, such as Saudi Aramco, are also likely to emerge as winners, the report says: some of the downstream chemicals being planned require oil-based rather than gas feedstock.

So the strategy for these smaller, marginalised producers is likely to be mergers, acquisitions and diversification into plastics processing, the industry source said.

It is important to stress, though, that larger and more diversified private companies are in a different position – most notably, Saudi Arabia International Petrochemical Co (Sipchem).

Sipchem brought is methanol plant on stream in 2004 and has since commissioned acetic acid and vinyl acetate monomer (VAM) facilities.

Last month, Sipchem announced a joint venture with Rhodia to build the Middle East’s first ethyl acetate plant.

This is exactly the kind of “access to feeds” integration that HSBC is talking about, as Sipchem has acetic acid raw material for the ethyl acetate project.

SABIC, along with Saudi Aramco, is, of course, ideally placed to cash in on the diversification strategy because of its own access to feedstocks.

But to what extent will these two giants make money?

What is certain is that returns will be less than the massive margins generated by a relatively simple ethane-based cracker and downstream polyethylene (PE) and monoethylene glycol (MEG).

How much is made depends on what Saudi Arabia decides to build, says HSBC.

The bank carried out an internal rate of return (IRR) study of 40 basic and differentiated commodity chemicals that could be produced across the Middle East with a 10% hurdle rate for project viability.

Its conclusion is that intermediate chemicals – but not all the way downstream into specialities – Is where Saudi Arabia, and the Middle East in general, should be positioned.

These include acrylics, acetyls, epoxy resins, polyacetals and the polycarbonate (PC) and nylon chains.

SABIC has announced a polyacetals joint venture with Celanese, which is due to start up in 2013.

Saudi Kayan Petrochemical Co (Saudi Kayan), which is 35% owned by SABIC, will become the region’s first PC producer when it brings its plant on stream at Al-Jubail, Saudi Arabia, next year.

And the second phase of Saudi Arabia’s PetroRabigh – the joint venture between Saudi Aramco and Sumitomo Chemical – could include other intermediate petrochemicals such as ethylene propylene rubber (EPR) and thermoplastic olefins.

The second phase might also include paraxylene (PX), purified terephthalic acid (PTA) and polyethylene terephthalate (PET), which HSBC identified as other products suitable for the region.

A feasibility study into PetroRabigh’s second phase is due to be completed in the third quarter of this year, with a start-up targeted for the third quarter of 2014.

What will not work in the Middle East is production of water treatment chemicals, plastic additives, construction chemicals, catalysts, oil-field chemicals and speciality coatings and adhesives, adds HSBC.

This is the result of low demand for these products in the region and the importance of locating plants in countries where the consumption is big, such as China.

This assumes, though, no heavy government subsidies, with plastic additives quite possibly part of slow-to-get-off-the-ground plastics-processing parks in Saudi Arabia and Abu Dhabi.

A big question is to what extent western and Japanese companies will be willing to license technologies.

The returns for licensors are solid enough, as they include marketing and distribution fees at 5-8% of revenues and licensing fees at a further 1-2% of revenues, says HSBC.

Access to low-cost finance is another temptation, with interest rates at just 2-3% – well below what the foreign majors would have to pay in their home countries.

The evidence to date is that a fair number of overseas players have been prepared to license technologies, although a great deal more deals need to be struck if Saudi Arabia is to fulfil all its ambitions.

But a second industry source adds: “The western and Japanese speciality chemicals market is highly fragmented…so for the smaller players, going to Saudi Arabia makes every bit of sense.

“These smaller players are in a bind when you think about it. It is a choice of no growth at home or going overseas to sometimes less-than-ideal returns.”

Saudi Arabia also has the money to acquire companies that own these technologies. An historic case in point was SABIC’s purchase of GE Plastics, and with it a distribution network. Ownership of distribution networks becomes important as you go downstream.

Where there is money, there is usually a way around most obstacles.

($1 = €0.75)

For more on SABIC and other producers, visit ICIS company intelligence
Read John Richardson and Malini Hariharan’s Asian Chemical Connections blog
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By: John Richardson
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