22 September 2010 16:16 [Source: ICIS news]
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
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.
But returning to
“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
“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,
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
The bank carried out an internal rate of return (IRR) study of 40 basic and differentiated commodity chemicals that could be produced across the
Its conclusion is that intermediate chemicals – but not all the way downstream into specialities – Is where
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
And the second phase of
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
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
This assumes, though, no heavy government subsidies, with plastic additives quite possibly part of slow-to-get-off-the-ground plastics-processing parks in
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
“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.”
Where there is money, there is usually a way around most obstacles.
($1 = €0.75)
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